Strategic thinking…

The other day Chase Carey was talking to Germany’s Sport Bild about how Liberty Media plans to change the rules and economics of Formula 1, in order to attract more big players. He was talking to the Germans and so was saying that the sport wanted more German companies involved, with more manufacturers, teams and a solid German Grand Prix. This was interpreted in a fairly narrow way, the suggestion being that he wants more German influence in the sport.

In reality, it was a rather different message that he was delivering. If he had been talking to the Japanese media he would probably have said the same about Japanese manufacturers and likewise with the Americans. The bottom line is that he wants more automobile manufacturers – and it does not matter from where they come.

This is a logical strategic statement because F1 currently has only had four manufacturers (Mercedes, Ferrari, Renault and Honda). Back in 2008 there were six (Mercedes, Ferrari, Renault, Honda, BMW and Toyota) and that was pretty much a normal sort of number going right back into the 1980s. Some made little impression, such as Yamaha and Peugeot, and there were always odd suppliers looking for customers, such as Judd, Hart and others. Cosworth was there too, to pick up the stragglers as required, but the last Ford win was 14 years ago.

Everyone understands the power and global market penetration of F1, but not many manufacturers want to pay the kind of money that is required to join the F1 club today – and they are quite open about it. F1 is too expensive. Thus it is safe to conclude that if one can bring down the costs to a sensible level, other manufacturers will join the fight. There is no real logic these days in building teams from scratch, as there are 10 perfectly good ones in action, at least three of which are for sale at any given moment. It would probably be wise to change the system a little and have all of these entrants being given what the Americans call “franchises”. These are basically contractual rights to own and operate a team – within an established framework. In the US these are often linked to the team’s location, but in F1 it would simply be 10 teams, contracted to work together and sharing out money in an equitable manner.

The current system is secret, complex and not really very fair. Franchises in the US are bought and sold, although the franchise-holders can vote to admit new members if they see fit to do so. European sports leagues tend to work with promotion and relegation being used to determine membership, but this is impractical in F1 because of the huge leap in budgets from Formula 2 to Formula 1. If rising teams want to move into F1, they need to find backers to fund such a move.

The current prizemoney structure is heavily weighted towards Ferrari and other big teams, but if the money was redistributed in a more equitable fashion there would be more for almost everyone – and less reason for anyone to argue. Teams would get what they deserve, based on results. History and loyalty to F1 is all well and good, but the big brands make additional money from merchandising as a result of their heritage and so to reward them just for being there is deemed by many as being unfair. If all these bonuses and benefits were removed, the teams would get around $60 million apiece for appearing at races (what is known as Column 1 money) and the prize money (known as Column 2 money) would range from $110 million for the World Champion Constructor, to $23 million for the 10th placed team. That means that every team would get at least $83 million, without requiring any sponsorship or pay-drivers. Given that a couple of teams are operating on around $100 million with decent success, the need to cap budgets would only apply to the biggest teams.

A car manufacturer might baulk at paying $200 million for an F1 programme, but if a moderately successful programme generated $120 million in guaranteed prize money, one can imagine the decision being rather easier for the auto industry executives involved. And one must add that these numbers are percentages based on the money the sport generates and with everyone working together and new revenues being generated, the numbers will definitely rise. So too will sponsorship if the sport moves away from pay-TV in markets that will not support it.

At the moment, the manufacturers who do not want to pay for F1 go elsewhere in the sport. This generally costs less – but achieves less as well. At the moment the fashionable place to be is Formula E, which costs very little, has environmental credibility and goes into urban areas. The fact that it gives little back in terms of publicity and prize money does not matter at the moment, but it will do when the costs start to rise, which they inevitably will do as manufacturers are given more freedom to design their own powertrains and chassis.

Other championships have the classic boom-bust cycle with manufacturers seeing an opportunity and entering a series. This means that either one manufacturer dominates or a number battle and raise the spending levels. Usually only one can be the winner, so the others withdraw and the championship sinks back. This is seen in series like the World Touring Car Championship and the World Rally Championship. The World Endurance Championship allows for more exotic machinery and more spending, but the only race with any real promotional value is Le Mans and even this requires advertising spending to tell the world that a company has won the event.

DTM and NASCAR have the manufacturers working together to keep the regulations tight and thus spread the winning around a little bit more. By working together they all benefit, while remaining rivals on the race tracks.

In a perfect world, the spending in F1 would be limited to make the sport attractive to car companies. Manufacturers would then enter their own teams, rather than being only engine suppliers, thus guaranteeing that they have full control over their investments and making it more interesting for the fans. If the sport generates sufficient money to make the involvement entirely positive, then everyone will gain from the experience.

There was a time 15 or so years ago when it was reckoned that it was worth an automobile manufacturer being in F1 because of the halo effect that the sport had on the image of any company involved. Some believe that it is essential for there to be independent engine suppliers to provide competitive engines for any team not backed by a manufacturer, but without cost controls they cannot be competitive. At the moment F1 engines are still wildly expensive with research into the complicated hybrid technology being useful for the industry. Industry relevance is important, but not when it creates an automobile industry arms race in the sport. Car companies will be doing this research whether they are in racing or not, so the trick is to find a formula with rules that allows them to showcase their technology, without it becoming a question of who can spend the most.

At the moment the industry is still looking to hybrids and electric cars but it must be noted that of the 94 million vehicles manufactured in 2016 only four percent of them were using hybrid or electric powertrains. This is expected to rise to about 15 percent by 2023, but it will still only be a small part of the overall market. Having said that, up to now the big manufacturers have not been investing in the new technology nor marketing such cars aggressively, so the estimates may change. It makes little sense for F1 to switch away from hybrids, but it makes a great deal of sense to restrict these in order to cut costs. If that can be done, and chassis costs can also be cut back, F1 may become more attractive. It is clear that nothing is going to happen before the rules change in 2021, although discussions about the direction that this will take are now ongoing. Liberty Media is hoping that the new package will convince more manufacturers to join the fray. In order for that to happen, the rules need to change in such a way as to give everyone an equal chance to be successful.

At the moment Renault is the biggest of the manufacturer in F1. It is now the third largest car firm in the world, following its acquisition of Mitsubishi Motors last year and the fact that GM has sold its European operations to PSA Peugeot Citroen. This means that GM will likely slip to fourth in the pecking order, behind Volkswagen (10.3 million), Toyota (10.2 million) and Renault (9.9 million). Behind these four are Hyundai (7.8 million), Ford (6.3 million), Honda (4.9 million), Fiat Chrysler (4.8 million), PSA Peugeot Citroen (which should rise to around 4.3 million with its GM sales) and Suzuki (2.8 million). Of the luxury brands Mercedes sells 2.2 million, and is in a fight with BMW (2.3 million) and VW brand Audi (1.87 million), while another VW brand that might be interested is Porsche (238,000). As a comparison, super car companies Ferrari and Lamborghini currently only make 8,000 and 3,500 cars respectively, although they have far bigger margins.

There is a pretty solid case for GM and Ford to get involved in F1 to boost their global sales, while Fiat Chrysler has talked about an entry for Alfa Romeo. BMW, Audi and Porsche are obvious candidates as well.