Features - Feature
JANUARY 31, 2005
Taking a long view
BY JOE SAWARD
Formula 1 is an industry in which people never look very fair ahead. There is always a crisis to be sorted out or a deadline to be met. Formula 1 is a world in which a talent for fire-fighting is usually more successful than brilliant long-term thinking.
However as Formula 1 looks beyond the immediate matters of the moment and ponders what rules to adopt in 2008 and beyond, it is worth analysing what is really important to keep the sport healthy. Despite all the warnings over the years F1 is not going to die from lack of teams. The argument that the smaller teams will die out and all that will be left are big manufacturer sounded good until Red Bull and Midland popped up and bought out the struggling small teams. Suddenly the only really poor team in F1 is Minardi. These new companies will either build successful teams or they will end up as backmarkers and sell the teams on to the next people willing to try. The only teams that go out of business are those that have been badly run and have built up debt. The pattern has been repeated throughout the history of the sport. Ligier bought Matra's assets back in the 1970s; Benetton came along in the 1980s and picked up Toleman and in the 1990s British American Racing bought Tyrrell.
There are always enough rich organizations around to fund such adventures. Perhaps these days that is restricted to rich corporations but there are still people out there and sensible cost-cutting will keep the sport within the realms of sanity. Multi-millionaires who want to play may not be able to afford F1 these days but A1 Grand Prix has created a very neat system to get their attention: setting one rich man against another in each country, bidding for the national franchise to represent their country at international level. Tycoons can pay to become national figures, a concept which is obviously appealing to many of them. Perhaps once they have competed in A1 some of them will look at the bigger picture and join the F1 scene. A1 is good for F1 in that it is opening up new markets for teams, drivers and sponsors.
Sponsors are drawn to Grand Prix racing because people aspire to the Formula 1 image and marketeers understand this. Formula 1 is not just about racing cars its also about a jet-set lifestyle, Monaco harbour, models and film stars. That may not be the reality but that does not matter to the man walking down the High Street in a dull suburb proudly wearing his Ferrari baseball cap and feeling like a stud.
If Formula 1 continues to be a good shop window for the sponsors it will remain fundamentally healthy. End of story.
The backbone of F1 for the last 20 years has been the presence of the car manufacturers. If the rules had demanded it they might have been forced to supply more than one team (as tyre manufacturers are) but they were allowed to be selfish. Now there is a chance that they will accept new responsibilities as they try to convince non-manufacturer teams to stay with them for the future. this would be a good thing. Five manufacturers supplying 10 teams means a grid of 20 cars. If there are seven manufacturers, all the better.
There is little point in trying to go back to "the good old days" when teams were smaller and life was easier. That is a fallacy, of course, because competing in F1 was never easy. Team bosses are not going to downsize their businesses (often their life's work) to meet the whim of the government body. So sticking with the car manufacturers is a logical way to go forward. The question therefore is whether the car manufacturers can afford Formula 1.
It is true that the car industry is not hugely healthy at the moment but that has not stopped six manufacturers (five of them majors) from being involved in F1. Ford would still be involved if the company had not squandered so much money in the sport in the early days.
These companies recognise that the association with F1 will make their cars more exciting than those of the opposition. An involvement in F1 is not about selling cars as much as being about branding. Companies that can win in Formula 1, so goes the logic, must have pretty spectacular technology available. It is not important that the technology is restricted but it is important that this image remains true. Formula 1 is about technology and so trying to get rid of technology in order to keep down costs is not perhaps the right approach. This appears to be the conclusion drawn by the car manufacturers when they met in London last week.
Keeping costs down in sensible ways is a good idea but they believe that there must be a serious technological challenge involved. There are some firms who are happy to be in F1 simply because of its marketing power but to most the image of being technologically "sexy" is important.
No-one is going to un-invent the automobile even if someone invents a device that allows to fly from place to place without an aeroplane around us. Cars are going to be a major part of life for most of the developed world. And so automobile racing will flourish if the people involved in it do not make a mess of the sport. And even if new vehicles do come along the sport will probably still be fine. Not many people use the horse to get from A to B these days but this has not really affected the popularity of horse racing.
The car industry is not looking very healthy at the moment because some of the big car companies are being badly managed. Very few of them are making money from building cars. They may make money from credit operations or from some of their model ranges but these successful models rarely pay for the money invested in them. Much has been done to make car companies more efficient and cost-effective but the fact remains that most car companies will not make profit unless the factories are working at full capacity and at the moment there is too much production capacity compared to demand. Car companies can build 80m vehicles a year but the world only wants 60m cars at the moment. The car companies have continually and systematically over-estimated future demand. China will create more demand but production facility are being built there to meet that, the factories in Europe and North America are not going to increase production unless demand increases. Thus companies have been discounting heavily to move cars even if the profits from those cars is negligible. This has flooded the market with new cars and that means that demand is now scaling back because consumers are making do with older cars until the economy improves.
There are only a few well-run companies that are making money on their cars, notably Toyota, Honda and Nissan. They are successful because they are efficient not only in terms of manufacturing but also in product planning. They build good cars. They do not need to be propped up by governments or mergers and acquisitions and accounting fireworks.
The US car industry is geared to the wrong market. The US has low oil prices and few controls on emissions. The Japanese and the Europeans build cleaner and more efficient cars because of high fuel costs and governments pushing them to improve their emissions. The Japanese won a foothold in the US and Europe because they built more efficient and cost-effective cars after the fuel crisis of 1973. Having won ground with small cars they moved into the more profitable luxury car sector. The US and European firms have adopted many Japanese production techniques but have still to match the quality and reputation of the Japanese. In an effort to meet the Japanese challenge the car companies began to consolidate and create global businesses, introducing new economies of scale and "platforms" capable of building different models. The Japanese are still more efficient. There is a chance for the US to catch up if it gets ahead in new technologies and alternative fuels but they need to move fast to catch up and win back market share.
One of the biggest problems for US and European car companies is getting the best from demoralised work forces. The Japanese have shown that success in F1 can be a huge benefit for a company in terms of corporate morale. It can be useful for technology and for instilling in engineers the need to work quickly.
What Formula 1 needs to do now is to decide whether it might not be wiser to have more relevance to the motor industry in the years ahead by having rules which will be useful to the industry in terms of research and development and technology. Rather than fighting progress, perhaps it would be wisest for F1 to adopt an under-developed technology and help the industry move forward. In that way the sport could have more relevance and thus guarantee longer-term involvement. Fuel efficiency is not always a good way to make good racing but developing hybrid racing engines might be worth considering.
The problems of F1 today are, however, rooted in money. It is unavoidable that someone will make money from the sport if people want to watch cars going round in circles and are willing to pay for it. There is always someone willing to collect the money. Bernie Ecclestone has collected plenty over the years. Not surprisingly, those who are directly involved in running teams believe that he takes too much and that the players should profit more. There is no reason why this should not be the case but if the challengers are to be successful they must come up with a better business plan than Ecclestone. That should not be hard given that he is taking a great deal out of the sport and so a rival promoter should be able to undercut him and offer teams a better deal. Logically, if the teams do it themselves they will cut out the middle man and make more money. The FIA took a pile of money to lease the commercial control of the sport to Ecclestone and so should not be involved in backing one party or another in commercial negotiations. If Ecclestone cannot keep the teams interested in his financing schemes, the rights he acquired will be worthless and the FIA will be in a position to sell them again to someone else. The federation should however have the power to take the rights away from someone if the people involved have eyepatches, wooden legs and are obviously a bunch of pirates. Otherwise, so the European Union says, the federation should stay out of the deal-making.
Formula 1 is a marvellous way to make money. Ecclestone has done a great job but who is to say that others could not do better? When one looks at what the France Family have made from NASCAR and how they operate, one can see that there are many avenues that Bernie has not even begun to develop - because he is not interested. Thus there is huge potential for growth. Spreading the wealth would be a good idea if only because it would get rid of the climate of mistrust that exists and give F1 the feeling that people were working together while at the same time competing. NASCAR does that, F1 could as well.