Honda website
Honda website

MARCH 24, 2005

The economics and value of F1

It is clear, and has been for some time, that the world has too many automobile companies. The result of this is that competition is fierce. This drives the car firms to try to win market share by looking for ways to brush up their images. Formula 1 serves that purpose well but not everyone can be a winner. The trouble with competition is that it tends to force up the costs in the sport as one company outspends another to gain success. Success does pay off but the investment needed to be successful is considerable. And one of the problems that the big old car companies are facing is that investment money is thin on the ground.

Thus the car manufacturers in F1 are getting together to try to reduce the costs and enjoyed more benefits from F1. They all want to be in the sport but they need to be able to afford it.

The biggest problem for mnay of these firms is that they have been too nice to their workers in the past. The US giant General Motors, as an example, has a workforce of 180,000 yet it is committed to paying more around 450,000 people each month because of its pension and health insurance schemes for past employees. These costs are growing as workers retire and better medicine and care helps them live longer. This means that GM's costs are rising by around $500m a year. The current bill for such commitments is around $6bn a year and this has eaten into the profits. That in turn means that less can be spent on product development and so the firm has dropped back in comparison to some competitors. In recent years GM has reacted and made cuts in the workforce in order to pour money into new models in an effort to win back sales lost in the 1990s when the company was doing fine with sports utility vehicles and let its image as a builder of high quality cars fade. This policy has, alas, failed to increase operating profits and GM has tried to cover its costs by selling cars at a discount, to keep the money rolling in. Even this is not working and now the firm is beginning to realize that it must face up to the problem and start talking to the unions about cutting the workforce and reducing the benefits. There are no options left. And that means that companies cannot afford to be seen spending large sums on luxuries such as F1 at time when jobs are being cut.

The problem is one that other companies may also fall into unless they are willing to deal with the hard problems before they get out of control.

Formula 1 still has a place in the automotive world but it is clear that it is in the interest of everyone that costs be reduced and yet at the same time, the image of the sport must be maintained.