Page last updated at 00:05 GMT, Wednesday, 24 December 2008

Cost concerns rile Formula One

By Theo Leggett
Business reporter, BBC World Service

It has been a vintage year for Formula One Motor racing.

Honda Racing's Jenson Button
Honda's decision to close its F1 team created shockwaves

After a season of high drama, Lewis Hamilton swept through to win the drivers championship on the very last corner of the final lap of the final race.

But since then, F1 has been attracting the headlines for all the wrong reasons - as the economic downturn has started to take a heavy toll on the sport.

In early December the Japanese firm Honda announced that it was closing the doors on its high-spending but underperforming team.

The company was one of six carmakers that made up more than half of the F1 teams during the year.

Costly sport

F1 Total financial resources 2008
Toyota: $445.6m
Mclaren: $433.3m
Ferrari: $414.9m
Honda: $398.1m
Renault: $393.8m
BMW: $366.8m
Red Bull: $164.7m
Williams: $160.6m
Torro Rosso: $128.2m
Force India: $121.85m
Source : Formulamoney.com

Honda's withdrawal was prompted by a sudden and unexpected fall in sales.

Now there are fears that other manufacturers could follow the Japanese carmaker out of the sport - leaving F1 with half-empty grids to show its millions of television viewers.

The problem is that Formula One is simply too expensive.

In this hi-tech world, a single nut or bolt can cost up to $1,000 (664) - and top teams can burn through more than $400m a year.

Times are hard

Until recently, manufacturers such as Honda, Renault and BMW were happy to plough cash into the sport, in exchange for valuable television exposure.

Bernie Ecclestone
Mr Ecclestone raises $1bn a year from race fees, TV rights and advertising

But now things have changed.

In November, Honda saw its sales in the United States and Europe fall by almost a third compared with the same period a year ago.

Other companies are also struggling to sell cars. Their profits are suffering, and that means Formula One is starting to look like a luxury they can hardly afford.

A handful of teams in F1 do compete without the backing of a major car manufacturer, yet they too are far from immune to the effects of the downturn.

They rely on support from wealthy shareholders and on income from sponsorship, but in the current economic climate, good quality sponsors can be hard to find.

"It is difficult. Times are hard," says Ian Philips, commercial manager of Force India, a relatively small team owned by the Kingfisher beer billionaire, Vijay Mallya.

"You just have to work harder, to prove that you can give a return on investment."

Bigger share

Yet while F1's teams are struggling to make ends meet, the sport itself has seemingly never been richer.

Lewis Hamilton racing
Formula One is past its peak in terms of spending

About $1bn is raised every year from advertising, race fees and television rights - a commercial empire created by the sport's figurehead, Bernie Ecclestone.

But the teams only get half of the cash.

Much of the rest is used to repay debt and interest on loans taken out by the company that ultimately controls F1, private equity group CVC Capital Partners.

"CVC have $2.3bn in debt that they took out to buy the commercial rights to F1," says Christian Sylt, author of Formula Money, a detailed guide to F1's finances.

"They're making annual repayments of about $240m. To sustain that, F1's revenues need to keep going up.

"But the teams also want more money - and the easiest way to get it is to ask the rights holder for a bigger share of the income the sport generates."

Tough debt burden

This is a big problem for CVC.

If they don't get a bigger share of Formula One's marketing riches, more teams could follow Honda out of the door, potentially undermining the glamour and prestige that have made F1 so wealthy in the first place.

But CVC cannot afford to give too much away, or it could find itself struggling to repay its debt, something which would have serious implications for the sport as a whole.

According to Mr Sylt, a large chunk of that debt was provided by the part-nationalised British bank, RBS - secured on the commercial rights to F1.

Hence, in the unlikely event that CVC was to default on its loans, the British taxpayer could effectively and inadvertently end up with a stake in the sport.

CVC declines to comment.

F1 in recession

Meanwhile, the company is scrambling to increase its revenues.

In recent years, it has abandoned many of F1's European heartlands, in favour of new events in regions such as Singapore, Shanghai and Bahrain.

The reason is simple: governments in the Middle East and Asia are willing to pay tens of millions of dollars for the right to host a grand prix. European governments, by and large, are not.

At the same time, F1 teams are under intense pressure to cut costs.

"An F1 team should be able to get by on $60-70m a year," says Max Mosley, president of motor racing's governing body, the FIA.

At a meeting in December, F1's teams did agree to a raft of measures designed to cut their budgets by up to a third.

But in the current frosty economic climate, even that may not be enough.

What is clear is that Formula One is in recession, and racing headlong into a rather uncertain future.

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