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1 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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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:  http://www.guardian.co.uk/business/2008/dec/07/formula-­‐one-­‐recession.  Last  accessed  19th  July  2012.  2  Keith  Collantine.  (2008).  F1  sponsors  hit  by  global  recession.  Available:  http://www.f1fanatic.co.uk/2008/11/08/f1-­‐sponsors-­‐hit-­‐by-­‐global-­‐recession/.  Last  accessed  20th  July  2012.  3  Andrew  Benson.  (2012).  Ferrari  president  Luca  Di  Montezemolo  urges  F1  cost-­‐cutting.  Available:  http://www.bbc.co.uk/sport/0/formula1/18421007.  Last  accessed  26th  July  2012.  4  Guy  Logan.  (2009).  Mercedes-­‐Benz  job  cuts  triggered  by  Formula  1  rule  changes.  Available:  http://www.personneltoday.com/articles/09/06/2009/51004/mercedes-­‐benz-­‐job-­‐cuts-­‐triggered-­‐by-­‐formula-­‐1-­‐rule-­‐changes.htm.  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  (Fédération  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:  http://www.crash.net/f1/news/156870/1/in-­‐season_f1_testing_ban_amended.html.  Last  accessed  28th  July  2012.  6  John  Greene  .  (2009).  Recession  forces  Toyota  off  Formula  One  race  track.  Available:  http://www.independent.ie/incoming/recession-­‐forces-­‐toyota-­‐off-­‐formula-­‐one-­‐race-­‐track-­‐26579230.html.  Last  accessed  10th  July  2012.  7  Andrew  Benson.  (2008).  Global  crisis  ends  Honda  F1  era.  Available:  http://news.bbc.co.uk/sport1/hi/motorsport/formula_one/7766092.stm.  Last  accessed  6th  July  2012.  8  Kash  Kahn.  (2012).  MERCEDES  AMG  LOOKING  TO  WITHDRAW  FROM  THE  SPORT  –  FORMULA  1  NEWS.  Available:  http://blogs.bettor.com/Mercedes-­‐AMG-­‐looking-­‐to-­‐withdraw-­‐from-­‐the-­‐sport-­‐Formula-­‐1-­‐news-­‐a180460.  Last  accessed  9th  July  2012.  9  Keith  Collantine.  (2010).  Five-­‐race  gearboxes  among  other  rules  changes.  Available:  http://www.f1fanatic.co.uk/2010/12/10/five-­‐race-­‐gearboxes-­‐among-­‐other-­‐rules-­‐changes/.  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:  http://www.netcars.com/_client/images/infographics/Formula1IG-­‐Euro.jpg.  Last  accessed  28th  August  2012.  11  James  Roberts.  (2008).  Cost  of  an  F1  Car.  Available:  http://www.f1-­‐country.com/f1cost.html.  .  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  costs  as  well.  This  took  up  a  very  big  part  of  a  team’s  budget,  and  when  the  recession  hit  the  sport  in  2009,  it  was  inevitable  that  mid  season  testing  would  be  banned  by  the  FIA,  as  overall,  it  is  a  very  expensive  process  and  it  would  become  a  method  in  order  to  cut  costs  and  try  to  ease  the  problem  of  recession.      A  Formula  1  car  has  many  components,  which  need  to  be  supplied  in  large  quantities  (for  example  spare  parts,  in  case  the  original  part  gets  damaged).  A  team  could  only  use  one  car  for  testing,  however,  still  it  was  very  expensive.  The  table  below  that  I  put  together  shows  how  much  each  component  costs:13  

                                                                                                               12  Pat  Symonds  (2012).  F1  Racing  Magazine  (Issue  206).  London:  Haymarket.  p26-­‐27.  13  James  Roberts.  (2008).  Cost  of  an  F1  Car.  Available:  http://www.f1-­‐country.com/f1cost.html.  .  Last  accessed  25th  August  2012.    

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 By  adding  up  all  the  costs  of  the  different  parts  that  enables  a  Formula  1  team  to  run  a  car,  it  can  be  concluded  that  it  is  very  expensive  just  to  assemble  a  car  for  a  Formula  1  testing  event,  especially  with  the  fact  that  one  part  of  each  component  is  not  enough;  spare  parts  are  needed  as  well,  because  if  for  example,  the  first  engine  fails,  the  team  will  need  another  one  to  be  able  to  continue  the  work,  therefore  instead  of  spending  £150,000  on  an  engine,  they  will  have  to  supply  two  engines  (in  very  rare  cases  three)  which  would  usually  last  three  days  of  testing,  bringing  it  to  a  total  of  £300,000  or  even  £450,000.  It  is  true  that  today  a  Formula  1  car  is  more  reliable  than  in  the  past,  however  mechanical  failures  are  still  very  likely,  and  any  parts  listed  above  can  break  easily,  especially  the  parts  that  are  responsible  for  the  car’s  down  force.  The  front  wing  creates  about  25%  of  the  car’s  total  down  force,  so  it  is  a  very  important  part  for  the  teams  to  perform  successfully,  but  it  is  the  most  vulnerable  component  on  an  F1  car.14  The  teams  supply  a  lot  of  these  “weak”  body  parts  as  this  can  be  broken  by  the  smallest  of  mistakes  by  the  driver,  and  if  there  is  no  replacement,  the  team  cannot  progress  if  a  mistake  is  made.  A  team  usually  takes  four  pieces  of  front  wings  to  a  testing  session  just  in  case,  which  is  very  expensive,  considering  how  small  the  part  is.  A  front  wing  costs  approximately  £15,000  and  the  teams  usually  spend  £60,000  just  on  this  part  of  the  car  to  go  and  test  and  maximise  the  performance.      Overall,  the  most  expensive  part  of  this  business  was  the  supplement  of  the  Telemetry  Softwares,  which  gives  feedback  to  the  mechanics  and  engineers  about  the  car  and  its  performance.  A  team  usually  takes  around  25-­‐35  mechanics  to  a  test  session  (depending  on  the  size  of  the  team)  and  more  telemetry  data  means  more  data  can  be  analysed  quicker  and  more  efficiently,  and  thus  the  car  performance  could  be  potentially  improved  better,  therefore  a  team  takes  (minimum)  ten  of  these  to  an  event.  One  unit  of  this  type  of  technology  is  expensive  already;  costing  £75,000  (due  to  the  complexity  of  these  systems  and  how  much  information  it  can  provide  in  no  time)  let  alone  ten  of  these,  equalling  the  cost  to  £750,000.    This  amount  of  money  is  only  spent  on  technology  that  would  only  be  used  for  testing  and  not  for  the  races,  so  the  teams  usually  buy  an  extra  20-­‐25  Softwares  just  for  the  races.    The  tyres  come  out  expensive  as  well  as  a  single  Formula  1  tyre  manufactured  by  Pirelli  is  £450,  which  is  a  big  amount  for  a  single  tyre.  The  teams  get  10  sets  for  each  test,  and  it  is  a  very  important  element  of  the  sport,  as  teams  test  different  compounds  to  understand  how  they  can  maximise  their  performance  from  them  and  as  a  result,  they  used  demand  a  lot  of  sets  from  the  tyre  manufacturers,  as  more  tyres  meant  more  data  could  be  collected.  Overall  the  tyres  cost  £18,000  for  a  single,  three  to  four  day  session.  Usually  there  were  five  mid  season  tests,  so  overall,  just  for  testing,  financing  the  tires  could  have  cost  £90,000.  15                                                                                                                      14  David  Barnes.  (2011).  Front  wing  aerodynamics.  Available:  http://www.f1technical.net/articles/8.  Last  accessed  22nd  August  2012.  15  Jake  Simpson.  (2011).  In  the  Pits:  Formula  1  technology.  Available:  http://www.netcars.com/_client/images/infographics/Formula1IG-­‐Euro.jpg.  Last  accessed  28th  August  2012.  

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It  is  not  just  the  car  part  costs  that  needs  to  be  considered,  but  the  mechanics’  wages  and  the  travel  costs  as  well,  which  both  contribute  to  the  costs  of  mid  season  testing.  On  average  a  mechanic  is  paid  £2000  for  working  at  a  three-­‐day  test.  The  salary  could  depend  on  the  position  of  the  person.  A  normal  mechanic  could  be  paid  around  £1500  a  month,  but  a  chief  engineer  could  earn  as  much  as  £3500  a  month.  A  large  team  normally  takes  around  35  members  of  its  staff  to  an  event,  so  approximately  between  £70,000  and  £80,000  is  spent  on  the  salary  of  the  staff.  The  travelling  cost  of  the  team  varies,  depending  on  the  length  of  the  flight  and  the  airline,  but  on  average  it  is  calculated  to  be  around  £4000-­‐£4500.  Up  until  mid  season  testing  was  banned,  there  used  to  be  at  least  five  mid  season  tests,  which  would  mean  the  expenditure  of  salary  and  travelling  costs  would  have  been  around  £370,000-­‐£380,000.  To  this  amount  comes  the  cost  of  the  car  parts  as  well.  16      In  the  future,  if  mid  season  testing  was  re-­‐introduced,  it  could  become  cheaper,  as  technology  improves  every  year  and  better  capital  would  become  available,  therefore  the  parts  of  the  car  could  be  assembled  more  efficiently,  hence  reducing  the  costs,  however  for  now,  during  this  economic  recession,  from  an  economic  point  of  view,  it  is  a  very  good  method  to  cut  the  costs  and  a  lot  of  money  could  be  saved,  but  from  a  pure  sporting  point  of  view,  people  from  smaller  teams  would  argue  that  they  cannot  close  the  gap  to  the  top  teams,  if  testing  is  not  allowed,  because  they  do  not  have  time  to  develop  their  cars.    However  at  the  moment,  teams  should  carry  out  their  testing  duties  during  the  Practice  Sessions  of  a  Grand  Prix  weekend.    

As  a  result  of  the  uncertain  of  the  future  of  the  economic  situation,  it  is  very  likely  that  new  solutions  must  be  introduced.  However  it  is  very  hard  to  find  methods  that  would  guarantee  that  it  would  work  and  that  it  would  reduce  the  costs  by  a  large  amount.    A  lot  of  teams  would  argue,  especially  smaller  teams,  that  cost  cutting  would  not  be  a  good  idea,  if  they  look  it  from  the  

competition  point  of  view,  because  they  would  not  have  a  proper  chance  to  close  the  gap  to  the  other  teams,  if,  for  example,  mid  season  testing  is  banned  in  order  to  cut  costs  and  no  development  work  could  be  carried  out  on  the  car.      Therefore,  a  method  would  be  to  re-­‐introduce  tobacco  advertisement  in  Formula  117,  which  could,  however  be  controversial  and  some  people  might  be  against  the  

                                                                                                               16  Amrita  Chuasiri.  (2010).  The  Average  Salary  of  an  F1  Racing  Mechanic  Read  more:  The  Average  Salary  of  an  F1  Racing  Mechanic    Available:  http://www.ehow.com/info_12027198_average-­‐salary-­‐f1-­‐racing-­‐mechanic.html.  Last  accessed  28th  August  2012.  17  CNN  World.  (2005).  F1  to  ban  cigarette  ads.  Available:  http://articles.cnn.com/2001-­‐11-­‐22/world/fia.tobacco_1_tobacco-­‐advertising-­‐tobacco-­‐promotion-­‐ban-­‐tobacco?_s=PM:WORLD.  Last  accessed  20th  August  2012.  

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idea.  Tobacco  advertisement  started  in  the  sport  in  the  early  1970s,  and  by  the  end  of  the  1990s,  most  of  the  teams  relied  heavily  on  these  companies  to  provide  them  enough  revenue  to  be  able  to  keep  the  team  running  and  competing.  The  table  below  shows  the  teams  that  had  a  tobacco  company  that  sponsored  them  in  1999  (the  period  when  this  type  of  advertisement  was  at  its  pinnacle):    

 It  can  be  seen  that  many  tobacco  companies  invested  in  the  sport,  in  1999  particular,  when  seven  out  of  the  eleven  teams  were  sponsored  by  various  companies,  

which  was  the  most  companies  present  in  the  sport  at  the  same  time.  18      In  most  of  the  cases,  these  tobacco  companies  were  the  “title  sponsors”  of  the  teams,  which  meant  it  provided  the  most  money  out  of  all  the  sponsors  that  support  a  team  and  took  up  the  biggest  spot  on  a  car.  Sometimes  tobacco  companies  were  so  influential,  they  demanded  the  team  to  change  their  team  livery  matching  it  to  the  colours  of  their  product.19  Tobacco  advertising  was  banned  initially  as  a  result  of  many  people  campaigning  against  advertisement  of  smoking  and  the  “anti-­‐smoking  legislation”  was  introduced.20  However,  even  in  an  economic  crisis,  like  the  one  we  are  in  today,  it  would  be  a  sensible  idea  as  these  companies  would  have  the  confidence  to  invest  into  the  sport  once  again  as  they  would  have  the  revenue,  and  thus  the  opportunity  cost  would  not  be  high  for  them.  In  terms  of  economics,  tobacco  counts  as  an  “addictive  good”,  therefore  whatever  the  economic  situation  is,  consumers  are  still  likely  to  use  part  of  their  real  disposable  income  on  these  goods.  As  a  result,  tobacco  companies  can  

increase  their  profits  if  they  want  to,  by  simply  increasing  their  prices.    Such  as  tobacco,  they  are  relatively  inelastic  in  demand,  which  means  that  quantity  changes  less  than  price  does.  So,  if  a  company,  like  Marlboro  decided  to  increase  the  price  of  their  products,  their  total  revenue  will  

                                                                                                               18  Brad  Spurgeon.  (2011).  The  End  of  Tobacco  Sponsorship  Led  to  the  Beginning  of  Other  Sponsors  in  F1.  Available:  http://formula1.about.com/od/historyofsponsorship/a/The-­‐End-­‐Of-­‐Tobacco-­‐Sponsorship-­‐Led-­‐To-­‐The-­‐Beginning-­‐Of-­‐Other-­‐Sponsors-­‐In-­‐F1.htm.  Last  accessed  28th  August  2012.  19  Tamerlane,  B.  (2008).  The  Drag  Strips:  Tobacco  Liveries  in  F1.  Available:  http://karakullake.blogspot.co.uk/2008/05/drag-­‐strips-­‐tobacco-­‐liveries-­‐in-­‐f1.html.  Last  accessed  27th  August  2012.  20  N/A.  (2005).  The  history  of  anti-­‐tobacco  legislation.  Available:  http://www.grandprix.com/ft/ft14769.html.  Last  accessed  30th  August  2012.  

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increase,  as  they  will  not  loose  as  many  consumers.    It  was  estimated  that  Marlboro,  the  largest  selling  brand  of  cigarettes  in  the  world  has  paid  Scuderia  Ferrari  £100  million  a  year  during  the  years  it  sponsored  the  team.    Because  Marlboro  sells  most  of  the  cigarettes  worldwide,  it  has  a  very  a  big  revenue,  and  therefore  they  have  a  lot  of  funds  available  to  inject  it  into  the  team.21        Ferrari  have  been  trying  to  cheat  the  rules  by  using  subliminal  advertising  of  Marlboro  (until  2011)  in  order  to  not  to  loose  a  large  amount  of  money,  which  they  so  heavily  depended  on  for  more  than  a  decade  after  tobacco  advertising  was  banned  in  the  sport.22  As  a  result  the  team  still  received  its  £100  million  a  year  and  it  stayed  as  a  major  sponsor  of  the  team.  The  team  itself  does  not  have  a  lot  of  sponsors,  therefore  it  was  essential  for  them  to  rely  on  Philip  Morris  International,  but  luckily  for  them  they  managed  to  replace  them  by  a  Spanish  Bank  giant,  “Santander”,  but  with  the  current  economic  and  financial  worry  of  Spain  and  the  Spanish  banks,  the  sponsorship  of  Ferrari  could  become  unstable  and  could  quit  Formula  1  in  the  near  future  leaving  Ferrari  with  £60million  less  a  year,  which  could  potentially  hinder  their  F1  project  and  development.        If  the  anti-­‐smoking  legislation  were  to  be  abandoned,  it  would  encourage  Formula  1  teams  straight  away  to  find  tobacco  companies  and  negotiate  with  them  over  sponsorship  deals  and  it  is  likely  that  these  companies  would  be  open  to  the  idea  of  returning  to  the  sport  as  well.  Both  sides  would  benefit,  as  the  teams  would  get  a  big  amount  of  sponsorship,  and  arguably,  less  costs  would  have  to  be  saved,  therefore  things  such  as  mid  season  testing  would  not  have  to  be  abandoned,  and  it  would  keep  a  lot  of  teams  satisfied.  In  return,  the  companies  would  get  a  lot  of  advertisement  on  the  cars,  and  it  could  lead  to  even  more  revenue  for  them.  However,  the  return  of  tobacco  advertisement  could  be  very  controversial,  as  some  people  would  believe  that  it  would  not  be  a  good  idea  from  an  ethical  point  of  view,  due  to  the  fact  that  advertisement  would  encourage  more  people  to  smoke  and  as  a  result  increases  the  chance  of  more  people  dying  from  smoke  related  illnesses.      I  have  carried  out  a  survey  on  a  Formula  1  website  (www.gpro.se)  asking  people  about  the  issue  of  tobacco  advertisement,  and  whether  it  should  be  brought  back  in  order  to  help  the  economic  situation.  The  results  of  the  survey  can  be  seen  here:    

                                                                                                               21  Tom  Love.  (2011).  PMI  to  pay  Ferrari  US$480  million  over  three  years.  Available:  http://www.sportspromedia.com/news/pmi_to_pay_ferrari_us480_million_over_three_years/.  Last  accessed  3rd  September  2012.  22  Gemma  Charles.  (2010).  Ferrari  F1  comes  under  fire  for  Marlboro  barcode  logo.  Available:  http://www.marketingmagazine.co.uk/news/1000160/.  Last  accessed  3rd  September  2012.  

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                     It  can  be  seen  that  the  results  were  very  close,  however  51%  (195  people)  of  the  poll  agreed  that  tobacco  advertising  should  be  allowed  in  Formula1,  because  they  would  bring  crucial  revenue  to  the  sport:      “Yes  it  should  be  allowed  with  a  compromise  that  the  teams  should  be  allowed  to  have  tobacco  sponsors  but  not  the  circuits  or  anything  else.  I  think  it's  hypocritical  that  alcohol  and  junky  energy  drinks  are  allowed  in  but  not  tobacco.  Budget  is  crucial  to  the  teams  and  they  should  be  allowed  to  raise  finance  by  using  tobacco  sponsors.”23      Meanwhile  on  the  other  hand,  49%  (187  people)  said  that  it  should  not  be  allowed,  with  views  that  it  could  tempt  people  to  smoke  and  have  a  bad  effect  on  younger  generations  as  well  as  adults:      “The  worry  is  that  advertising  on  cars  is  not  aimed  at  the  adults  who  are  quite  happily  entrenched  in  their  ways  and  routines  -­‐  it's  aimed  at  kids  and  teens  who  are  there  for  the  moulding  as  future  consumers”24      It  was  also  suggested  that  companies  like  McDonald’s  and  Coca  Cola  should  enter  Formula  1,  as  nowadays  “junk”  products  are  very  popular  and  these  companies  have  plenty  of  revenue  to  invest  into  F1.  As  an  example,  in  2011,  McDonald’s  had  a  revenue  of  27.006  billion  dollars,  however  just  like  with  tobacco  advertisement,  some  people  and  organizations  might  not  be  in  favour  of  this  idea  as  these  products  are  likely  to  have  a  bad  effect  on  the  viewers  of  the  sport  as  they  would  be  encouraged  to  consume  these  products  that  could  make  the  issue  of  obesity  even  bigger  in  today’s  society,  therefore  it  is  not  likely  that  these  companies  would  enter  the  sport  because  of  the  controversy  that  would  follow  this  issue,  but  it  is  undeniable  that  if  the  sport  wants  to  survive  and  the  teams  do  not  want  to  cut  costs  because  they  want  to  push  their  technical  abilities  to  the  limit,  the  best  idea  would  be  to  allow  these  types  of  advertisements.      

                                                                                                               23  Quote  by  Lee  Ifans  (Accessed  Jun  16th  2012)  on  www.gpro.se  (Topic:  Tobacco  advertisement  in  Formula  1)  24  Quote  by  Chris  O`Sullivan  (Accessed  Jun  16th  2012)  on  www.gpro.se  (Topic:  Tobacco  advertisement  in  Formula  1)  

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Another  idea  that  could  potentially  cut  the  costs  in  Formula1  is  introducing  “Development  Zones”.25  Because  the  competition  is  so  intense  and  everyone  wants  to  win,  teams  are  pumping  a  lot  of  money  into  their  Research  and  Development  section  and  usually  big  teams,  such  as  McLaren,  Red  Bull  and  Ferrari  bring  new  parts  to  every  race  and  try  them  on  the  Fridays  if  they  work  or  not.  However,  usually  only  half  of  these  developments  work  and  the  other  half  is  thrown  out,  which  is  a  big  waste  of  money  of  one  of  the  biggest  expenses  nowadays.  It  is  estimated  that  an  average  Formula  1  team  spends  around  $35-­‐$40million26  just  on  researching  and  developing  new  parts  for  their  car,  and  usually  $20million  goes  down  the  drain,  just  because  the  parts  that  have  been  developed  did  not  make  the  car  go  faster,  which  is,  in  an  economic  recession  like  today  is  not  acceptable  and  has  to  be  dealt  with.  Therefore  the  teams  should  not  be  allowed  to  change  their  car  specifications  for  five  races,  only  the  set  ups,  and  as  a  result,  research  and  development  is  restricted  until  the  5th  race  of  the  season,  where  the  teams  will  be  able  to  modify  their  cars  and  bring  new  parts  to  try  out,  and  the  same  would  apply  for  the  10th  and  15th  race  of  the  season.  This  method  has  never  been  used,  however  it  would  definitely  work  as  the  teams  would  carry  out  less  R&D  and  wouldn’t  spend  $35-­‐$40million.  A  team  like  McLaren-­‐Mercedes  brings  new  parts  to  every  race  as  they  are  a  team  who  are  a  top  team  and  fight  for  the  championship  every  year,  spend  approximately  ($40million  a  year  divided  by  20  race  season)  $2million  a  race  just  for  developments,  however  if  “Development  Zones”  would  be  introduced  it  is  likely  that  a  team  would  only  spend  around  $9-­‐$12million  for  R&D  mid  season,  saving  a  significant  amount,  around  $30million  a  year.  With  these  regulations,  it  is  likely  that  a  team  would  carry  out  more  developments  for  a  race  that  they  can  use  for  the  next  five  races  until  the  next  “zone”  so  a  team  could  bring  updates  worth  up  to  $4million,  because  they  are  restricted  but  it  would  still  cost  far  less  than  what  it  was  before  when  Research  and  Development  was  not  controlled  and  was  not  regulated  by  the  FIA.        A  last  idea  would  be  use  of  a  “Budget  Cap”  would  also  be  a  method  to  cut  the  costs,  however  it  would  be  very  hard  to  implement  this  because  of  the  different  sizes  of  the  teams.    A  £40million  budget  cap  was  proposed  at  the  start  of  the  financial  crisis  in  2009,  however  it  was  rejected  by  the  bigger  teams  as  they  found  the  figure  too  low.  Big  teams,  such  as  Ferrari  and  McLaren  spend  approximately  £300m  a  year  on  their  team,  therefore  a  jump  from  that  figure  to  £40million  is  huge  and  it  is  very  hard  to  achieve.  A  budget  cap  would  be  beneficial  for  teams  with  small  budgets  and  they  could  close  the  gap  while  the  big  teams  would  need  to  reduce  their  costs  significantly  and  therefore,  a  lot  of  money  could  be  saved.  With  a  budget  cap  it  is  definitely  possible  to  reduce  costs,  however  the  £40million  figure  that  was  proposed  three  years  ago  is  too  low  and  if  it  was  to  be  implemented  it  needs  to  be  increased.    Team  Principals  of  top  teams,  such  as  Martin  Whitmarsh  of  McLaren  Mercedes  said  that  it  is  ”impossible                                                                                                                  25  Gary  Anderson.  (2012).  Keeping  Formula  1  costs  down.  Available:  http://www.bbc.co.uk/sport/0/formula1/18464273.  Last  accessed  5th  September  2012.  26  Jake  Simpson.  (2011).  In  the  Pits:  Formula  1  technology.  Available:  http://www.netcars.com/_client/images/infographics/Formula1IG-­‐Euro.jpg.  Last  accessed  28th  August  2012.  

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to  work  with  such  a  low  figure”,27  which  is  not  surprising  as  teams  like  McLaren  employ  high  calibre  drivers  who  tend  to  earn  a  lot  of  money  during  a  season.  As  an  example,  in  2011,  the  McLaren  drivers  employed  two  world  champions,  Lewis  Hamilton  and  Jenson  Button,  therefore  the  team  offered  them  a  salary  of  $20million  each  for  a  year,  bringing  it  to  the  cost  of  the  proposed  budget  cap,  and  this  is  only  the  salary  of  the  drivers.28  These  high  profile  drivers  are  not  willing  to  accept  salaries  of  for  example  around  $2million  (which  is  still  a  lot  comparing  it  to  the  earnings  of  other  people),  therefore  the  budget  cap  line  needs  to  be  raised.      

 The  budget  difference  between  a  top  team  (Mclaren)  and  a  bottom  team  (HRT)  is  very  big  and  with  teams  spending  more  and  more,  smaller  teams  cannot  keep  up  financially  and  eventually  they  would  withdraw  from  the  sport  and  it  would  discourage  new  teams  to  enter  and  the  sport  could  lose  much  needed  revenue.  Therefore  a  budget  cap  of  around  $150million  could  work,  which  would  exclude  Marketing  and  Promotion  costs,  in  order  to  attract  as  many  sponsors  as  possible,  and  Engine  costs,  in  order  to  attract  more  manufactures  to  the  sport,  which  as  well,  could  lead  to  more  revenue,  but  this  is  debatable  as  the  Engine  development  usually  takes  up  half  of  the  budget  of  a  team.  However  the  rest  of  the  components  would  come  under  the  “budget  cap”  and  the  teams  would  not  be  allowed  to  exceed  this  amount.  The  budget  cap  could  also  be  combined  with  the  “Development  Zones”  as  then  Research  and  Development  would  only  cost  around  $10-­‐$12million  per  season  (for  the  big  teams)  which  means  less  money  would  have  to  be  spent  on  capital,  such  as  machinery  which  helps  the  R&D  department  and  the  teams  could  cut  down  at  least  $10million,  in  order  to  meet  the  requirements  of  a  $150million  budget  cap.  An  example  how  a  team  like  McLaren-­‐Mercedes  can  spread  out  its  cost  with  a  budget  cap:      

                                                                                                               27  Jonathan  Noble.  (2012).  McLaren's  Martin  Whitmarsh  says  FIA  'has  to  make  decision'  on  cost  control  in  F1.  Available:  http://www.autosport.com/news/report.php/id/100901.  Last  accessed  9th  September  2012.  28  N/A.  (2012).  F1  2012  driver  salaries  revealed  -­‐  but  who  earns  most?.  Available:  http://www.crash.net/f1/news/180405/1/f1_2012_driver_salaries_revealed_-­‐_but_who_earns_most.html.  Last  accessed  15th  September  2012.  

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It  can  be  seen  that  with  this  budget  cap  top  teams  that  usually  spend  around  $200million  a  year  (excluding  engine  and  sponsorship  cost)  can  save  around  $50million.  However  small  teams  might  argue  that  a  $150million  budget  cap  is  still  too  much,  for  example  

HRT,  who  spent  approximately  $90million  in  2011  and  they  would  still  not  be  able  to  compete,  however  then  big  teams  would  argue  that  it  is  impossible  for  them  to  cut  costs  down  even  further,  because  then,  they  would  have  to  decrease  their  labour  (staff  salaries)  and  would  leave  a  lot  of  people  unemployed  (which  follows  the  macroeconomic  theory  that  when  there  is  a  recession,  unemployment  tends  to  rise),  so  it  would  be  very  hard  to  come  to  an  agreement  if  there  was  a  talk  of  a  budget  cap  being  implemented  (like  in  2009,  when  the  £40million  cap  was  rejected  by  the  big  teams).29          In  conclusion  Formula  1  teams  can  cut  their  costs  in  order  to  ease  the  problem  of  the  current  economic  recession  by  using  various  methods.  Formula  1  teams  are  already  working  on  how  to  cut  costs  efficiently  during  this  tough  economic  period  that  hit  the  sport  at  the  end  of  2008,  and  the  FIA  has  already  introduced  measures  such  as  restriction  of  the  use  of  technical  parts  like  the  gearboxes  and  engines  and  the  restriction  of  mid  season  testing,  which  both  turned  out  to  be  very  effective,  with  the  teams  saving  millions  of  pounds  as  a  result.  However,  with  today’s  economy  becoming  very  unpredictable,  it  is  possible  that  Formula  1  will  need  to  consider  even  more  solutions  to  the  problem  in  the  future.  There  are  many  ideas  that  could  benefit  the  sport  that  I  have  earlier  discussed,  such  as  bringing  back  tobacco  sponsorship,  which  would  bring  a  lot  of  revenue  of  the  teams  (but  could  be  controversial,  as  it  was  already  banned  once),  impose  a  budget  cap,  which  would  prevent  teams  spending  hundreds  of  millions  of  pounds  (and  it  would  also  make  the  competition  closer)  or  implant  new  radical  reforms  such  as  my  idea  of  introducing  “development  zones”  which  would  also  reduce  costs  significantly.  Some  methods  would  be  easier  to  implement  than  others,  for  example  it  would  be  hard  to  bring  back  Tobacco  advertising  with  many  ethical  issues  surrounding  it,  or  the  budget  cap,  which  would  be  hard  to  agree  on  where  the  line  should  be  drawn.  However  things  like  “development  zones”  would  be  fairly  easy  as  the  idea  is  pretty  simple  and  would  be  easy  to  agree  on.  But  by  looking  at  all  the  figures  and  numbers  of  the  methods  that  have  been  calculated  and  how  much  could  potentially  can  be  saved,  it  can  be  concluded  that  all  of  these  methods  would  allow  the  teams  to  achieve  their  aim  of  saving,  and  costs  can  be  cut  with  all  of  these  ideas.  This  would  encourage  teams  to  stay  and  come  into  the  sport  as  it  would  be  affordable  and  companies  would  have  the  confidence  to  invest  in  a  team  without  making  any  losses.  The  

                                                                                                               29  Formula  1  .  (2009).  FIA  Q&A  on  Formula  One  cost  capping.  Available:  http://www.formula1.com/news/interviews/2009/4/9291.html.  Last  accessed  20th  September  2012.  

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end  of  the  current  global  economic  crisis  is  not  to  end  yet,  therefore  it  is  important  for  the  sport  to  make  contingency  plans  for  the  future,  to  make  sure  that  the  sport,  the  teams,  the  sponsors  and  the  investors  will  have  a  stable  and  successful  future.                                                                                              

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Bibliography      1.  Tom Love (2012). “PMI to pay Ferrari US$480 million over three years” [online]. Available at: http://www.sportspromedia.com/news/pmi_to_pay_ferrari_us480_million_over_three_years/. [Accessed 25th June 2012]        2. Jake Simpson (2011). “In the Pits: Formula 1 technology” [online]. Available at: http://www.netcars.com/_client/images/infographics/Formula1IG-Euro.jpg. [Accessed 25th June 2012]    3. CNN World (2005). “F1 to ban cigarette ads”. CNN World, Available at http://articles.cnn.com/2001-11-22/world/fia.tobacco_1_tobacco-advertising-tobacco-promotion-ban-tobacco?_s=PM:WORLD . [Accessed 29th June 2012]        4. Jonathan Reynolds (2009). “F1 rules and stats 2000-2009”. F1 Technical, Available at: http://www.f1technical.net/features/27 . [Accessed 2nd July 2012]    5. Andrew Benson (2008). “Global crisis ends Honda F1 era”. BBC Sport, Available at: http://news.bbc.co.uk/sport1/hi/motorsport/formula_one/7766092.stm . [Accessed 6th July 2012)     6. James Roberts (2008). “Cost of an F1 Car”. F1-Country, Available at: http://www.f1-country.com/f1cost.html. [Accessed 25th August 2012]      7. Keith Collantine (2008). “How the last global recession affected F1 teams – and how the next one might”. F1Fanatic, Available at: http://www.f1fanatic.co.uk/2008/12/09/how-the-last-global-recession-affected-f1-teams-–-and-how-the-next-one-might/ . [Accessed 23rd June 2012]  

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 8. John Greene (2009). “Recession forces Toyota off Formula One race track”. Independent, Available at: http://www.independent.ie/todays-paper/recession-forces-toyota-off-formula-one-race-track-1934843.html . [Accessed 10th July 2012]  9. Formula 1.com (2009). “FIA Q&A on Formula One cost capping”. Formula 1 Official Website, Available at: http://www.formula1.com/news/interviews/2009/4/9291.html . [Accessed 12th July 2012]      10. Tim Webb (2008). “Is Formula One on the skids?”. The Guardian Website, Available at: http://www.guardian.co.uk/business/2008/dec/07/formula-one-recession [Accessed 11th July 2012] 11. Keith Collantine (2008). “F1 sponsors hit by global recession”. F1 Fanatic website, Available at: http://www.f1fanatic.co.uk/2008/11/08/f1-sponsors-hit-by-global-recession/ [Accessed 8th July 2012] 12. Andrew Benson (2012). “Ferrari president Luca Di Montezemolo urges F1 cost-cutting”. BBC Sports website, Available at: http://www.bbc.co.uk/sport/0/formula1/18421007 [Accessed 10th July 2012] 13. Guy Logan (2009). “Mercedes-Benz job cuts triggered by Formula 1 rule changes”. Personnel Today Website, Available at: http://www.personneltoday.com/articles/09/06/2009/51004/mercedes-benz-job-cuts-triggered-by-formula-1-rule-changes.htm [Accessed 29th July] 14. Keith Collantine (2010). “Five-race gearboxes among other rules changes”. F1 Fanatic Website, available at: http://www.f1fanatic.co.uk/2010/12/10/five-race-gearboxes-among-other-rules-changes/ [Accessed 5th July 2012] 15. Brad Spurgeon (2010). “The End of Tobacco Sponsorship Led to the Beginning of Other Sponsors in F1”. About.com Website, Available at: http://formula1.about.com/od/historyofsponsorship/a/The-

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End-Of-Tobacco-Sponsorship-Led-To-The-Beginning-Of-Other-Sponsors-In-F1.htm [Accessed 12th July 2012] 16. Gemma Charles (2010). “Ferrari F1 comes under fire for Marlboro barcode logo”. Marketing Magazine Website, Available at: http://www.marketingmagazine.co.uk/news/1000160/ [Accessed 25th July 2012] 17. N/A (2012). “F1 2012 driver salaries revealed - but who earns most?”. Crash.net Website, Available at: http://www.crash.net/f1/news/180405/1/f1_2012_driver_salaries_revealed_-_but_who_earns_most.html [Accesed 22nd July 2012]