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Gergo Sram-EPQ1

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    How can Formula 1 Teams cut their costs in order to ease the problem of the current economic recession?

    By Gergo Sram

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    The current recession, which has begun in 2008, has had a big impact on everybody all over the world, on both householders and businesses, with a numerous amount of bankruptcies and credit crunches as a result. The recession has also left its mark on many things, including on the highest class of single seater auto racing in motorsport, which is known as Formula 1. 1 Recession is best defined as 2 successive quarters of negative economic growth. When this happens, the macroeconomic theory shows that Aggregate Demand falls and as a consequence of the Real GDP (negative economic growth) falling as well and when Real GDP falls, it has a direct effect on the components of aggregate demand as well: Consumption and Investment.

    During a recession, a business will have less confidence to invest into a certain project and banks will decline lending money to other firms, so automatically they will have less money available.2 For example, a company that wants to invest into a Formula 1 Team during a recession will be very cautious about the amount they invest (as they do not want overinvest because of the possible losses in the future) and they will be looking for solutions how they

    will be able save as much money as possible and what methods they can use in order to cut their costs, but still be able to carry out their project(s) successfully.3 Cutting costs also mean that some people would loose their jobs and unemployment would increase, as a result of for example a team is trying to save costs by carrying out less research and development, so less people would be needed to carry out jobs therefore they would be relieved of their duties, which would free up more money as well.4 My main objective is to look at methods of how Formula 1 Teams can stay in the business during a recession and how effective they are in terms of saving money. There are a lot of methods in action at the moment and the teams are coming up with different solutions every year to reduce costs, such as limiting the number

    1 Tim Webb. (2008). Is Formula One on the skids?. Available: Last accessed 19th July 2012. 2 Keith Collantine. (2008). F1 sponsors hit by global recession. Available: Last accessed 20th July 2012. 3 Andrew Benson. (2012). Ferrari president Luca Di Montezemolo urges F1 cost-cutting. Available: Last accessed 26th July 2012. 4 Guy Logan. (2009). Mercedes-Benz job cuts triggered by Formula 1 rule changes. Available: Last accessed 26th July 2012.

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    of engines and gearboxes per season, or the ban of mid season testing. 5As the economic situation is not likely to improve in the near future, the teams and the FIA (Fdration Internationale de l'Automobile) most likely need to come up with new and efficient regulations for the future to improve the situation even more. When the recession hit the sport in 2008, it was evident that it hit the sport very hard, as alarmingly, three manufacturers quit the sport within a year: Toyota, BMW and Honda.6 Honda said they decided to pull out because of the quickly deteriorating operating environment facing the global auto industry... and the sudden contraction of the world economies. 7Motor racing had to be sacrificed for these companies in order to have the financial ability to keep carrying on working on their road car manufacturing industry. If cost cutting methods are not introduced in the near future it is likely that more manufacturers will leave the sport, with Mercedes rumoured to be the latest team to abandon their F1 project at the end of 20148, which could potentially leave permanent scars on the sport with fans becoming uninterested in the sport as a result of fading competition between world famous manufacturers. One of the first methods over the past couple of years to deal with the finance situation; that was introduced in the sport was limiting the number of engines and gearboxes allowed to be used throughout the season. From 2009, one driver is only allowed to use 8 engines and 5 gearboxes per season, and if the teams exceed these numbers, they are facing a penalty, which motivates the team to try to stick to these numbers, in order to not to loose out against other teams and as a result reducing the costs. Up until 2008, each car could use a new engine every two Grand Prixes and a new gearbox at every grand prix. 9However, it is clear that the rules that were introduced in 2009 had a good effect on the sport in terms of saving as this table shows below:

    5 N/A. (2010). In-season F1 testing ban amended. Available: Last accessed 28th July 2012. 6 John Greene . (2009). Recession forces Toyota off Formula One race track. Available: Last accessed 10th July 2012. 7 Andrew Benson. (2008). Global crisis ends Honda F1 era. Available: Last accessed 6th July 2012. 8 Kash Kahn. (2012). MERCEDES AMG LOOKING TO WITHDRAW FROM THE SPORT FORMULA 1 NEWS. Available: Last accessed 9th July 2012. 9 Keith Collantine. (2010). Five-race gearboxes among other rules changes. Available: Last accessed 15th July 2012.

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    The engine is the most expensive component in a Formula 1 car, costing approximately 150,000 and it takes 80 hours to assemble 5000 parts. Nowadays, there are not as many engine failures as in the past, however this part of the car can still be a weak point. Prior to the cost cutting measures that were introduced in 2009, the drivers used usually 10 engines (however this also depended on how many races there were in a season, but on average a season is 18 races long, and an engine failure at a weekend is common for everyone) which was enough for the whole season and this number was not exceeded by any team. Because the team operates two drivers, they needed to supply 20 engines. This amount was just for the Grand Prixes, testing required more engines to be supplied, however the number of this varied from team to team, depending on how much each team decided to test (A team with a small budget usually cannot allow itself to spend a lot on testing). The 2009 regulations meant that the teams would be supplied four less engines than before, and it meant that one team would save around 600,000 per season. 10 However, the restrictions on the use of the gearbox has had bigger impact than the engine, mainly because the drivers were allowed to use a brand new gearbox every race, which meant a driver used around 18 gearboxes per season, and the team 36 in total, and as a result, this component of the car was a very expensive part to provide, costing around 3,240,000 per season. It can be concluded from the table that reducing the number of gearboxes for the season to five per driver was very effective, as the teams need 26 gearboxes less, and it would mean a team is likely to save around 2,340,000 in a single season. In some cases, this number can vary, as some teams might use more than 10 gearboxes a season, which depends on how many gearbox failures a team has, and even today, this component of the car tends to be the most vulnerable mechanical part, and teams have to deal with gearbox failures quite often. In the worst cases, a team might only save around between 2,000,000 and 2,100,000, which are still a large amount and a very important figure during a recession. 11 10 Jake Simpson. (2011). In the Pits: Formula 1 technology. Available: Last accessed 28th August 2012. 11 James Roberts. (2008). Cost of an F1 Car. Available: . Last accessed 25th August 2012.

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    From an economic point of view, saving this amount of money is very positive, especially when the costs saved of the engine and gearbox limit is added together: With these methods, one team saves almost 3million, however some teams could argue from a racing point of view that it is hard not to exceed these limits and because of the penalties they could receive, as a result of pushing throughout the race weekends with full commitment in order to extract the most of the car and to have a competitive edge over their rivals and they would have, ironically, a disadvantage throughout the championship, but overall, if the sport is looking for a way in which it can deal with the current financial situation, it is a very effective way to save money and a method that should be definitely kept until the sport is struggling with the problem of recession and until the manufactures are looking to cut back in investing into Formula 1. Up until 2009, mid season testing was allowed in Formula 1, where teams could run their car to collect more information and improve the performance of their cars for future races.12 This meant that the team had supply more car parts, in order to take part in a testing event, had to increase the wages of the mechanics and cover their travelling cos

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