13/05/2008
FEATURE BY MARK GALLAGHER
The demise of the Super Aguri Formula One team is a sad reflection on the fact that the sport has backed itself into a financial corner that it seems either unable or unwilling to get out of. With the exception of Williams, the current business model of Formula One leaves no room for team owners other than car companies or billionaires who are each happy to subsidise their teams to the tune of hundreds of millions of dollars; teams for which the concept of genuine third-party income exceeding expenditure and thus running like a proper business appears to be a hypothetical concept.
This is a serious state of affairs, and one that time and again appears to have little done about it apart from lip service being paid to the idea of reducing costs. Engines and gearboxes may last multiple races, driver aids get banned and technology frozen, but I have yet to hear anyone report that their expenditure has dropped and sent a cheque back to head office at Toyota, Honda, Mercedes et al. Meanwhile the crass and obscene expenditure on ever more complex and, to the sponsors, fans and media, irrelevant aerodynamic development continues unabated. The cars look more like batmobiles than ever, and corner with such prodigious speed that it raises questions over safety.
There is, undoubtedly, an unswerving belief among the powers that be that the major teams will always find the cash, that the car companies are tied in for the foreseeable future and that Formula One is better off without the tail end Charlies. To me, though, this is pure hubris and it's not impossible to see how our fast-changing world could one day side-step the best laid plans of Formula One's chiefs and cause a seismic shift.
Consider that, at USD$120 a barrel, oil is at an all-time high with UK consumers paying USD$2.40 per litre, or USD$10.80, per gallon at the pumps for diesel, slightly less for petrol. Yes, US visitors to Pitpass, that is the price today and it's coming to a gas station near you…
Worse still, global demand is not dropping at these prices, it is rising; driven by demand in the Middle East and China. It's now being forecast that oil will hit USD$200 a barrel within the next six months, 400% higher than the OPEC nations were working on as recently as two years ago.
What the impact of this will have on car sales in Europe, North America and oil-poor Japan will be is anyone's guess, but I doubt people will be rushing out to buy new motors when they can hardly afford to fill their tanks. At the premium end of the market, the more fuel thirsty models from Mercedes and BMW may remain unsold on forecourts, while at Toyota, Honda and Renault increased demand for smaller, fuel efficient and hybrid models may require them to invest heavily in advanced technologies which will have little to do with Formula One and everything to do with keeping the car industry relevant.
As I have written before, companies like Toyota and Honda do indeed have a great deal of money and can well afford Formula One. Cash is one thing, however, but changes in their business imperatives could easily cause senior executives to question the wisdom of continuing to spend hundreds of millions on Formula One at a time when they need to refocus their businesses; and particularly when on track success continues to elude them.
Car companies aside, major sponsorship categories within Formula One also have their problems, and none more so than the financial services sector. I doubt many executives at RBS, ING, Credit Suisse and Banco Santander have enjoyed the start of the Formula One season as the global credit crunch has seen share values dissolve and one major UK bank face a 1920's style collapse and the need to be nationalised.
Fred 'The Shred' Goodwin, CEO of RBS, is a long standing fan of Formula One and his bank's money has helped Frank Williams weather the difficult years since BMW jumped ship, but RBS has recently had to ask existing shareholders to participate in a major rights-issue in order to bolster their financial position. Having spent a colossal amount of money beating Barclays to the acquisition of ABN AMRO last year, RBS has been hit hard by recent events, and there have even been suggestions in the financial media that Goodwin may have to step done. This was unthinkable not so many months ago but, as I said, we live in a fast changing world. An RBS without Goodwin could prompt a Williams team without RBS.
A Formula One over-reliant on the health of the car industry and financial services sector is a Formula One which needs to find ways to spread its risk.
Even Ferrari must wonder what the future holds. When Marlboro finally tires of spending a lot of money not to show its brand identity, it will be interesting to see which global brand finds USD$100m to spare each year.
Red Bull owns one and a half teams, but is selling its share in Toro Rosso which, like Super Aguri and indeed Red Bull Racing, has struggled to find any worthwhile sponsorship to mitigate its costs of competing in the sport. I left RBR in March 2005 and, three years later, have not seen the major co-sponsorship arrive in the team that Dietrich Mateschitz would like to have scored. It's not surprising that the added pressure of keeping a second team going has caused a rethink.
Force India, nee Jordan, Midland and Spyker, is another tale of hardship in relation to Formula One's inability to create a sustainable business for anyone other than the top two thirds of the grid. When EJ finally had to throw the towel in, Alex Shnaider came on board only to find out that the old adage that to make a small fortune in F1 you first had to start with a big one, remains true. At least for the backmarkers. And Spyker? Well, they came, they saw and they ran away as fast as they could - this was no place for a low volume sports car company.
VJ Mallya is clearly determined to harness India's growing industrial might in his vision of a nationally-identified Formula One team, and perhaps he stands a better chance than most given he happens to already own one of the country's leading businesses and probably knows everyone worth knowing in Indian business circles.
Two causes for concern here; firstly that companies may not rush to subsume their brands to a team dominated by Mr Mallya's Kingfisher brand or other businesses, secondly that national teams are a tough sell in the global business of Formula One. International companies like a global identity, not a national one. If you want to know how easy it is to create a national team, ask Alain Prost. Once SEITA (Gauloises), Peugeot, Total and Alcatel took off, the cupboard was bare.
Given all the above, I think it is very important that Formula One takes the issue of how to sustain all the teams and tackles it head on. Better still, finds a way to make it possible for new teams to come in. Asking the existing top ten, now the only ten, teams to agree to an eleventh, twelfth or thirteenth team coming into Formula One is going to be greeted with silence. Why would they want it given that only the top ten (again, now only ten…) benefit from a share in the vital TV and licensing revenue?
The problem is that, with Super Aguri gone, someone else is now going to be last each weekend. Force India or Toro Rosso. And that makes it very hard for them to sell sponsorship, or sell the dream, on top of which they don't get much TV coverage. Sponsors like to be associated with success, or the possibility of success, and certainly they want exposure. With none of those ingredients available to the chaps down the back, what exactly do they have to sell?
When I first went to a Formula One race working for a team, Jordan, at Phoenix in 1991, there were 18 teams in Formula One - the era of pre-qualifying. Some of them were a shambles, and I completely agree with Bernie Ecclestone's quest to rid the sport of teams that add nothing to the show and in fact detract from it. Ten teams, however, is too few.
With 18 Formula One races on the calendar, the prospects for some of the new markets ever having a driver in Formula One have been diminished by the fact that there are now only 20 race seats available. Such is the relatively slow turnover of drivers that countries such as China, Korea, India, UAE, Bahrain and Singapore will now have to wait many, many years before they can find a berth for their talented sons - let alone a daughter which is surely the next taboo to be broke.
Fewer drivers means fewer fans, fewer media, fewer opportunities for Formula One to expand its global footprint.
The advent of car company-owned and run teams has also diminished the pool of hard edged sponsorship sales talent in the sport. Gone are the days when, unless you filled your car with sponsors, the bills would not get paid. The owners now take care of this in most cases.
Is that healthy? Some, I am sure, will say that to have 10 teams fully funded and not about to fall over because their owners will always make up the annual shortfall is a good thing. That's fine so long as the owners have the capability and interest to pay the team's bills. But what happens when the owners falter or, worse still, have to pull out of Formula One. Who, for example, would take on Toyota's massive factory and staff overheads in Cologne?
In the days when the Team Principal was the man with his name over the door of the shop, commercial reality mean that they would wake up each morning with deals to be done, sponsors to be landed, finance to be found. How many of the car manufacturer team principals do that now?
Somewhere between the extremes of private team owners unable to find the money to go racing and corporations dominating the sport to the extent that it is over-reliant on their continued involvement, lies a happier medium. In all the discussions about cost reducing technical regulations and so on, I have never seen a financial target - and there really ought to be one.
In order to attract the next generation of team owners, and indeed provide for the continuation of the remaining 10 teams even if their corporate owners bail out, I would propose the following;
1. The TV revenue should be shared among all teams, down to 12th, so that in effect there are two slots remaining for new teams. In the event that there is no 11th or 12th team, those monies go into a cumulative Team Fund to be used to rescue any teams who subsequently fall on hard times.
2. Customer cars should be permitted, with a specific price on chassis, engine and technical support such that the smaller teams could operate to a USD$60m budget annually. Such teams would only be awarded half-points towards the Constructors World Championship.
3. The last six cars in qualifying - Q1 - will be eligible to receive a 'wild card' grid position, one car per weekend drawing a grid slot in the top 16 during a post-qualifying draw. In this way a Super Aguri could, for example, be drawn in any one of the top 16 grid slots, thus ensuring a degree of unpredictability, TV exposure for the smaller teams guaranteed, and the possibility that in, say, poor weather conditions they might score points and play a key role in the outcome of the race.
4. In the event of one of the remaining ten teams withdrawing from Formula One for reasons other than insolvency by the parent company, they must return the last two years of TV rights payments to FOM's Team Fund.
5. Teams should be restricted to having no more than 40 technical staff at a race, or 25 in testing.
6. Aerodynamic development should be strictly limited to front and rear wings, main body area and floor, with all winglets, flick-ups, turning vanes banned.
Some of the above is undoubtedly unpalatable; to the technocrats who want an unfettered approach to F1 technology, to the existing 10 teams who will selfishly protect the TV fund instead of realising that more teams would make the whole show better and generate greater overall TV revenue, and no doubt from the same people who already managed to prevent teams such as a fine company like Prodrive coming in with customer chassis. Frankly, the 10 existing teams are not the people to ask, so they need to be told the rules are changing; I can't see what position they are in to do anything about it.
When Jordan came into Formula One in 1991 the team endured some very tough times, even to the extent of requiring assistance from Bernie Ecclestone, but it survived, thrived and added significantly to the show for 15 consecutive seasons. Super Aguri added something to it too - a drive for two talented drivers, a focus for racing fans in Japan who believed in Aguri's dream, and even a team which kept Honda on its toes and rather embarrassed the works outfit. F1 teams deserve to be kept on the straight and narrow, and there's nothing like a minnow embarrassing a shark from time to time.
As we head into a summer where the headlines will be dominated by an FIA Senate meeting, a sex scandal played out in the high court and other such distractions, the fact that Rome is burning might be missed by some. I cannot imagine that the Super Aguri staff sitting at home weekend after weekend will have much desire to switch on the TV and watch the races. The show will be almost 10% smaller, but the loss is 100% for them and, for the sake of Formula One, it really ought to be the last.
Mark Gallagher
mark@pitpass.com
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