63% of F1 teams in ‘survival’ mode

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McLaren’s Martin Whitmarsh told the BBC that 7 out of 11 teams are in survival mode in Formula One. That’s a scary thought on the surface and yet small teams have always struggled for the cash to keep going. That argument, however, is not really justification for the situation just as a historical precedent of paying drivers is not justification for the rash of young rookies with cash in 2013. Teams are looking for revenue streams to prop up their operation and Whitmarsh says it’s a tenuous situation.

“The majority of the teams are in survival mode,” Whitmarsh says. “So having longer-term strategic discussions, they glaze over. (They are more concerned about), ‘How are we going to pay our freight bill to Australia?’.”

As the 2013 season prepares to launch, Formula 1 boss Bernie Ecclestone has quietly been speaking with teams regarding a new Concord Agreement. That agreement has financial impact on the teams based upon performance and could mean the difference in staying or leaving F1. As Christian Sylt points out, Marussia are a team on the edge:

Marussia’s latest financial statements are for the year-ending Dec. 31 2011 and show that the team made a net loss of $72.6 million. In September of 2012, its chief executive Andy Webb said, “The directors are in active discussions with potential new investors in the business and are also pursuing other sources of income including potential sponsorship and drivers.”

It adds gravity to the concern over new engine regulations for 2013 when a team is experiencing a net loss and a new engine supply agreement could cost a fortune to cover the OEM’s R&D on the new V6 turbo format. Marussia’s desire to attract new sponsors is also equally difficult because of their back-of-the-grid performance. This is where I feel teams must make the most of their involvement in F1, not just their grid position but through creative marketing and fun activations that set the team apart. Marussia, to its credit, has done some of that… I’m living proof with my Marussia backpack they sent me via a Twitter contest but more needs to be done.

Bernie Ecclestone said the teams have “got more money than God” and the new Concorde Agreement will solve some issues. In fact, he told Sylt:

“On Thursday I was bringing the teams up to speed with the new Concorde Agreement,” he said. “They are all safe. We have got a deal with them all, including Marussia. We are continuing with Marussia. I thought they were going to go but they are not.”

On the other side of that coin, McLaren’s Martin Whitmarsh has been concerned that F1 is not operating with one voice and that this could create some of the reticence in potential investors, sponsors and OEM manufacturers to the sport:

“F1 is pretty good at being self-destructive,” Whitmarsh says. “Every other weekend we say, ‘Shall we really go with the V6? Shall we stick with the V8s? Do we really want turbo-charging or shall we stick with the normally aspirated?’

“If I was facing the board of Hyundai or Toyota and saying, ‘Come to F1 (as an engine supplier)’, they’d say, ‘What are the rules?’ And I’d say, ‘Well, they’re published like this’. And they’d say, ‘I read yesterday we’re not going to do these V6s’.

“We’ve created an unstable environment and we’re very good at that because we like arguing publicly and debating these things in an unhelpful way.

“Manufacturers need to see it happen now. Even in the last few weeks, people have been saying, ‘Oh, should we really go V6 next year?’.

“Christ, we’re committed to it. Good, bad or indifferent, we’ve got to do it now. We’ve been saying it for long enough, we’ve delayed it long enough.

Like any business, teams exist for a host of different reasons but in Formula One, they exist to race. They produce one product, a race car, and sally forth to compete on the world stage at morotsport’s highest level. If there are alternate technologies and business opportunities, such as Williams Hybrid Power , McLaren’s electronics division or Ferrari’s road car division, then that’s even better but these teams have found a world of opportunities and new revenue streams that sustains them. This isn’t the case for the small teams.

What we simply may be seeing is the unsustainable nature of the current business model of Formula One. Sauber, Force India and Marussia come to mind as teams without significant alternative revenue sources and perhaps the only way to move forward in F1 is to be a multi-platform business with alternative sources of revenue to fund your F1 marketing efforts at a loss.

Force India is rumored to be on the ropes every fortnight and it’s understandable given team owner Vijay Mallya’s financial troubles with Kingfisher Airlines. According to team boss Bob Fernley, this isn’t the case. Bob told our friend James Allen:

“There is a disconnect between what happens in Vijay’s business and what Vijay is doing on the F1 team,” Fernley told the jamesallenonf1.com website.

“So it doesn’t matter what happens there. The shares in United Spirits have quadrupled in the last few months, so he did a wonderful deal there.

“But whether Kingfisher or United Spirits is doing well or not doesn’t affect the team, and it’s very difficult for us to get that message across, although we have been trying for several years.

“We get a story every three or four months where we are about to go bankrupt, or someone is selling us or whatever, and we’ve had that for five years, so we are used to it.

“Five times a year we are up for sale. But we are still there and the strength of Force India, which so many people seem to have missed, is our shareholders.

“We don’t have to go to the external market to be able to raise our race budgets. We are blessed to have quality shareholders like Vijay and Sahara (an Indian conglomerate who also sponsor the Indian cricket team).”

Ultimately the economic correction is impacting everyone and teams are no different. Consider the fact that small teams have entered F1, raised sponsor money, investor money and paying-driver money coupled with a  stipend from the Concorde Agreement (based on back of the grid performance) and are barely surviving or running at a loss (insolvent). In short, this model may be keeping teams like Marussia on life support but is that what the pinnacle of motor sport really needs?

With deference to Bernie Ecclestone, he built the Formula One series to become what it is but he’s under no obligation to make sure teams are solvent / profitable. At some level, that responsibility is up to team owners and one can argue that the distribution of money from the commercial rights holder should be increased in order to help the smaller teams stay afloat.

Teams share in 47% of the revenue generated from the series which is an estimated £963m ($1.5bn) and clearly they would like more but so would the FIA and the commercial rights holder. The 47% shared by teams is not divided equally. There are performance-based escalators that see the lion’s share of the money go to the top teams. This leaves a team like Marussia, who narrowly lost 10th place in the World Constructor’s Championship in the final race of 2012, $30 million poorer than had they secured the position against Caterham F1. You can see where that may have come in handy for a team running at a loss of $72 million.

The Solution

The solution is a moving target and while Martin Whitmarsh is correct is suggesting that F1 should get on the same page to attract investors, it is also weathering a tough economy. Making radical regulation changes that will naturally see the top teams funnel millions into R&D is not a good idea in the short-term. Then again, Whitmarsh seems to suggest that the small teams are incapable of seeing the long-term over current fears of keeping the lights on in their shops.

So how does F1 weather the current storm? Give us your thoughts on what you think F1 should do to ensure good racing, a full grid and sustainable teams.

 

 

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