Honda website
Honda website

MARCH 28, 2001

Is F1 a good deal for the car manufacturers?

THERE has been a great deal of talk in recent weeks about the possibility of the major car manufacturers buying shares in the Formula One group of companies. This sounds like a great idea but the question that is being asked by the automobile industry executives is whether or not this is a good idea. One (rather crude) analogy which has been used is that Formula 1 is a bit like a whorehouse where car companies go for a bit of titillation and gratification. Maybe even to improve their image. The Formula 1 teams will do anything if the money is right. It is a very simple commercial transaction. Formula 1 uses the car manufacturers and the car manufacturers use Formula 1. When it no longer suits them or they lose interest in the sport they go off and spend their money on other things.

But who ever bought shares in a whorehouse?

There is a valid argument somewhere in all this but at the same time there is also an important point that with the increasing costs of being involved in Formula 1 there is a need for executives to protect the investment being made. If a company owns shares in Formula 1, the amount of money coming back from the sport increases and so the program becomes a little bit more justifiable. But if it costs a lot of money to buy a small percentage of the company controlling the commercial rights of Formula 1 the payback is going to be very small. At the moment the sale of television rights brings in around $350m a year, so a five percent shareholder will get around $17.5m a year in income. This is likely to increase with each passing year. If you value the business at $4bn - based on the recent sale of 25% of the business from $1bn - then you are going to need $200m to buy a five percent share in the business but at the rate at which that investment will be paid back it is a very good deal for a car company. The automobile business is one that makes big profits when things are going well but it takes a lot of money to make a lot of money. Most of the car companies make more money out of their financial divisions than they do out of their car sales. They are not used to quick return on investment so a business like F1 would seem to be quite attractive. And, of course, for a car company investing $100m a year in Formula 1 a saving of 17.5% is a great idea.

These may sound like huge figures for normal human beings but to car company executives, hundreds of millions are not big sums of money. Opening new factories, altering product lines and so on cost fortunes and there is nothing like the commercial impact that Formula 1 can bring. The power of the sport as a marketing tool is undisputed and there are additional benefits in terms of improving one's engineers and pushing ahead with technologies.

There is an argument that Formula 1 is only good for those who win but increasingly this does not seem to be the case. Being there is enough if you are moderately competitive. If you have a disastrous program like that of Yamaha or Peugeot there may be downsides to the involvement but if you go along to the average Peugeot dealer and ask him if the F1 program did him any harm he will tell you that this was not the case at all. The reason Peugeot stayed in F1 for so long was that there was constant pressure from the dealers.

This helps to explain why it is that every major manufacturer in the world - with the exception of inward-looking General Motors - is either involved in F1 or in the process of getting involved. If there are six manufacturers each owning 5% of the Formula One business only 30% of the shares will be accounted for. Their involvement will give F1 a stable future and decent credibility with the stock markets so that the Ecclestone Family and Leo Kirch can, if they choose to do so, cash in their chips and let racing fans all over the world own a piece of the sport they love.