[F1line] “It’s time to act”-F1 team bosses feel the squeeze

[F1line] “It’s time to act”-F1 team bosses feel the squeeze Nov 1, 2014 10:43:22 GMT -6

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Post by n7thGear™ on Nov 1, 2014 10:43:22 GMT -6

The anger and frustration of the smaller teams in F1 began to boil over on a tense afternoon in Austin, as the Sauber, Force India and Lotus team laid out their concerns that the distribution of F1′s commercial revenues, combined with the lack of effective cost control, threatens the livelihood of their teams. After two teams went into administration last week, the time has come to act, they said.

There are even suggestions tonight that a boycott of the US Grand Prix has been threatened by the three teams could happen as a protest against the inequality. My understanding is that it was discussed prior to leaving Europe, but the prospect of being blamed for a repeat of the 2005 Indianapolis fiasco, where only the three Bridgestone contracted teams ran due to a problem with the Michelin tyres, is too much to contemplate.

“I think the disappearance of two teams is pretty unfortunate but.. probably now is the time to say things as they are. Number one: the distribution model of revenues is completely wrong. Whether the size of what is distributed or not is right or wrong is debatable and Vijay has mentioned one side of the thing. But then, you know, when you’ve got teams showing up to the championship that get more money just for showing up than teams spending a whole season then something is entirely wrong with the whole system and so that cannot be allowed to happen.

“And now is the time to not be talking about it but the time to be acting about it, so we will see what’s going to happen in the next couple of weeks.

“The second thing is the cost cap. We always find excuses not to have a cost cap. There are reasons why certain areas should not be capped but there are also reasons why certain areas should be. And, again, now is the time to be acting rather than talking about it. And finally, this is an odd sport. We say things and then we tend to do the opposite. I’ll just give one example. The birth of the new engines happened when we started talking about cutting costs and so forth. The fact is that the new engine, which from a technology perspective is a great thing, the costs were passed on to all the teams.

“In our case this year, between the engine and development we probably spent something like US$50-60 million. That’s not cost cutting in our books, that’s essentially throwing money out the window. So we tend to also do completely the wrong things in terms of… if we unfreeze the engines now, which is the next topic that is coming up. All we are going to do is again essentially force everybody to keep developing and so on and so forth. At the end of the day, the revenue split, the capping of costs, have an immediate impact on the sport and not taking decisions has had an immediate impact on the sport in the last couple of weeks with two teams disappearing. So, as far as I am concerned… it’s really interesting to have the press conference but it’s going to be really interesting to find out what’s going to happen in the next couple of weeks around this topic.”

Gerard Lopez

Gerard Lopez, the owner of Lotus F1 team made a powerful impact with his opening comment on the subject in a fascinating FIA press conference on Friday afternoon,

“I think the disappearance of two teams is pretty unfortunate but.. probably now is the time to say things as they are. Number one: the distribution model of revenues is completely wrong. Whether the size of what is distributed or not is right or wrong is debatable and Vijay has mentioned one side of the thing. But then, you know, when you’ve got teams showing up to the championship that get more money just for showing up than teams spending a whole season then something is entirely wrong with the whole system and so that cannot be allowed to happen.

“And now is the time to not be talking about it but the time to be acting about it, so we will see what’s going to happen in the next couple of weeks.

“The second thing is the cost cap. We always find excuses not to have a cost cap. There are reasons why certain areas should not be capped but there are also reasons why certain areas should be. And, again, now is the time to be acting rather than talking about it. And finally, this is an odd sport. We say things and then we tend to do the opposite. I’ll just give one example. The birth of the new engines happened when we started talking about cutting costs and so forth. The fact is that the new engine, which from a technology perspective is a great thing, the costs were passed on to all the teams.

“In our case this year, between the engine and development we probably spent something like US$50-60 million. That’s not cost cutting in our books, that’s essentially throwing money out the window. So we tend to also do completely the wrong things in terms of… if we unfreeze the engines now, which is the next topic that is coming up. All we are going to do is again essentially force everybody to keep developing and so on and so forth. At the end of the day, the revenue split, the capping of costs, have an immediate impact on the sport and not taking decisions has had an immediate impact on the sport in the last couple of weeks with two teams disappearing. So, as far as I am concerned… it’s really interesting to have the press conference but it’s going to be really interesting to find out what’s going to happen in the next couple of weeks around this topic.”

Monisha Kaltenborn of Sauber supported Lopez’ position,

“Look at the facts: we are sport here, in my view still one of the best global sporting platforms, we have turnovers of billions of dollars and the sport as such, together with the stakeholders, are not in a position to actually maintain 11 teams. And we’ve often enough discussed what it means to have a third car, where that can go to, and we could probably sit very long, arguing the pros and cons about it but that’s not what we should do in this sport. It’s time that we focus on reducing the costs.

The top teams were represented by Mercedes’ Toto Wolff and McLaren’s Eric Boullier. Wolff sympathised with the three smaller teams and said that the stakeholders must make sure that efforts should be made to ensure that all the current teams continue, but argued that at the same time entrepreneurs like Tony Fernandes, the former Caterham boss and Gene Haas, whose US based team is due to enter in 2016. should understand what they are getting into.

Toto Wolff

“If you look at Marussia and Caterham when they joined the sport it was an entrepreneur deciding to join Formula One and maybe underestimating what it meant joining that field. You have other examples, such as Vijay, who is extremely successful in his business and who had stamina and size enough to cope with the challenges until today,” Wolff said.

“I have great respect for what Tony Fernandes and Andrey Cheglakov have done in their businesses but maybe Formula One is just a different ball game, because you have these various agendas. So I think it is time to sit down and reflect and think what can we do? Because the remaining nine teams are part of the DNA of Formula One, they are heart and soul, names like Sauber, Force India and Lotus need to stay in the business.

“I think we all need to sit down, not with our own little narrow agenda of wanting to win the championship – and this is why I am paid, and why Eric is paid – but by looking at the whole of Formula One. But I think there are… like in any other sport, like in any other industry, this is the pinnacle. This is the pinnacle of motor racing and if you want to complete at the pinnacle of motor racing then you need to have the resources of competing there. This is a high entry barrier sport. I’m getting overboard now, but if you want to set up an airline tomorrow, it’s going to be difficult, because Lufthansa is going to eat you up. If you want to go motor racing and you want to do Formula One like the new teams decided four or five years ago, you need to understand that this is the very top.”

It was a very interesting press conference, one of the most interesting of recent times and worth reading the transcript in full at www.fia.com And afterwards Force India slammed the ‘arrogance’ of the large teams.

Yesterday the FIA issued a response statement to the withdrawal of Caterham and Marussia, hinting that FIA president Jean Todt was about to launch another initiative to get costs under control.

Force India deputy team boss Bob Fernley was dismissive of the FIA’s willingness to get involved.

“I think the FIA are both impotent and powerless, and that has been proven this year in that they wished to bring in cost controls and used their best efforts to do so, but they were completely overpowered by CVC and the (top) five teams,” he said.

“Responsibility lies with the people in control and that is CVC.

“One would have thought if there was any concern the commercial rights holder would be trying to bring together the disenfranchised teams and there has been nothing at all. If there was any concern at all about it, you would presume the head of CVC would be here. And he is not.”

Clearly things are reaching breaking point and it will be interesting to see how far the medium sized teams will go in the next few weeks, while the season is still live, to get their way and whether the FIA will confront the bigger teams if they block meaningful controls. A budget cap is a line in the sand for many of them.

Ferrari will be particularly interesting to watch as they are the ones who take the most money from F1′s commercial revenues and at the same time are pushing for a development ‘unfreeze’ on engines, which will add further cost. At the same time they have a new chairman in Sergio Marchionne, who has a very different agenda from Luca di Montezemolo; a much more US focussed agenda and one can imagine him, if things get difficult, playing a strong hand, as he could threaten the unthinkable – that Ferrari would leave F1 to focus on the US and on Le Mans.

“There is something entirely wrong”: F1 teams clash over costs and revenue sharing
2014 United States Grand Prix

In a tense press conference at the Circuit of Americas, team representatives clashed over how F1’s financial situation has led to the loss of two of their rivals.

Here are some of the key points made by both sides of the discussion.
Wolff: Marussia and Caterham overspent

Mercedes executive director Toto Wolff said Formula One should protect its nine remaining teams but that Marussia and Caterham ran into trouble because they were spending beyond their means.

I have an emotional and a pragmatic view. The emotional view is that there is personal drama behind it. There are families who need to pay mortgages, there are kids going to school and these people don’t have any jobs today anymore and that is a drama and it is painful and I am sorry for that. The rational side of things is that we have seen in the past that teams come and go. We have seen great teams who have folded, went into liquidation or administration. Great names: Brabham, Arrows, Ligier, Prost, Larousse, Leyton House… I mean there are 20 others. That was part of Formula One. Now, is that something that should happen? No, of course it shouldn’t. But when Formula One was opened up for new teams to join, you can’t compare the agenda of the teams. You know in our case we are representing a multi-national car company. This is a branding exercise, we are showcasing our technology. And on the other side if you look at Marussia and Caterham when they joined the sport it was an entrepreneur deciding to join Formula One and maybe underestimating what it meant joining that field. [...]

If today you run a team, it’s like running a company. And this shouldn’t be sounding arrogant in any way – but you’re not obliged to spend more than you have. There are different agendas. If you run a company today and you own it, you should probably run it in a sensible way. And that means spending what you have. And if you decide to invest or to go into debt because you believe that there is a sound business case behind it, this is what you should do. Now, I find it disturbing as well that you need to spend one hundred million, or you want to spend one hundred million if your income is only 60 or 70 million. In my time back at Williams that was the philosophy. You spent what you have. And if you decide to follow a more aggressive strategy, you need to know what happens tomorrow. I have a lot of respect for everybody sitting on the stage, from an entrepreneurial view, but that is the economic reality and the economic reality is valid for any company out there and for any sports team.

Lopez: F1’s business model is killing teams

Pastor Maldonado, Lotus, Circuit of the Americas, 2014Lotus team principal Gerard Lopez said that expensive rules changes, supported by teams who receive far more generous remuneration from Formula One Management, are driving teams to destruction.

I take a GP2 team, or a GP2 car, and I make it race around this track. It’s not going to be ridiculous. It’s going to be down by a couple of seconds, four, five, six, maybe seven seconds. The whole GP2 team for the whole season is going to cost €4million. Are we really that much better? I mean are we really better to the point that a team needs to spend €300 million to be six seconds faster? We’re not. I wouldn’t accept that argument from anybody. We’re not €300 million better if you take the top teams compared to a GP2 team. So it’s a bit ridiculous to say that you need to spend that kind of money to have that kind of performance – because that makes us the worst managers in the world. If I took a financial view of this sport, comparing GP2 to F1, and the so-called Law of Diminishing Returns, we are most probably the worst managers there are. And we pride ourselves of not being. So, if we’re not, we really need to think about… and I’m not saying that suddenly Mercedes needs to cut down because I understand that for Mercedes it’s a small portion of their overall budget but a very important budget in terms of image. So, nobody’s saying Mercedes suddenly need to spend 20 per cent more than the cheapest team in F1, if I may say so, but what we’re saying is, where the money goes – which is essentially developing the cars and so on and so forth, if we need to spend €300 million more than a GP2 team to make the car go six or seven seconds faster, that’s not a very efficient use of capital – and so that’s where the issue is. So nobody – certainly I am not saying – that we should take the budgets down to a fixed amount. What I’m saying is we should take the budgets down to an amount where everybody can spend whatever they want on whatever they want – as long as the technological development, the development of the car is done within a framework that makes financial sense – and that can be measured. Because it doesn’t have to be measured in dollars, euros or pounds, but it can be measured in wind tunnel, number of packages, updates, so on and so forth. [...]

I take the example of Marussia, of Caterham. I kinda guess what they must have paid for the engine this year and what they have paid for developing around that engine and I guarantee that in the budgets that they have, there was not a whole lot left – so it’s not like they had a choice. And the choice of the engine was not made by these guys – and this is one of the examples I gave before. It’s all good and fun and so on to say that you shouldn’t spend more than what you what you have or not. But at the end of the day, certain decisions on budget are forced up on you just by the fact that that’s what the market is giving you. [...]

Mercedes, Circuit de Catalunya, 2014We’re in the lucky position, we took a Mercedes engine for next year. Seems to be the better engine – it clearly is – but the fact is we still have to pay. And I’m not finger-pointing because they’re the same price, all of them, but the fact is there’s a minimum budget that is required today to even exist in Formula One. And that minimum budget has actually killed two teams. [...]

A lot of people like to criticise [F1 owners] CVC for instance and unfortunately sometimes I have to take their side because in my real life that’s where I work, that’s the type of business I do, and the fact is that close after taking over the business, I think the sport was distributing about around $300m to the teams, something like that – three, three-forty. Today it’s almost $900m but it’s not distributed equally otherwise we would all be smiling here and saying there is no issue. So the amount might be an issue but certainly the distribution is a huge issue because – I’m not going to say it’s pareto rule, it’s not like 80% goes to 20% but close enough. A lot of the money goes to the top teams and it’s almost like – how can I say this? – it’s a self-fulfilling prophecy, essentially, that the ones that have more, get more and as a result want more and want to spend more and so on, and the ones that have less, get less. There is something entirely wrong with the distribution model right now. [...]

I’ll be very frank, there wasn’t a whole lot of leverage to get a whole lot more [money]. At the end of the day, if I had gone to Bernie, for instance, and said you know what, I just don’t want to do this any more, he might have been sad – maybe – to see me go, but he might have thought OK, that’s the way it is. If somebody wearing red had done the same thing, that’s a whole different leverage effect.

Boullier: Not up to teams to fix F1’s problems

McLaren’s racing director Eric Boullier said the top teams would not sacrifice their competitive advantage to help other teams.

Each of us wants to beat everybody. We are competitors. If we compete with a bottle of water, if we compete with a Formula One team, we want to beat the others – and we will do it by any means. So, this is normal. Even, actually, as you say in the back row, they want to still compete and actually beat everybody. So, this is not… we can… I’m pretty sure we can sit down and agree drastic decisions altogether – but this has to be led by the governance body and by the people who are running the show. Not the competitors.

Mallya: Big spenders will walk out

Jarno Trulli, Timo Glock, Toyota, Monza, 2009Force India owner Vijay Mallya pointed out that if Formula One is increasingly populated by a smaller number of teams spending very large sums of money, it will become more vulnerable when those teams withdraw, as the likes of Toyota, Honda and BMW have done in the recent past.

We have to find some viable medium here – but what is actually compounding the problem is that the revenue-share model is skewed completely towards the teams who can afford to race at the pinnacle of sport at the direct expense of those who perhaps are marginal. And that’s why two of the smaller teams have disappeared. I would also like to take this opportunity of saying that sustainability in F1 is necessary for the sport but when large corporations like Toyota and Honda decide, for corporate reasons, that they want to walk out, they go. [...]

I think what I’ve heard in the last few minutes is that if the smaller teams got more by way of income, that they would necessarily spend a lot more. I disagree with that completely because I think that the three of us sat here in the back row are smart enough to know how much to spend without going the Marussia and Caterham way. And as Toto said, if I can use his expressions as an indicator of how the big teams think, well if you can afford to be in Formula One, you’re welcome. If you can’t, get out. Fine. I think the FIA must decide this, not the participants because after all it is the FIA Formula One World Championship and if it is to be designed to be affordable to those big boys in the business, who of course benefit hugely in terms of their regular core businesses. That’s one way of looking at it and if it is meant to be racing in sportsmanlike terms, with big teams, small teams that compete with each other… Look at Williams: I’m sure Williams doesn’t spend a fraction of what the big teams are spending and look at their performance this year. Until the last race, Force India and McLaren were competing head-to-head. So money doesn’t necessarily buy performance. Equally, spending is discretionary and if the big teams want to spend $300m, it’s discretionary. That cannot be used against the smaller teams. The smaller teams must get a revenue share that makes it financially viable or sustainable. That’s the point.

Kaltenborn: Fewer competitors leaves F1 vulnerable

Sauber team principal Monisha Kaltenborn echoedMallya’s view that F1 would be at greater risk if it had fewer competitors.

Entrepreneurs should also think a bit long term at least. If you do that, it would be interesting where that strategy leads to. We just go on the way we are and too bad for some teams that can’t make it because they’re not investing enough and it’s such a high motorsport level that you really have to have maybe three-digit million figures of budget that then in F1 are normal, for the outside world, not really. Let’s see where that will lead us to. Eventually you’ll have four – probably – participants with endless amount of cars. Let’s see where that show will gets you. How much of income you have there. And amongst the four participants, you probably all have big names, so you’ll have three losers every year. So, it’ll result into that. As a big name – and we’ve experienced that again – if you lose, you have to invest more. But a big corporation does that maybe for one year, for two years but the third year, it definitely gets too much for them. Because, surprisingly, those corporations do have budgets they control, they can control, and they have ways to measure what they are doing – and that system will just collapse at some point in time.

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Post by n7thGear™ on Nov 1, 2014 10:43:22 GMT -6

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