The Economics of Sport
  • Sports Economics
  • About
  • Workshop
  • Selected Publications
  • Book Reviews
  • A Primer on Gaelic Games
  • Upcoming Events
  • Media
  • Education
  • Resources & Links
  • Data

A Crash With No Debts

16/10/2013

 
By Ed Valentine

Formula 1 teams are heading for a major crash. Within the next 18 months the “smaller” independent teams who make up the midfield and back of the grid will face serious challenges to continue to compete as costs will rise significantly. With the introduction to a new set of technical regulations from 2014 onwards more expensive machinery (in the form of different power-trains and engines) will need to be developed. F1 team owners and investors will be tightening their seat belts at the prospects of having to fork out up to an extra $25 million next season to cover the increases. "We have made some mistakes with introducing the new power-trains, we didn't control the costs enough, and the sport may well pay the price of that very soon," says Martin Whitmarsh boss of McLaren.
 
Last month Marussia, the team who finished last in the 2012 championship, announced record losses of $56 million. Though Marussia F1 is not in debt, it’s not a widely held belief in the paddock that such a trend can continue for much longer, especially with the new prize money structure that was put in place in 2004. Prize money is differed for three years, in order to encourage commitment to go racing; Marussia received nothing last season and so had to raise money from sponsors and road car sales from the parent company thus treating Formula 1 as a very expensive form of advertising. 

The prize money is divided up based on championship position (previously it was divided up based on the amount of points scored in the championship where the amount won was a ratio of the top championship winning team’s total) which means that 1st place in the table will have a pre assigned amount and so once the championship positions have been decided, usually with a number of races remaining, there is little incentive to ramp up a greater points hall.
Picture
Currently, 10 of the 11 teams get a share of 60% of the profits but 70% of that is divided among the top 5 teams with the next 5 sharing 30%. The 11th place team gets nothing. The teams receive no money for the driver winning the championship nor does the driver receive any financial reward. Don’t feel sorry for them however as they command large sponsorship endorsements and salaries far greater than any footballer.
 
The average team budget has been reduced from $282 million per team in 2009 to $161 million in 2010 and $150 million in 2011 – in-line with a cost-cutting drive – that figure is skewed somewhat by the arrival of newcomers Lotus and Marussia. However this figure is likely to increase dramatically over the coming seasons and it is expected that some constructors will have to put the brakes on going racing. Ferrari spent $240 million in 2012 which left Marussia’s $51 million budget at the side of the road.

Despite massive bills and relatively little prize money no F1 team has ever registered as going into debt. Debt doesn’t exist in F1 like it does in football. This is due to the mechanisms in place for gaining entry and being permitted to continue in the franchise. Access to the Formula 1 roulette wheel requires financial guarantees from the moment an entry enquiry is made. A prospective team must fulfil strict monetary criteria that are designed to ensure that a competitor has enough cash to survive for at least two seasons. 

Part of this requirement is that the prospective team lodges about $60 million dollars into a locked bank account 3 months before the start of the season. This account can not be touched and therefore acts as a threshold or cushion of
capital. If a team ever attempts to access these funds it is deemed that financial credentials are not strong enough to grant further access to the franchise and the team must fold.  It happened to Super Aguri Honda midway through 2008, the last time a team has checked out before the season’s end, when the team had a liquidity problem and so folded rather than borrow money. It’s a mechanism that has seen 124 teams enter and leave the F1 World Championship with Ferrari being the only ever present since the championship began in 1950. It  also highlights how financially strong the business end of the Formula 1 franchise is. In 2007 McLaren were forced to pay a $100 million fine for spying on another team. They remained in contention for the championship that season and won the driver’s title with Lewis Hamilton a year later. It sends out a strong message that a team can let go of $100 million and carry on competing in an industry with stringent financial controls and massive outgoings. It’s a tight policy but it has ensured that there are no “cut price” attempts to go racing resulting in large arrears.

Comments are closed.

    Archives

    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013

    About

    This website was founded in July 2013.

    RSS Feed

    Categories

    All
    American Football
    Athletics
    Baseball
    Basketball
    Behavioural Economics
    Boxing
    Broadcasting
    Competitive Balance
    Cricket
    Cycling
    Darts
    David Butler
    Declan Jordan
    Drugs
    Ed Valentine
    Epl
    Esports
    Expenditure
    F1
    Fifa World Cup
    Finances
    Funding
    Gaa
    Gaelic Games
    Gambling
    Game Theory
    Gary Burns
    Geography
    Golf
    Greyhound Racing
    Guest Posts
    Horse Racing
    Impact Studies
    John Considine
    John Eakins
    League Of Ireland
    Location
    Media
    Mls
    Mma
    Olympics
    Participation
    Paul O'Sullivan
    Premier League
    Regulation
    Research
    Robbie Butler
    Rugby
    Simpsonomics
    Snooker
    Soccer
    Spatial Analysis
    Sporting Bodies
    Stephen Brosnan
    Swimming
    Taxation
    Teaching
    Technology
    Tennis
    Transfers
    Uefa
    Ufc
    World Cup
    Wwe

Related

The website is not formally affiliated to any institution and all of the entries represent the personal views and opinions of an individual contributor. The website operates on a not-for-profit basis. For this reason we decline all advertisement opportunities. 

Contact

To contact us email sportseconomics2013@gmail.com or find us on Twitter @SportEcon.