SURVIVAL TIME
Like all professional sports, motor racing was driven into hybernation by the COVID-19 outbreak. But for the sake of its own survival it’s had to begin again before the storm has truly passed. So how will Formula 1 cope with racing in a pandemic? And why
How teams plan on surviving when racing during a pandemic
The truth is out there in the form of grim economic statistics posted by countries the world over: on top of the disruption to everyday life, and the hundreds of thousands of unnecessary deaths, COVID-19 has brought financial ruination. In the UK alone, Gross Domestic Product (GDP) – the essential barometer of a country’s economic health – plunged more precipitously in April than it did during the global financial crisis of 2008, or any other previous recession for that matter.
For that reason, many professional sports – including Formula 1 – are desperate to get back to some form of business before the cash runs out. They are teetering on the brink of that figurative precipice. Liberty Media, owner of F1, has reshuffled its finances to afford shortterm protection not just for the commercial rights holder, but for the competitors who depend on it. Already facing its own cashflow issues owing to cancelled and postponed events, F1 has had to advance payments to struggling teams. Even then, two of the biggest names in the business – Mclaren and Williams, among the most successful operations of all time – face an uncertain future.
So is all the talk of F1 “coming back stronger” a realistic aspiration, or mere platitudinous cant? Is it now just a question of survival?
What the pandemic has done is expose major structural weaknesses in the F1 ecosystem. And although the stakeholders have united to agree a swathe of measures previously thought impossible to push through – including a reduced budget cap, and design freezes and development limits on high-cost parts – all the businesses that rely on grand prix racing face a jittery few months.
“We went through a learning process we are not used to,” says Haas team principal Guenther Steiner. “Reacting quickly is something we’re good at, reacting collectively we’re normally not…
“We banged our heads together and came out a bit more united for the time being.
I don’t know how long it will last. What it [the pandemic] has shown is that as businesses we’re too much on the edge – any disruption threatens to tip us over the edge. We don’t have any reserve fuel in the tank, let’s say.”
Sudden economic shocks such as the interruption wrought by COVID-19 not only
“WE BANGED OUR HEADS TOGETHER AND CAME OUT A BIT MORE UNITED FOR THE TIME BEING. I DON’T KNOW HOW LONG IT WILL LAST. WHAT IT [THE PANDEMIC] HAS SHOWN IS THAT AS BUSINESSES WE’RE TOO MUCH ON THE EDGE – ANY DISRUPTION THREATENS TO TIP US OVER THE EDGE. WE DON’T HAVE ANY RESERVE FUEL IN
THE TANK”
GUENTHER STEINER
provide the final nudge required to tip an already struggling business into crisis, they can also hobble successful enterprises. Williams, for several seasons now a straggler at the back of the grid, was vulnerable to scenarios such as unpaid sponsorship. What’s most shocking in this case is that it’s a family-owned business whose leaders have previously been adamant that they would never sell. And yet there it is. Mclaren, for its part, had a portfolio of successful businesses within the group, including a rapidly expanding high-end road car manufacturer – but the bottom has fallen out of that market. In trying to shore up its position Mclaren has sought to raise bonds using assets such as its heritage cars and factory as collateral… but those are already claimed by holders of a previous bond, issued to buy Ron Dennis out of the business in 2017, and now the subject of a court battle
F1’s cost cap, due to come into force next year, has therefore taken on increased relevance. When first mooted, its critics dismissed its value, saying that the teams with the deepest pockets would ‘pre-load’ by spending as much as possible now. Circumstances have changed and the budget cap now offers a lifeline – both to the cash-strapped independents and the manufacturer outfits whose owners are now pondering the wisdom of ongoing involvement in racing when they have showrooms full of unsold cars.
“This pandemic hit at a time when a lot of our costs were sunk for the season,” says Racing Point team principal Otmar Szafnauer. “Designing, building, manufacturing components, putting the car together – that had all happened and that’s a big part of our costs. So that bit of it we couldn’t really save on.
“However, what we [the teams] did do, together with the FIA, we made some smart decisions on homologating components so that for the rest of this year and next year we can’t develop them further. That will help save a significant amount of money – because although there were a lot of sunk costs involved in getting ready to race in Australia, we would normally spend a lot of money upgrading throughout the season.
“So I think we’ve done a smart job with the token system, and the homologation of components that are expensive to develop, such that all teams can save money – which we have to, now that the revenues have significantly decreased.”
With a denuded calendar – currently eight European events – the amount of income the teams will receive as a share of the prize pot remains uncertain, hence the push to start racing again and fulfil contractual obligations to promoters, broadcasters and so on. This represents an operational challenge for this
season, even before the cost cap comes in.
Steiner describes the decisions he had to take during lockdown, in terms of putting staff on furlough, as the “toughest time of my management career”, a phrase that’s been echoed by other team principals including Mclaren’s Andreas Seidl. The challenge has been magnified by that lack of certainty over whether there would be any racing at all in 2020 – or how it would be organised if and when it did begin. A grey area still exists beyond the eight European events this summer, though F1 has expressed the desire to run up to 18 races.
“You never had a fixed budget to work with – and we still don’t really know,” says Steiner.
“If you know what you have to achieve, you don’t have to guesstimate how much you’re going to spend. You know what you’ve got and then you manage it.”
It’s going to be a hand-to-mouth existence, then, in the coming months, as COVID-19 remains a threat. In terms of keeping personnel safe, the ‘cluster’ system (see Pat Symonds column, p24) is the most logical structure in
the circumstances, although an element of risk remains which will require constant vigilance. Shortly before this issue of GP Racing closed for press, for example, New Zealand declared itself free of COVID-19 and released its lockdown measures (which included sports such as Super Rugby being played in front of live crowds), only for two British visitors to test positive. Likewise, China experienced a spike in cases in Beijing.
“The financial impact for sure will be this year,” says Szafnauer. “I don’t know how significant because we don’t know whether we’ll get to 15, 16, 18 races. I hope we get that many in. And I also don’t know how many will have fans and how many won’t, so unless you have that definition it’s really hard to pinpoint the revenue. Hopefully by next year we’ll be back to normal.
“We’re working through what the payment profiles look like for our sponsors based on how many races we do. Some sponsors are saying, ‘Well, we’ve committed to this, so we’ll pay you in full.’ Others are saying a pro rata amount works better for them. I can understand both. Long-term sponsors generally take the view that the relationship is for more than one season and they’re prepared to stick with you through thick and thin.”
Although Racing Point halted construction of its new factory in March, it still intends to complete the project. It now intends to occupy the premises a year later than planned, in the summer of 2022 rather than 2021. It is also continuing to recruit at a time when other teams, notably Mclaren, are downsizing.
“The nice thing with us is that apart from Haas – which has a completely different business model, with a lot of outsourcing – we still have the smallest number of employees,” explains Szafnauer. “Inclusive of Haas, I’m pretty sure we have the smallest budget. When something like this hits, and you’re the most efficient – or you have the least number of employees and the smallest budget – it’s easier to ride the storm, so to speak.
“We had plans to continue hiring up to a certain level and we’re still doing so, even though I understand there are other teams that are letting people go. Our strategy in expanding hasn’t changed. We weren’t going to expand to anywhere near the numbers some of the bigger teams have, but definitely bigger than we were.
“SOME SPONSORS ARE SAYING, ‘WELL, WE’VE COMMITTED TO THIS, SO WE’LL PAY YOU IN FULL.’ OTHERS ARE SAYING A PRO RATA AMOUNT WORKS BETTER FOR THEM. I CAN UNDERSTAND BOTH. LONG-TERM SPONSORS GENERALLY TAKE THE VIEW THAT THEY’RE PREPARED TO STICK WITH YOU THROUGH THICK AND THIN”
OTMAR SZAFNAUER
We’ve gone from 405 to 465 from the time it was Force India to now, and we will probably add in the region of the same again, maybe 50 more people. But that’s about it.
“525 or so is still pretty small when you have around 1100 at Mercedes and over 900 at Red Bull. The cost cap I think will mean they have to look at getting smaller, having a smaller workforce, but we won’t. We will ‘rightsize’ the business for what we plan to do from a competitive standpoint, and that won’t be impacted by the cost cap.”
Having been the proverbial bone of contention for several years now, prompting the likes of Ferrari to threaten to flounce out of Formula 1 as recently as last April, the budget cap may now be the saviour of the category. No less an eminence than F1 managing director of motorports Ross Brawn has said it has proved vital to the continued involvement of both manufacturers and independents.
A salient question, though, is whether the budget cap is realistic enough. Too high and it could be irrelevant; too low and the human cost of large teams forcibly downsizing would be painful. Initially pegged in the region of $200m, then $175m, it has been negotiated down to $145m with a glide path in subsequent seasons through $140m to $135m by 2023. That’s lower than some stakeholders wanted but a higher figure than others had demanded.
“Is that $145m figure, with the glide path, the correct one? I don’t know,” says Szafnauer. We came down to $145m, mainly as a result of the pressures of the pandemic and looking at it and saying, ‘If this is going to be the new normal, then perhaps $175m is too high and Formula 1 has to do a better job on the cost cap such that we are financially sustainable.’ Some teams wanted the $145m to be lower – they’d have been happier at $100m – and the big teams were happy at $175m. Having it at $145m with a glide path, to me, seems like a good compromise. I always say that if the big teams and the small teams are equally happy, or equally unhappy, then it’s a good compromise.
“Is this indicative of F1 coming to us [independents such as Racing Point]? Our sweet spot would probably have been below that level
because we don’t spend that today. But it’s a lot harder to come down in costs than it is to expand into a cost cap that you’re not at. From that perspective we’re going to be in a better position than some of the bigger teams who are having to shed costs. It’s easier to find a way to spend than it is to find efficiencies when you’re used to spending for performance.
“So we’ll be in good shape when the cost cap comes in – we’ll still be under it. But we won’t be able to spend up to it, unless of course we find some sponsors, which Aston Martin may be able to help with because its journey back into the sport will be a great one – we’re expecting to perform at a pretty good level.”
Inequalities will persist: big teams will still have an advantage, even if they have to slim down, because of the huge databases of knowledge they’ve acquired over the years. That data and experience may decrease in relevance with time, but the sharp economic correction we’ve seen during the COVID-19 pandemic is unlikely to result in greater competition in the short term. In the long run, though, the measures taken to restructure F1’s financial model should pay off in terms of greater stability.
“Before, if you were planning to start an F1 team, it was a case of ‘how long is a piece of string?’ How much money do we need to do this?” says Steiner. “It could be anything, because there was no limit to what you could spend. With the budget cap, when you’re doing your planning, you know the maximum you can spend, and it’s just a case of whether you can get there. That will give stability to the smaller teams, and then the next thing is that the new FOM contracts will be more equal – not 100% equal, but it will bring more [proportionally] of the prize fund to the little teams.
“At the moment the gap between us and one of the big teams is between $100m and $150m. In future it might be $20m or $30m. Is that not a good step? I would say yes.”
But what of the aspiration expressed by many of F1’s senior figures that it can “come out stronger”? Certainly it will only be treading water for the coming months as teams send skeleton crews to a handful of races held behind closed doors. Perhaps there’s a wider lesson to be drawn from the rapid consensus achieved in agreeing measures which have already saved several teams from financial failure – and which should make the ones still struggling, such as Williams and Mclaren, more attractive prospects for new investment. For too many years F1 has been beset by counter-productive infighting; one positive of the COVID-19 pandemic is
GUENTHER STEINER
“WE NEED TO STAY ON COURSE, IMPLEMENT PROPERLY WHAT WE’VE DECIDED TO DO – AND NOT START GIVING CONCESSIONS TO THE BIG TEAMS. I THINK WE’VE LEARNED THINGS WE MUSTN’T FORGET WHEN THE GOOD TIMES RETURN.
THAT’S HOW WE’LL COME OUT STRONGER”
that it has made mutual interests outweigh vested self-interests.
“We need to stay on course, implement properly what we’ve decided to do – and not start giving concessions to the big teams,” says Steiner. “I think we’ve learned things we mustn’t forget when the good times return. That’s how we’ll come out stronger.”