Breaking Down the Costs of Racing in Formula 1: Is Spending Out of Control?

Matthew Walthert@@MatthewWalthertFeatured ColumnistJanuary 19, 2014

New money is pouring into the sport from places like Singapore. Why are teams still struggling?
New money is pouring into the sport from places like Singapore. Why are teams still struggling?Mark Thompson/Getty Images

The 2013 Formula One season was filled with reports of teams in financial trouble. It is no secret that many of the smaller teams (and even the race-winning Lotus team) are struggling. At the same time, F1 is bringing in record levels of revenue.

So, how can we reconcile these two, apparently conflicting, realities?

To do so, there are two areas that must be considered: the teams' spending and the goals of the sport's commercial rights holders.

The first reason for F1's financial health problems is the amount currently spent by the teams to go racing. By any reasonable measure, the costs to compete in modern F1 are ridiculous—but then, F1 has always been about excess.

For reference, here are the estimated 2013 budgets for each team, according to Autosport's Dieter Rencken (paywall protected):

2013 F1 Team Budgets
Ferrari£250 million
Red Bull£235.5 million
McLaren£160 million
Mercedes£160 million
Lotus£130 million
Force India£100 million
Williams£90 million
Sauber£90 million
Toro Rosso£70 million
Caterham£65 million
Marussia£51 million

The cost seems to be close to £100 million just for regular points finishes (Williams excepted), even now that the top 10 finishers score in each race. (If you are interested in exactly where all that money goes, here is a breakdown from NBC Sports, comparing F1 and IndyCar costs.)

However, the teams cannot really be blamed for the increase in spending. Their mandate is to win, and in pursuit of that goal, they will spend whatever money is available to them. They always have and they always will.

Even if one area of spending is restricted—as is now the case with, for example, hours of operation for team wind tunnels—the teams with the money will find another way to spend it. Therefore, the only way to effectively rein in costs is for the FIA to implement a hard spending cap and to police it vigilantly.

Luca Bruno/Associated Press

For the 2015 season, the FIA has announced that a cap will be in place. Whether it will be set at a reasonable limit and whether it can be effectively monitored are the two biggest question marks in determining the success of the initiative.

Red Bull team principal Christian Horner alluded to the second part in an interview with Edd Straw of Autosport, saying:

Controlling costs in F1 is important. ... Elements that are tangible and transparent have been successful, such as a the restriction in personnel at the circuit, the reduction in testing and the limitation of engines and gearboxes. 

But once you get into equivalence, structures of companies are different and that is where it becomes murkier.

Many of the teams operate in a number of businesses with links to, but distinct from, their F1 teams (e.g. McLaren Applied Technologies or Williams Advanced Engineering). Determining which costs are attributable to which parts of a team's structure is much more difficult than policing, say, the salary caps that have been implemented in other sports.

Just because it is difficult does not mean it should not be done. Even the financially well-off teams are acknowledging that the gap between themselves and the mid-range and back-marker teams is not good for the sport.

Mercedes executive director Toto Wolff recently told Autosport that: 

Probably the highest spending teams spend three or four times the money of those other teams. Is that sustainable and healthy? No. ... So I see that major stakeholders are pushing towards a more sustainable F1, a more balanced F1, in terms of financial resources.

Even with an enforceable spending cap in place, though, some of the smaller teams will not be able to spend to the limit of the cap. As such, they will still lag behind. By itself, this is not a huge issue. F1 is not in the business of creating a completely level playing field (as the breakdown of prize money demonstrates), nor should it be.

MELBOURNE, AUSTRALIA - MARCH 14:  Toto Wolff the Executive Director of Mercedes GP talks to the media at an event near St Kilda beach during previews to the Australian Formula One Grand Prix on March 14, 2013 in Melbourne, Australia.  (Photo by Clive Maso
Clive Mason/Getty Images

However, this does illustrate the second cause of F1's current financial issues: The commercial rights holders, led by CVC Capital Partners, are bleeding the sport of revenue that could be used to support the teams.

Last October, according to Tom Cary of The Telegraph, CVC, "Formula One’s largest single shareholder, took a $865 million (£538 million) dividend in 2012," and that, "It is believed that CVC, who paid roughly $1 billion (£620 million) for the sport back in 2006, has now gained more than $2 billion (£1.24 billion) from the sport in the last 24 months."

The private firms that own the commercial rights are not interested in what is best for F1, other than if it can make them money. As the numbers demonstrate, they are making quite a lot right now, so, from their perspective, F1 is probably not in need of fixing.

The ongoing attempts to float F1 on the Singapore stock exchange indicate that the current owners are ready to divest at least part of their stake. Although the FIA leased the commercial rights to Bernie Ecclestone and his partners for 100 years, one solution would be for the FIA or the teams to buy them back.

Luca Bruno/Associated Press

In that case, instead of paying a £500 million dividend to shareholders, the money could be reinvested in the sport. 

Again, there would still be a divide between the Ferraris and the Marussias of the the F1 world. But with the additional revenue and a strict cost cap, at least the smaller, independent teams would be able to survive and maybe even thrive.

For now, this scenario seems like a pipe dream. The teams, competitive by nature, can rarely agree on anything. The cost cap is coming, but it is unlikely they could come up with an agreement on their own to buy the commercial rights, leaving the FIA as the only option. 

Still, this is F1. Anything is possible, if you have the cash—just ask Pastor Maldonado.

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