- Formula Money
Keeping the wheels turning
Costs may have been cut in Formula One but on average a team still needs a budget of around $170m to run every year. At the same time, the economic downturn has made it even harder to secure sponsorship so perhaps now more than ever, only the strongest will survive in the sport.
Last year was one of the most thrilling in Formula One's history and it came just at the right time. In 2009 F1 had faced calamity after calamity ranging from three car manufacturers pulling out of the sport to the threat of a rival series and a scandal over a rigged race. After these breakdowns it needed a boost and this is exactly what it got.
Politics took a back seat to the racing in 2010 and four drivers were in contention for the title right down to the season-ending Grand Prix. It crowned Red Bull Racing's Sebastian Vettel as F1's youngest-ever world champion and fuelled a 7m rise in the number of people watching the sport taking its total viewers to 527m. This year will be the first season in four decades in which five champions line up on the grid and next weekend we will find out if they can maintain last year's pace. Off track there is already a good indication that the teams have what it takes to pull it off.
We don't have to wait until the first race to find out which teams have the strongest hands. All of them have launched this year's cars and the liveries show which have managed to capitalise on the increasing interest in F1 by gaining sponsorship and which have had a reversing tally of sponsors. Overall, they are ticking over nicely.
According to F1's industry monitor Formula Money, the teams' total sponsorship has increased by 9.6% to $831m in 2011. It is a world away from last year when they started the season with $705m in sponsorship, 14% less than they had in 2009. It represented the biggest fall in the past five years and, remarkably, it came despite the number of teams rising from 10 to 12 as newcomers Hispania, Team Lotus and Virgin joined the grid.
However, it soon became clear that several teams would be vying for the title in 2010 and sponsors realised that this would fuel an increase in viewing figures. It led to a steady stream of deals signed in 2010 including $8m in sponsorship of Mercedes GP from British software company Autonomy and a further $8m which Lotus received from Malaysian telecoms firm Maxis. This upswing continued over the winter break.
The biggest of this year's new sponsors is the Lotus car company which has paid around $40m to the Renault team to become its new title sponsor. It means that for the first time F1 will have two teams with Lotus branding this year and it heralds a return of sorts for car manufacturers.
The biggest loser is Williams which has parted with an estimated 40.8% of its sponsorship from 2010. It was the team's biggest fall in the past decade and in total it lost an estimated $46.5m from six brands including German insurer Allianz, a Williams sponsor since 2001, and UK government-owned bank Royal Bank of Scotland, which was alone paying $20m to the team annually.
It is also set to lose its engineering director Patrick Head who is expected to retire this year. Earlier this month he floated an 14.5% stake in the team on the Frankfurt stock exchange giving himself a £31m payout before he leaves. Since the float, Williams' shares have crashed by around 19% to €20.20 per share so confidence in the team does not seem to be on the up.
This year Williams has dropped highly-rated German driver Nico Hulkenberg in favour of Venezuelan Pastor Maldonado who brings with him an estimated $16m of sponsorship from local businesses including oil company PDVSA. It takes the team's sponsorship tally to $44m but puts most of its eggs in just a few baskets as the float prospectus revealed that Williams' income from prize money and its three largest sponsorship agreements "represent between 80% and 90% of the group's contracted income."
Sponsorship typically provides around 60% of a team's budget but this is increasingly harder to attain. When companies cut their marketing budgets it made them look even harder at the returns they were getting from sponsorship. So whilst the budgets of the best-performing teams ticked over, it became even harder for the back markers to sign sponsors. This has led to the funding gulf between the top and bottom of the grid growing ever wider.
To prevent teams from hitting the wall if owners decided to pull the plug on funding the Resource Restriction Agreement (RRA) was introduced. This limits areas such as staff numbers, size of computer storage space and the amount of days cars can be tested on track. However, there are significant exclusions from it such as marketing costs and engine development which accounts for around $350m of annual spending. They may make all the difference.
The RRA was introduced in 2009 but this didn't stop Red Bull Racing's costs increasing 8.8% to £156.9m in its bid to win the championship. To maximise lead time, development work on F1 cars is done the year before they are introduced and in 2009 Red Bull Racing's spending on research and development increased 18.8% to £57.2m. It was far from the only focus of the team's investment drive as it also spent £4.9m on improving its engineering facilities and although staff numbers remained stable at 592 their total pay increased 21.9% to £45.9m.
To cover the increase in costs Dietrich Mateschitz, co-founder of the Red Bull energy drinks company which owns the team, agreed to boost investment in F1 by 29.5% to £107m. It gave the team victory and proved that although the championship seems to be decided on track the off-track battle of budgets is an equally important part of the season.