NOVEMBER 21, 2007
Why F1 now needs vested interests
Formula 1 has long been plagued by those with vested interests but increasingly these are the people who needed to keep the sport growing. Out in India, people are currently asking how an Indian Grand Prix makes financial sense for those involved. They have seen the much-publicised losses of the Australian GP in Melbourne and wonder how the Jaypee Group, which will promote the event, is going to make any money from the Grand Prix. It is known that the Formula One group takes almost all the available revenues, leaving only ticket sales to recoup the investment. And it does not take a rocket scientist to work out that paying an annual fee of perhaps $30m means that it would take 300,000 people each paying $100 for the event to break even. This might be possible but one should never forget that despite impressive growth rates the annual income per capita at the moment is still under $1000, and while there are many who earn more than that they have other priorities such as the Indian middle class is not yet enormously advanced and a large percentage is still in the process of acquiring televisions, refrigerators, mobile phones and maybe one day a car.
So how can Jaypee hope to make money when building a race track will cost at least $100m and there will be ongoing losses from the event itself?
Building up the non-F1 business of the racing circuit is obviously one option but India does not have a motor racing culture and thus that will be a slow process (as they are finding out in Bahrain, Malaysia and China) before a track can find a way to break even.
The only logic therefore is if the race promoter is involved other activities which will benefit from the event - whether there is a local audience or not. Jaypee owns and operates five-star hotels, golf resorts, commercial complexes and shopping malls in the region. It is also building a new road to transport people around. The aim is to create a tourist destination and draw the world's attention to it using F1. India boasts much that people would like to see and visit but many are turned away by the fear of poverty, unhygienic conditions and poor infrastructure. Thus it makes sense for the Indians to construct new airports, roads, tourist complexes and so on within easy reach of such major tourist destinations as the Taj Mahal. The economic impact of a Formula 1 race in a region is difficult to calculate accurately (beyond obvious benefits such as money spent by the spectators) but there is no doubt that races can and do help create new perceptions of places and than results in more tourists throughout the year, more investment and so growth.
It is a weird reality that F1 nowadays needs such vested interests in order to grow.