L&T Motorsport

Should Mercedes’ financial figures worry us?

At the US Grand Prix two years ago, the F1 financial crisis was one of the hottest topics in the Formula One paddock. Caterham and Marussia had gone into administration. Teams like Force India made threats of boycotting the race in protest. Fast forward nearly a year to the 2015 Belgium GP, where Lotus nearly had the cars impounded by the bailiffs. Yet two years later after the 2014 US GP, nothing has really changed and the financial situation of the sport is not really under scrutiny. However, after Mercedes released their financial figures, should we be talking more about the financial problems in F1 or is there simply nothing to worry about?

 

Interestingly, teams are looking to be in much financial shape then they were two years ago. Williams made a £31.5 million loss in 2014, but then recorded an increase in revenue, as well as making profit. Force India as well recently recorded a $9.8 million loss, which was much better than the $21.9 million loss they made in 2014. Mercedes, who made £76.1 million loss in 2014, slashed that to £22.3 million. So at first glance, all of this looks positive. However, all of this is due to them performing better than previous year. There are deeper problems with the financial situation, and it doesn’t look like it’s changing anytime soon.

 

Mercedes reported that there was an increase of £8.1 million in operation costs, which while it may not sound a lot, could cause a few teams a few issues. The problem is Mercedes can easily plug the financial gap, being a big manufacturer, but small independent teams like Manor and Sauber, who don’t get a large split of the prize fund, don’t have that luxury. The operation costs are unlikely to go down either. With Liberty Media announcing plans to increase the calendar to 25 races, the actual cost of operations could go from around £55 million a season to just over £70 million, which would be catastrophic for the smaller teams. Not only that, but more races would mean smaller teams would need to hire more staff, which they can’t afford to do in the current landscape of F1.

 

Between 2010 and 2014, the average team budget a season rose by 29%, which mainly comes down to the introduction of the hybrid power units. It comes to no surprise why Caterham and Marussia went into administration. The cost was so large, that Marussia were £20 million in debt to Ferrari. We are now at the point that teams are taking on drivers to try and reduce costs. More causes for concern are the new regulations. Teams will have to spend millions on developing the new Aerodynamic parts and developing brand new cars, instead of evolving from last years car like they’ve done in previous years. Tyre testing could also be a factor, especially with completely new tyres coming in for next season.

 

Another huge problem Mercedes’s financial figures reveal is how prize money is distributed. Mercedes’s reducing their loss by £54 million mainly comes down to this, and it highlights a huge problem. Mercedes got paid £171 million, which is a 36% increase from the previous year. Half of this comes from the fact they are now entitled to the Constructor Championship Bonus. This is a £39 million pound payment. Now, this might be a bit more understandable if they were the only team to get this, but Ferrari, McLaren and Red Bull also get this payment, despite the fact Ferrari and McLaren haven’t won the constrcutors championship since 2007 and 2008 respectively . These four teams received £145 million in total from the CCB. This is £1 million more than Red Bull received all together in prize money.

 

The unfair distribution system doesn’t stop there. Ferrari gets £70 million  as a long-standing team payment (for being in F1 since 1950). This payment alone is more than the prize money received by Force India, Renault, Toro Rosso, Sauber and Manor. That’s not all unfortunately. Red Bull receive £35 million for just being the first team to sign the Concorde agreement, Mercedes received £35 million for winning their target of two constructor championships, (the other half of the reason they made a much smaller loss) and Williams get a £10 million heritage bonus.

 

In total, these five teams receive £295 million in these bonuses. This also means Mclaren, who finished 9th in the constructors last season, received more money than Force India, Renault, Toro Rosso and Sauber, the teams that finished ahead of them. Meanwhile, the system is skewed so that Ferrari pretty much earn the most amount of money no matter where they finish in the constructors, and Williams earning less than Red Bull despite beating Red Bull last season. If this £295 million were evenly split across the 11 teams (including Haas), then each team would get an extra £26.8 million. For context, that would mean Force India would have made a £17 million profit instead of a £9.8 million loss.

 

Eliminating these unfair payments and distributing them out evenly across the eleven teams in one solution to the financial crisis in F1, but what else could would help? The FIA could implement a cost cap. However, while it stops expenditure spiral out of control, it will never come into fruition. Hundreds of people are employed by teams like Mercedes. A cost cap could threaten many jobs. However, a simple fix would be to have an opt in cost cap, suggested by former FIA president Max Mosely. Teams could choose to opt in or opt out of the cost cap. Opt in and teams will get more freedom while teams who opt out will have to follow stricter regulations. This is a far better idea than  Financial Fair Play rules which have been suggested, as a limit on how much loss a team could make would punish smaller teams.

 

Another way is to have a limit to how many races there are on the calendar, to prevent operation costs from rising. Finally, the engine manufacturers need to work to reduce the costs of the hybrid systems. Sure, you can argue they’ve already made them cheaper, but they simply aren’t as cheap as they were five years ago.

 

So in conclusion, Mercedes’s financial figures should worry us. Can the FIA or Liberty Media fix the financial problems? It’s wishful thinking to hope they will make these changes. The sport hasn’t learned or changed from when big manufacturers like BMW and Toyota left the sport due to the costs. However, with new owners, only time will tell what the financial future of the sport holds.

 

Photo Source- http://www.motorsport.com/f1/news/analysis-how-hamilton-vs-rosberg-became-an-on-track-battle-795439/

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