The root of F1’s cash crisis
By any index the sport’s costs have spiralled unceasingly – and it’s killing the small teams. Just how did we get here?
The leading players might be immune for now, but there’s no disguising the scale of Grand Prix racing’s financial woes. How did it happen? Read on…
Williams won its first world constructors championship in 1980, on a budget of £2.2 million. Twelve years later it won its fifth, for £32 million. Index-link that 1980 figure for inflation and the ’92 equivalent of the £2.2 million would equate to £4.4 million. Had F1 spending simply kept up with inflation £4.4 million would have been the ’92 title-winning budget. Taking inflation out of the equation, getting Nigel Mansell and Riccardo Patrese to 1-2 in the ’92 championship was almost 400 per cent more expensive than getting Jones and Carlos Reutemann to 1st and 3rd in 1980.
Yet that £32 million is £8 million less than the extreme budget cap proposed by Max Mosley for 2010 and which attracted the three new teams that have since gone out of business. Not even they got to such a low spend. Index-link that 1980 Williams spend to today and the budgetary equivalent would be £7.4 million – which if you don’t spend time in F1 sounds like more than plenty of money just to put two racing cars on track for a season, and it would be. Yet the top teams are now spending around two hundred million pounds. Taking inflation out of the equation again, that is an 800 per cent increase on 1980’s budget.
It is often assumed that F1 technology is what has increased the spend so crazily, but that isn’t so. Consider for example that ’92 championship of Mansell’s. It was achieved with a full active-ride car with no engine freeze or limitation upon the number of engines or gearboxes used or the number of testing miles completed. Yet with restrictions on all of those aspects now in place, top teams are spending almost four times what they were then. The crazy spiral of costs is little or nothing to do with technology. It’s to do with how much money is coming into the system. Competitive entities that they are, the teams spend all that is available. So they expand to fit. Teams that began the ’90s with a staff of 150 people were 12 years later employing 800, and had vastly increased the size of their factories and the technical resources within them. That’s all fine until the money coming into the sport falls – which is what’s been happening in the past five years, leaving teams vastly over-sized for the available income. But only as a group. The top teams have suffered no such shortfall in income; they have simply negotiated a bigger share of a shrinking total. Which, of course, is leaving the rest bleeding to death. That is the mechanism driving the current cost crisis in F1. Because of their much smaller share of F1’s revenue from the sport’s owners, the smaller teams are essentially subsidising the outrageous spend of the bigger teams – and beginning to go out of business as a result.
So how did we get here? What brought about the sport’s vast increase in wealth? What were the significant mileposts along the way?
When Ian Walker sold up his race team at the end of 1967 – the death of his friend Bo Pittard at Monza being the final straw in extinguishing his enthusiasm – he told his friend and former business partner Colin Chapman of the contact he had made with Player’s, the tobacco company, which he had previously hoped would sponsor his team. Walker suggested Chapman might be able to persuade them to back the Lotus F1 team instead. So Gold Leaf Team Lotus was born in 1968 and F1 entered the sponsorship era – though it had required Chapman to pressure the governing body into relaxing its stance about commercial liveries on F1 cars.
That initial Gold Leaf deal was commonly described as lucrative at the time, and for what was then such a minority interest sport it probably was. But it was actually for less than £100,000 – and this pretty much covered the cost of running the team. Although wings and downforce came to F1 at much the same time as sponsorship, that was nothing more than coincidence. The theory was already out there, the cost of a few sheets of aluminium and steel supports was negligible and wind tunnels were almost unknown. Sponsorship did not enable downforce; it was coming anyhow.
Gold Leaf Team Lotus still employed only a couple of dozen people at the beginning of 1970 as it won the championship again, with Jochen Rindt and the Lotus 72. On this occasion the Player’s sponsorship didn’t quite cover the cost of what had been a more expensive season than expected, as the 72 needed to be extensively redesigned and engineered from its flawed initial form. It was for this reason that Alex Soler-Roig was given a third car to drive in three events, the Garvey Sherry sponsorship he brought making up the shortfall in budget.
By the mid-70s Ken Tyrrell was complaining that it cost his team £600,000 to field two cars for Jody Scheckter and Patrick Depailler, this bill being met by the French government-owned Elf petroleum concern.
So what had driven the costs up six-fold (2.7-fold, inflation-adjusted) in half a decade? Nothing more than greater available income. It wasn’t just Elf following the Player’s example: Yardley, Marlboro, Martini, Embassy, Gitanes and others were cottoning on to how some of F1’s glamour could rub off onto the perception of their products. Marlboro became the world’s leading cigarette brand and it believed that this could be laid at the door of its two most successful marketing ploys: the invention of ‘Marlboro Man’ (the free-spirited outsider depicted in the ’70s and ’80s ads) and the association with the jet-set lifestyle of F1. Marlboro was selling a dream and F1 came to realise it could do exactly the same thing. Or at least the marketing people – a new species within F1 – realised it. The addicts running the teams just wanted to go faster and use up whatever means were available to do so. If more was available, then they’d spend more – more people, more research, more testing. This has been the mechanism ever since.
John Hogan headed up Marlboro’s sponsorship operations for more than two decades. “By the mid-late ’70s we were providing McLaren with $2 million [£850,000 at January 1975 exchange rates], which was big, big bucks at the time,” he says. “But you should also remember that during the early part of the ’70s, when there was a tyre war, the tyre companies were probably the biggest sponsors of all, not only paying the teams but the drivers too. I remember [Goodyear competitions boss] Leo Mehl telling me that Chris Amon was their highest paid driver at about £300,000, higher even than Jackie Stewart.”
With the Goodyear monopoly from 1975 that money largely disappeared and was increasingly replaced by income from non-trade sponsors such as the tobacco companies. There was even the early representation of the financial services sector that would later come to be a significant contributor, with First National City Bank adorning Penske in 1975-76 and Tyrrell in 1977-78.
The sport’s expanding reach
Meanwhile Bernie Ecclestone was commercially electrifying the sport.
If it hadn’t been him, someone else would have made the link between the increasing number of sponsors who were finding F1’s image attractive and getting TV companies on board. But few, if any, could have negotiated so brilliantly. It came in that order though: sponsors first, TV companies next. Playing a massive part in that commercial breakthrough was the epic human interest story of James Hunt vs Niki Lauda in 1976, a contest that brought F1 into the mainstream. TV companies and sponsors alike were soon flocking to the sport and the presence of one multiplied the benefits for the other, so compounding the whole process. Ecclestone was making himself considerably richer and the teams had turned down his offer of taking a share, settled instead for set payments and left him to negotiate on F1’s behalf. Those set payments allowed even teams not being paid £850,000 by Marlboro or £600,000 by Elf to set up on a proper footing, no longer living the sort of hand-to-mouth existence traditional in the ’60s. All these naturally evolving factors drove cost in the direction it’s always driven – upwards. As more money came in, so more was spent and the cost of being competitive steadily rose.
Then another breakthrough: Renault. So successfully was the glamour of F1 being portrayed that a mainstream car manufacturer began to look closely at setting up its own team. But being a manufacturer it wished also to use the sport to boost its technical know-how. Hence the turbo programme, taking advantage of the long-ignored equivalency factor in the regulations for forced induction engines. The company did not reveal its total spend over the period of its factory team participation from 1977-85, but it can safely be assumed to have been vast. This was cutting-edge technology, initially not at all well understood.
At the time of the turbo Renault RS01’s introduction in 1977, most of the field were running Ford Cosworth DFV engines, available off the shelf from St James Mill Road, Northampton, at £12,500 each. It wasn’t at that stage possible to buy an F1 V6 turbo. But the unit cost of each will have been stratospherically more than £12,500. That said, Renault’s participation did not of itself directly increase F1 costs. The costs of the project were shared between the parent company’s R&D and marketing departments and Elf. But as the turbo concept became progressively more competitive, it raised the bar. It attracted other manufacturers – Alfa Romeo, BMW, Honda. The latter two formed partnerships with existing specialist F1 teams, Brabham and Williams respectively, that garnered world championships. We need to distinguish here between team spend (not including the free supply of engines from the engine partner) and total spend (including the engine supply). Only for Ferrari has it been one and the same thing. The total spend increased vastly during the first turbo era, but for the teams the turbo engines themselves added cost only to those smaller outfits that were having to buy them commercially rather than being supplied free. But teams were beginning to increase in size. Coincidentally coming along at about the same time as the turbos was the harnessing of the ground-effect phenomenon. Suddenly more aerodynamic research required more aerodynamicists – but again this wasn’t game-changing so much as a gradual ramping up of staff numbers. The sport itself was still expanding commercially, so there was more money being attracted – and the teams were using that. As the ’70s met the ’80s there was more money sloshing about in the sport because more companies were being attracted to its expanding global coverage and increasing profile. Year on year it accumulated to a big change – hence Williams’ £2.2 million spend in 1980 compared to Lotus’ £100,000 (£364,000 in 1980 money) a decade earlier and employing 75 people rather than 25. But it wasn’t really game-changing. Not yet.
Ron Dennis & non-quantifiable marketing benefits
“One of the biggest drivers of the massive growth between the end of the ’70s and the beginning of the ’90s was Ron,” says his friend and former partner Hogan. “He was so determined for McLaren not only to win but dominate and he realised the only way to do this was to outspend Ferrari. That was his simple philosophy and it was very successful. He set about getting the money – from us and elsewhere.
“Every couple of years it would be time to renegotiate the Marlboro deal and we’d have this long-running argument as he ramped up what he was asking for. I’d say, ‘Ron, are you calculating that number based on TV exposure or cost of engineering?’ and he’d say, ‘Both’. But you cannot do it like that. Because – and this is key – the marketing numbers are not well quantified. The engineering numbers are quantified, but with all the money coming in as a result of the marketing justification for expansion, they cannot be controlled.”
F1 just sucked in whatever was out there and its suction power was becoming progressively greater as Bernie did his thing for F1 within a world that was becoming forever bigger and more linked up. Sucking hardest of all was Dennis.
McLaren’s budget went from about £2 million when Dennis took over at the beginning of the ’80s to circa £50 million by the end of it. Now the game was changing. Ron will have worked on Hogan the way he does anyone he sees as beneficial to his cause – with a relentless, thoroughly researched purpose, finding the point of mutual benefit and presenting that vision in a totally convincing manner, every possible objection thought out in advance and answered. He’s a force of nature and rode the Marlboro bronco long enough to help him realise his vision. He understood the scale change that was possible better than any other team owner and adopted an aggressively expansionist policy, borrowing from the future on the strength of the expansion of the sport itself to increase hugely the team’s size and financial power. You might have called it gambling on success if that didn’t suggest a recklessness that is definitely not Ron. Everything was meticulously planned, each move calculated, and the sheen of McLaren acquired an ever-deeper lustre, the on-track success of Alain Prost and Ayrton Senna a reflection of the big moves made by Dennis behind the scenes. The expansion was in large part financed by Mansour Ojjeh, vastly wealthy Saudi businessman and owner of an investment company Techniques d’Avant Garde (TAG) specialising in links between Europe and the Middle East. He had taken TAG into F1 as a sponsor to the Williams team in 1979. Soon enough he became the target of one of Dennis’ offensives, Ron presenting a joint vision whereby Ojjeh would become more than a sponsor, a partner, with McLaren the jewel in TAG’s crown. Ojjeh is a sophisticated, multi-cultural, highly educated, well connected man. He was won over by Dennis’s vision, was on board by 1981 and a majority shareholder by ’85. He’s been a crucial part of McLaren ever since, the financial muscle needed for any transitional periods, the guarantee of the team’s financial independence.
The second manufacturer wave
Initially TAG financed McLaren’s commission of Porsche to create an engine to designer John Barnard’s specification – the motor that powered the team to world titles in ’84, ’85 and ’86. But Ron’s vision was far from spent yet and his next move – bringing Honda on board as an engine partner at a shock-and-awe financial level, providing not just free engines but vast budget too – reset the parameters, initiating the second wave of car manufacturer involvement and increasing the scale yet again. “When Honda joined with McLaren in ’88,” says Hogan, “they were outspending [Marlboro, in the budget it supplied McLaren] by three to one.” Formula 1 had just been eased from tobacco to the car manufacturer era.
Almost single-handedly, Dennis had changed the scale and definition of what a top F1 team was. Seeing this up close was engineer Steve Hallam, who joined McLaren from Lotus in 1990. “Lotus had been a pretty competitive team even as late as ’87,” he says, “and when I was there I thought of it as a top F1 team. But then I arrived at McLaren, saw the scale of what Ron had put together and I thought ‘no wonder we were beginning to struggle’. It was on a totally different level of resource and organisation.” Other F1 teams that failed to recognise the Dennis-led scale change – even those like Lotus and Brabham with proud histories – would fall by the wayside if they didn’t borrow from the future to expand, to keep up.
Through the ’90s and into the 2000s other major manufacturers followed Honda (and Fiat through Ferrari) in partnering or even owning teams: a returning Renault, BMW, Peugeot, Mercedes, Ford (partnering and then buying out Stewart and relabelling it Jaguar) and Toyota. For a time it was in vogue not to ask whether a manufacturer could afford to be in F1 but whether it could afford not to be. These were the boom years, when teams quadrupled in size, built ever-more palatial bases – McLaren’s MTC (below) predictably the most palatial of all – created ever-more technological resources. But not because technology demanded it. Rather, just because the money was there.
In the same period, rules governing the ever-increasing speed of the cars became incredibly dense as hundreds of clever, well-funded engineers found ways around the intent of each new rule. The search for performance became ever more intricate and perfectly timed for the exponential growth in computing power. Because the money was there, that computing power was unleashed on F1. Some of the most powerful computers in the world, cutting edge and comparable with those in the US aerospace and defence programmes, are used to find another 0.1sec of F1 lap time. But the money came before the computers.
In boom time there is no business justification not to spend. All those manufacturers spending hundreds of millions of pounds each year felt it was justified – or at least might be. And so the sport, like a black hole sucking in the light, greedily consumed that spend. But some day the boom was always going to be over: it happened in 2008 and essentially remains that way today, leaving the top teams too big for the prevailing economic conditions (and ownership structure, but that’s another story). “F1 isn’t very good at forecasting or cost-capping,” agrees Hogan, “but neither are a lot of other industries. Look at the aircraft or defence industries – a bloody disaster. It’s not dissimilar, always at the sharp end, inventing new things and just pulling in the money from wherever it can be found rather than planning financially first and acting accordingly.”
It’s untrue to say there has been no cost-cutting in F1. A look at the table (on p27) reveals that, allowing for inflation, the title-winning spend in 2013 was actually £8 million lower than in 2005. With fewer manufacturer dollars available the sport responded with engine freezes, season limitations on the number of engines and gearboxes, severe testing restrictions and limits upon wind tunnel time and CFD capacity. But still, the total spend is out of kilter with what is left of the sport’s income after its owners have taken their cut, and still those teams made massive in the boom years need to be fed – hence their disproportionate share of the money set aside for the teams. Now it appears they are resorting to cannibalism as the smaller teams struggle to survive.
Hogan, however, is not so pessimistic. “There needs to be some form of cost cap. Back in 2008 Max Mosley said they had a cost cap solution that was on the verge of being agreed, but it got side-tracked. We need to go back and try again on that. But are there more sponsors out there? Yes. Will they get value for money from F1? Yes. Is there a limit? Probably, but no one knows what it is. It’s all relative.”
Indeed. Thirty-odd years ago Williams’ £2.2 million budget seemed vast. Today a manufacturer will invest around £1.6 billion for a new road car platform – which makes F1, at little more than a tenth of that per year, sound extraordinarily reasonable. F1 stands at a crossroads: one way is savage down-sizing to make it sustainable for independent teams. Another is a full-out drive to attract more manufacturers on the basis of marketing and engineering. Is it possible that one day, a couple of decades from now, we’ll look back on the current era’s budgets and be amazed at how small they were? Or is that just another F1 delusion?