Page last updated at 00:00 GMT, Tuesday, 5 January 2010

Has downturn left F1 underpowered?

By Theo Leggett
Business reporter, BBC World Service

A great deal has changed in Formula 1 since the 2009 championship roared into life at the Australian Grand Prix in March.

British Grand Prix at Silverstone in 2008
Formula 1 will never be the same again

It remains one of the wealthiest and most popular television sports in the world, a potent mixture of high-powered technology and high-rent commercialism.

But the economic downturn has had a profound effect, and that will be felt for years to come.

The most obvious change has been the departure of three big-name carmakers.

Honda sold its team before the 2009 season had even begun, and was followed out of the door a few months later by Toyota and BMW.

All three found themselves unable to continue investing hundreds of millions of dollars in top-level motorsport, at a time when the collapse of the car market had left them nursing heavy losses.

Their departure marked the end of an era for Formula 1.

For the past decade, big carmakers have dominated the sport. Mercedes, Toyota, Honda, Ferrari, Renault, BMW and Ford together made the series their own.

They lent the championship glamour, but they also pushed the cost of competing to extraordinary levels, as they tried to buy the success their directors demanded.

Colossal resources

According to F1 consultants Formula Money, the big carmakers spent a remarkable $6.3bn between them over the period 2005-2009.

To put that figure into perspective, it's nearly half the total $13.7bn spent by car manufacturers on F1 in the entire 60-year history of the sport.

It was bad news for the independent teams who had traditionally made up the bulk of the F1 grid, and who lacked such colossal financial resources.

They were left gasping in the slipstream of the manufacturers, struggling for survival. Many within the sport were concerned that if the big carmakers pulled out, the future of F1 itself could be thrown into doubt.

Italian Toyota driver Jarno Trulli steers his car on the Sakhir racetrack
Toyota was one of the three carmakers that left F1 in 2009

When Honda withdrew at the end of 2008, motorsport's governing body, the FIA, decided to act. It tried to impose a strict budget cap on the teams, which would have reduced their expenditure to a mere fraction of current levels.

The scheme failed, because the teams would not accept it. Instead, they signed up to a voluntary agreement aimed at reducing their spending to $80-100m by 2012.

That compares to the $363m spent by Honda in 2007 alone.

The agreement came too late to prevent Toyota and BMW from following Honda out of the sport. But it does appear to have encouraged Mercedes to increase its own involvement, by buying the Brawn team - the squad originally created by its rival Honda.

It may also have helped to keep Renault in Formula 1. The French firm recently sold a majority stake in its team to the investment firm Genii Capital, but for the moment at least, it will continue racing under the Renault brand.

But above all, it provided much-needed reassurance for the independent teams.

These teams rely on support from commercial sponsors and wealthy individuals. But the downturn has had a severe impact on sponsorship revenues. In 2009, they were down 8% on the year before.

New kids on the grid

The agreement means independent outfits can now hope to be reasonably competitive on a budget which, in the past, might have left them struggling at the back of the field.

But competition for sponsors will still be fierce, the more so as four new teams are due to join the series in 2010.

Among them are the Malaysian-backed Lotus F1 team, run by AirAsia boss Tony Fernandes, and Virgin Racing, which is supported by the Virgin group.

Sir Richard Branson attends the media launch for the new Virgin Racing team at the Louise Blouin Foundation on 15 December, 2009 in Notting Hill, London
Virgin has launched its own bid for F1 racing glory

If they make it to the grid, they should bring new blood and new backers to the sport. But it is far from certain that all of them will be racing in 2010.

Yet while the teams that compete in F1 are facing up to life in the current austere financial climate, the business that controls the series is looking healthier than ever.

The Formula One Group, which is run by Bernie Ecclestone and majority owned by private equity group CVC Capital Partners, has seen its revenues increase substantially.

It currently earns about $1.3bn a year, from TV rights, trackside advertising and the fees paid by racetracks for the right to host a Grand Prix.

These revenue streams are largely insulated from the effects of the downturn - partly because they are based on contracts that last for many years and partly because many Grand Prix events, such as those in Singapore and Abu Dhabi, have substantial government backing.

Teams tamed

The withdrawal of the big carmakers has also played into CVC's hands.

The company returns half of its revenues to the teams that compete in F1. The rest it keeps. It badly needs the money to repay debts run up when it bought the rights to F1.

Until recently, the teams were loudly demanding a bigger slice of the cake - putting intense pressure on Mr Ecclestone and CVC through their lobbying organisation, FOTA. As a group, they had threatened to undermine F1 by leaving en masse to set up a rival championship.

But the departure of Honda, BMW and Toyota means that is no longer a realistic possibility. The remaining teams simply do not have the financial muscle to set up and promote a new series.

So as F1 gears up for the 2010 season, one thing is abundantly clear. Budgets may be much lower, the names of sponsors may be different and the big beasts of the car industry may have been replaced by unfamiliar names.

But whatever happens on the track, the business built up by Bernie Ecclestone remains a winner, in financial terms at least.

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