Formula One: Preparing for the budget cap

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The Liberty Media vision for the future of Formula One Teams is clear. The owners expect 12 commercially viable, profitable, franchises all capable of challenging for race victories. In his role as Managing Director of Motorsports, Ross Brawn, has been mandated with the task of delivering a strategy to ensure this vision is achieved.

12 commercially viable & profitable teams, on paper, sounds fantastic. With the variable of available finances removed, the resourceful nature of F1 teams will truly be put to the test. Outwardly it seems as though there is widespread support from the teams for such a move. Afterall, what business wants to spend more money? With representatives from leading teams including Red Bull Racing emploring Liberty Media to ‘ Save F1 Teams from themselves’ the route to implementing a budget cap should, in theory, be straightforward.

However, As with any commercial decision in Formula One nothing is straightforward. The first major hurdle to overcome is the existing structure around payments and the legacy of disparity. In 2017 Joe Saward explained the complexities around the current structure in this article. The existing structure rewards success and longevity, a something which is not overly inviting to a new team, nor geared towards a midfield team ever being in a position to surprise. In an estimated payment fund of $900M per season, the top 3 teams receive approximately 60% of the revenue, leaving the remaining, currently 7, teams to compete for 40% ($360M) between them. It is estimated that the smallest operational budget in F1 today is in the region of $100M, with only $50M coming from the championship, teams have a significant shortfall to cover.

A more appropriate payment structure would be equal distribution amongst all teams, with a proportional bonus for constructors championship position, similar to that seen in the Premier league as detailed here.  Unfortunately, in order to reach this point, the largest teams, with operational budgets believed to be in excess of $400M per season must agree to a cut in support from the system under which their team structure has been developed. What business would agree to lose as much as 50% of its funding without a clear view of how it will cut costs or increase revenue through other ventures.

Convincing; Red Bull Racing, Scuderia Ferrari, and Mercedes Grand Prix to agree to this change will be one of the key tasks ahead of Ross Brawn through 2018 and 2019 if a new system is to be introduced under the new commercial vision for the sport in 2020.

The task is far from simple, the infrastructure of the top teams has been built around a mindset of a limitless budget. If a budget cap of $150m per season were to be introduced in 2020 with no consultation from the teams, it would be almost impossible for the top teams to comply. From a personnel headcount perspective alone a team such a Mercedes Grand Prix, with in excess of 1400 employees, if an average salary of $50,000 is applied, the team commit 46% of its budget to salaries before considering building a car. Without modifying the current team structure, introducing a budget cap within the next 3 seasons, unless Liberty Media expect teams to make more than 50% of their workforce redundant, is not feasible.

On a more positive note, there are indications that the top teams in question are preparing for the change. A budget cap in Formula One will not mean that the likes of operating entity such as Mercedes Grand Prix or Red Bull Racing will be limited to an expenditure of $150M per season, rather their allocation of resources to F1 will see this limit applied.

As a result, it is highly likely that diversification will be a key element to the future of F1 Teams. Over the past decade, McLaren and Williams have established an industry-leading position in the application of engineering solutions developed to improve performance in motorsport being incorporated into manufacturing processes and commercial entities.  For these teams, this third-party business will likely continue to grow. it is, however,  unlikely Ferrari or Red Bull Racing will view this as an appropriate use of resources or brand credibility.

Instead, expect the very top teams to move towards expanding their foothold in other forms of motorsport.

  • Mercedes Grand Prix has already made steps in this direction with the announcement of a commitment to Formula E team from season 6 of the championship. This alongside the development of the Mercedes Project One, which to many is a clear indication of Mercedes ambitions to return to Endurance Racing. A return which with LMP1 regulations under review and the prospect of the reinvigoration of the FIA Global Engine strategy, Mercedes are well positioned to find success.

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Credit to Sean Bull Design for the concept Mercedes Formula E livery 

  • Similarly, Red Bull Racing through their partnership with Aston Martin has acknowledged an interest in taking the Valkyrie racing, and under guidance from Ross Brawn will no doubt be seeking to bring the Toro Rosso team entirely in-house.

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  • McLaren has taken the decision to take control of their GT programme, and have already explored further engagements in championships including Indycar following the positive coverage generated through the one-off partnership with Andretti Autosport at the Indy 500 in 2017.

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  • Ferrari continually talks of a return to Endurance Racing, and could, similar to Red Bull Racing consider a strategy of an in-house B-team with which budget cap compliance could be achieved.

In conclusion, political posturing between the top teams in Formula One, Ross Brawn, and Liberty Media throughout the 2018-19 seasons will likely overshadow on-track performances. Fans of the sport should take any empty threats from top teams to walk away from the sport as just that. Empty threats. The financial implications of such a move make the option unviable. Instead, teams will double down on motorsport, getting involved with more championships, with the eventual winner being the fans.

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2 thoughts on “Formula One: Preparing for the budget cap”

  1. Lets assume that with budget cuts half the personnel from each team will need a new home. Why not encourage B teams for each team and also allow for more teams on the grid? A cheaper F1 will grow an entirely different F1 when it comes to the mid part of the grid to the back. And when I say different I mean radical new ideas and experimentation.

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  2. Liberty Media are the new formula one commercial rights holders, they don’t own F1, their mandate is to maximize the revenue that the sports generate. it isn’t to introduce budget caps or determine technical specifications or license drivers or teams wishing to compete in F1, this isn’t INDYCAR or NASCAR.

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