Features - Financial
SEPTEMBER 1, 1991
The financing of Formula 1
BY JOE SAWARD
It is no great secret that Formula 1 is a sport for the rich, but just how rich does one have to be to do F1? What does it really cost? There are no definite figures, only estimates. And these have to be revised every year by at least 15%.
There was a time when people like Lord Hesketh, Walter Wolf, or more recently Jean-Pierre Van Rossem, were able to fund their own teams, but even for these extravagant folk the dream is now over. Money is the only master of the game. Dollars are counted in tens of millions, soon it will be hundreds of millions for the wealthy teams like McLaren, Ferrari or Williams-Renault.
Alain Prost, a man who harbours the ambition of having his own team, must face the fact that it to be in the top five teams will cost at least $US50 million a year. To get into the top three would cost US$75 million.
And the other teams? They do what they can. There are teams like Ligier which have important political friends who can supply an annual budget of around US$40 million without the need for good results.
To give you an idea of the inflation in F1, in 1981 the same Ligier team a budget of US$4 million - an amount which, at the time, was a good healthy budget - and results were a lot better than they are today. Five years earlier, when Ligier entered F1 the team had a budget of only approximately US$600,000.
Benetton has a budget which is close to that of Ligier, but it is not more than US$45 million.
At the same time a team like Dallara, survives on US$10 million while Jordan had probably US$15 million in total last year, with which it arrived in F1 and performed miracles, scoring points which Eddie Jordan hoped would be changed into millions of dollars of new sponsorship for the 1992 season. Did it work? You will have to ask Sasol, Philips Car Stereos and Barclay...
What some of the smallest teams fail to understand is that with if you have [sl10] only[sl0] US$6 million, you might as well stay at home.
Formula 1 is not complicated. The richer you are the easier it is to become number one and when you are the number one you have the opportunity to get even richer. McLaren is the classic example.[
It's all about money, money, money. But where does it all go?
It's not a secret that the best drivers and the good engines are very very expensive. A driver who has won a Grand Prix, who is capable of qualifying well and can finish as many races as possible is worth around US$4 million a year. That is the case for someone like Thierry Boutsen, while Jean Alesi - who hasn't even won a race - is worth about the same.
Drivers like Riccardo Patrese and Gerhard Berger should be able to get around US$7-8 million on the open market. The men who have really profited from the inflation of driver salaries are stars like Ayrton Senna, Alain Prost and Nigel Mansell who have seen their salaries leap up in unbelievable fashion in recent seasons. Today Ayrton Senna will cost you around US$15 million a year, with Prost and Mansell coming with a price tag in the region of US$10-12 dollars.
And the others? They do not do quite as well. Basically, they divide into two groups: those that pay and those that are paid. A driver like Ivan Capelli would, last year, have been earning around a million dollars (he will certainly be getting more at Ferrari this year). In a similar price range would be a driver like Michele Alboreto or Stefano Modena and below them are those who earn only in hundreds of thousands of dollars, drivers like Alex Caffi or JJ Lehto. These drivers will earn less as the recession bites and may be obliged to find sponsorship to get drives.
Some drivers are paid nothing, but they do not go hungry as they have personal sponsors who ensure that they enjoy a very comfortable standard of living. The same is true of many drivers who take money to teams. They take a certain amount to buy the drive and then the team pays them from the money delivered.
These men will often look for other ways of making a buck. It has been known for drivers to take out insurance policies, so that if they pay a large premium and score X number of points, their insurers have to pay out. If they fail to get the necessary number of points they lose their premiums and the insurance men laugh all the way to the bank. It's a form of gambling, if you like.[QL]
What does it cost to buy an F1 drive in February 1992? Depending on who you ask, you will hear figures in the US$2-5 million bracket. If you have a superlicence and you have US$5 million, you won't have too much trouble getting a car like a Tyrrell or a Jordan.
There are exceptions to all these rules, of course. If you are Michael Schumacher or Karl Wendlinger, your path into F1 will have been paved with financial guarantees from Mercedes-Benz. In the case of Schumacher these did not last long. He proved himself to have an exceptional talent and, after one race, had switched teams and gone on to a payroll.
A good driver, however, is worth nothing unless he is given a good car and, as a result, there has been inflation also in engineers' salaries. In this field there are also stars: a John Barnard, an Adrian Newey, a Jean-Claude Migeot or even a Gerard Ducarouge will cost you at least US$1 million a year and if you have the money they will do a good job for you. If you don't have the cash you must look to hungry younger engineers, who come out of the design schools and colleges and cost a lot less - but do not have the experience of the stars. The other thing to remember is that if you get a top engineer, you will not keep him long unless you have plenty of money to fund his research schemes and new facilities.
Some teams seem to collect top engineers: McLaren has Neil Oatley, Giorgio Ascanelli and Osamu Goto, with Gordon Murray hovering in the background. It costs a lot, but it creates a think-tank. More importantly it reduces the talents available to the opposition. These things are important.
What about the engines? What do they cost a team to buy? Once again the top teams do not have to worry about such things. The motor manufacturers supply the engines for free. It would be impossible for a team - even McLaren - to pay the estimated US$130 million needed by Honda to build and develop the V12 engine?
It is the same for Williams, which does not pay for its Renaults; for Benetton, which has free access to the Ford HB V8 and to Jordan which gets its Yamahas free of charge.
For a special relationship like that between Scuderia Italia and Ferrari, the engine bill will be at least US$8 million dollars. A similar deal last year between Minardi and Ferrari failed to produce much in the way of results. An expensive way to go racing.
A Lamborghini V12 deal is thought to cost around US$7 million for a season and the Judd V10 comes in at around six.
In the most general terms the budget of an F1 team is made up of the following constituent parts: 20% for the engine; 20% for the drivers; 35% for the salaries and 25% for the cost of the research, development and construction of the cars. These, naturally, vary. Some teams pay more for drivers and get free engines, others pay more for engines and ask drivers for money.
While the costs of drivers and engines are quite clear, the costs involved in research and development and the construction and maintenance of the cars is less easy to gauge.
Components are not cheap but they are easy to calculate: a water radiator costs #350; a fire extinguisher system #1800 and so on. But when you come to the chassis and hours spent in wind tunnels the sums begin to mount up. It takes 1500 man/hours to build a chassis and the cost of this skilled labour must be added to the basic expense of the materials and processes involved.
The current fashion is to semi-automatic gearboxes. These are around four times more expensive than the traditional mechanical 'boxes used four years ago. Modern 'boxes with electronic control and six or even seven speeds, the cost of research and development can run into millions of dollars.
The need to make everything as light as possible has also increased costs. A few years ago one might need seven gearboxes in a season, today one must count on using at least 12 because they are less durable.
And the tyres? There are those teams which are paid to run with them; those which use them free; and those which must pay for them. At around US$500 for each tyre the cost is not negligible. It is a similar story with fuels. The more complex they become the more expensive they are if you happen to be a customer.
The wealthiest teams, of course, do not have to pay such charges and can invest money for the future in R&D or new facilities. In general terms McLaren is estimated to put 20% of its budget into such projects.
To transport all this equipment around the world does not come cheap. Teams used to take around 3 tonnes of equipment to each race, today the big teams can get up to as much as 10 tonnes. The cost of transportation for a year? Between one and one and half million dollars. There are advantages with being a top 10 team. If you use FOCA transportation you get three tonnes, two cars and 14 first class tickets thrown in.
The technical side is just a part of it all, of course. A team needs to entertain the corporate hotshots who pay the bills so motorhomes become larger and more luxurious. A motor home such as Benetton's costs US$250,000, but that's not really a lot of money when one hears that of Marlboro reputedly spent half a million on its hospitality unit.
But where does all this money come from to pay all these bills?
The major source of income, of course, is sponsorship and nowadays every inch of a car can be bought and sold - if someone wants to pay. The top teams are even selling the unclothed monocoque space these days. It is logical as 70% of the time during a race weekend is spent with the car minus its bodywork...
The cost of the various parts of the car differ depending on the rate cards of each team (or how desperate they are for money) but a general rule for the middle of the grid teams is that it costs between US$2.5 and US$4 million for a sponsor to put his logo on an engine cover and at least US$2.5-3.5 million for the sidepods. The nose is US$ 2 million (as is the the rear wing) and the front wings are not less than two, except the endplates which are less visible and cost about a million.
There is also other hidden income from the organisations which control GP racing. These are very well-organised and structured payments, but they are not well known.
The FIA Vice-President (Promotional Affairs) Bernie Ecclestone, who is also in charge of FOCA, runs this side of the business, while further income is generated by Paddy McNally who heads All Sport Management and by an organisation called International Sports Communications. The principal purpose of these organisations is to generate money from the television rights and from the advertising associated with the F1 circus.
There is also the prize fund at each race. Estimated in 1992-93 to be in the region of US$2.5 million per race, this money has to be found by the individual GP organisers.
Their only real source of revenue is the ticket sales, given the fact that the circuit must leave all advertising hoardings for Ecclestone and McNally to sell. To break even, therefore, the organisers must sell at least 55,000 tickets.
Last year's average prize fund is estimated at US$2.2 million per race. Of this figure the teams get 92% with FOCA retaining the remaining eight. This is then subdivided and 35% is paid as fixed rewards - effectively starting money. The US$700,000 is divided in two, the first US$350,000 being divided amongst the teams in proportion to the number of points they have scored in the championship in the two previous half seasons. The second US$350,000 is apportioned equally between the 10 best placed teams in the championship in the course of the previous two half seasons.
The remainder of the prize fund is paid out according to performance during a weekend. Qualifying represents 30% of the fund - approximately US$600,000 - which is distributed to the top 20 on the grid. The pole man in 1991 gained something in the region of US$42,500 with the second getting US$36,000, the third US$33,000 and so on down through a sliding scale - based on percentage figures - back to the 20th qualifier who received only US$8,200.
Forty-five percent of the prize fund was reserved for the race - around US$910,000 in 1991. In terms of pay-outs the race was divided into four quarters with payments being made on the positions at one-quarter distance, halfway, three-quarter distance and the chequered flag. Once again the system is based on sliding scales for the first 20 cars. At the first three points in the race the scale begins at around US$20,000 for the leader and goes down to the 20th man who gets about US$750.
The payout at the chequered flag is bigger with the winner getting around US110,000, the runner-up US$85,000 and the third placed man US$69,000. The car classified 20th gets only US$4000.
In general all this money goes directly to the teams who employ the drivers, although there are some teams which drivers are on a percentage of the prize money.
Looking back at 1991 as whole, ther was something in the region of US$36,000,000 divided up between the teams at the 16 races.
To these not inconsiderable sums one must add the other important revenue coming from FOCA - the television rights. This is the area which pays the most money, but how much that is no-one is willing to say. Certainly television rights for the F1 World Championship are not cheap, with channels believed to be paying around US$6 million a year each. If you think how many channels worldwide are transmitting F1 races, you begin to see that very large sums are being generated. Of this money 33% goes to FOCA; 30% to FISA and 27% is divided between the top 10 teams.
It may sound like a lot of money, but in reality when it reaches the teams it does not represent a huge percentage of their income. For a medium-sized team, like Scuderia Italia or Minardi, it is probably less than 5%. Even for McLaren, which does a prodigious amount of winning, the FOCA money is probably no greater than 5%, the team's buget being larger.
It is to know of all the money which is circulating in F1, but one should not forget the money made by All Sport Management from the sale of trackside advertising. If you want to be the name sponsor of a GP, be warned, it will cost you at least US$1 million. On top of this money there is money generated by the Paddock Club which entertains sponsors' guests for round US$1000 a head.
If all these figures do not scare you, you should be able to pick yourself up an F1 team without too much trouble. You'll have to buy it, of course, and a down-in-the-mouth operation will probably cost about US$5 million to buy. All this expenditure, of course, does not guarantee you anything in the way pf results. You need all this money just to compete.<\#026>