Toyota's exit adds to F1 woes

Analysis
By Theo Leggett
Business reporter, BBC World Service

Toyota's departure from F1 leaves just three carmakers competing.

Just days after the Grand Prix of Abu Dhabi showed that Formula One has not lost its taste for flagrant financial excess, the series has once again run head first into economic reality.

The world's biggest carmaker, Toyota, is withdrawing from the championship.

It is the third manufacturer to abandon Formula One within a year, following in the slipstream of BMW and its Japanese rival Honda.

Toyota blames the "abrupt economic challenges" that emerged last year for its departure. And it is not difficult to see where the problem lies.

The onset of the financial crisis sent shockwaves through the car industry. Like other manufacturers, Toyota saw its sales tumble. At the same time, the rising value of the Japanese Yen took a heavy toll on its bottom line.

In the year to the end of March, the company made a net loss of $4.4bn (£2.7bn), its first annual loss in nearly half a century. It is expected to lose even more money this year.

Several exits

Toyota's involvement in Formula One did not come cheap.

Until recently, it was spending more than $400m a year on the sport. Yet success proved elusive, and its team never won a Grand Prix.

Under those circumstances, Toyota clearly felt F1 was a luxury it could no longer afford.

Other Japanese firms are feeling similar pressures, prompting a remarkable exodus from top level motorsport.

Tyre maker Bridgestone is to follow Honda and Toyota out of F1 at the end of next year. Subaru and Suzuki have already abandoned the World Rally Championship, and Kawasaki has pulled out of motorcycle grand prix racing.

Three left

So where does this leave Formula One?

Toyota recently suffered its first annual loss in nearly half a century.

In recent years, the series has become one of the most lucrative sporting products in the world, with annual revenues of about $1bn, from television rights, trackside advertising and race fees.

On the surface little has changed. As the brash glitz of the floodlit Abu Dhabi Grand Prix made clear, F1 still knows how to put on a show.

Toyota is unlikely to be much missed. Its big bucks operation was neither successful nor particularly popular with the fans. It certainly didn't have the following of teams like Ferrari and McLaren.

But its withdrawal leaves just three car manufacturers competing in F1: Ferrari, Mercedes Benz and Renault.

All three say they are committed to the sport, but industry insiders believe one of them may depart before long.

More teams

The nightmare scenario for F1's owners, the private equity group CVC Capital partners, is that too many teams drop out, leaving a huge global television audience watching half-empty grids.

So far that has not happened. The Honda team was rescued by a management buyout and, rebranded as Brawn GP, went on to win the World Championship.

BMW too has sold its team to the rather opaque investment group Qadbak. It has yet to secure a place in F1 for next year, but Toyota's departure makes that more likely.

In fact there could be more cars on the grid next year, not fewer. Four new teams are due to join the series.

Their entries are the result of a concerted campaign by motorsport's governing body, the FIA, to cut the costs of competing in F1.

In July, it secured an agreement from the teams aimed at reducing their spending down to the levels seen in the early 1990s - a reduction of about 75%.

Noticeable change?

Nevertheless, in the current climate the cost of competing in Formula One remains very high. Teams which do not have the backing of a major manufacturer are wholly reliant on sponsorship - and competition for sponsors is fierce.

As a result, it is far from guaranteed that all of the new entries will actually compete next year, or that those that do will be able to make it to the end of the season. So concerns about the health of the series remain.

There is no doubt that F1 is being forced to undergo a profound change. The free-spending days when the competition was dominated by manufacturers seem to be over, for the moment at least.

Instead, the series is likely to rely much more on independent teams, whose business is primarily motor racing - not selling cars. This, of course, is how F1 used to be, until the mid 1990s, when carmakers began to take control.

Whether or not this change will harm Formula One's prestige as the pinnacle of motorsport, or reduce its colossal earning power, will depend almost entirely on what happens on the track.

If F1 can continue to offer red blooded racing against a backdrop of ostentatious glamour, then the chances are television viewers will hardly notice the difference.

But if the show starts to suffer, then the jewel in the crown of motorsport could rapidly lose its lustre.