Formula 1: The economic underpinnings of a F1 Team

As previously stated; I’ve always enjoyed watching F1, for as long as I can remember. As you may well know, Im also passionate about business. After seeing that:

Formula One’s revenues were $2.022 billion in 2019, but owing to the pandemic, they decreased by $877 million to $1.145 billion in 2020. The drop was 43%.

I wanted to know how the business side of a Formula one team actually works and how it seems Mercedes have had such a stranglehold for the past couple of years (Unless Max can do anything about it this year; but i’m doubtful).

GET READY FOR SOME FRESHLY GOOGLED FACTS, AND LOTS OF DATA TALK!!

Lets have a look at how the teams make money:

Team Revenues:

C1 Payments: The first type of guaranteed payment is known as a C1 payment. This sum is distributed to all F1 teams that have competed in the championship during the last two years. Haas F1 is a very new addition to the team roster, having only earned their first C1 payment in 2018. They have participated in F1 since 2016. The total sum distributed is 36 million dollars.

The second type of prize money is the constructor’s championship prize money, which is given based on the team rankings at the completion of the tournament. Mercedes finished first in 2019 and earned $61 million as a consequence. Ferrari finished second and received $52 million, while Redbull took home $41 million. Williams Racing finished last and so received a paltry $13 million. Certainly not enough for a Formula One racing team.

Heritage Payments: The following payment is also referred to as the Ferrari contract or the Long Standing Team. This payment is made solely to Ferrari. Why? This reward is mainly given to Ferrari, the oldest F1 team, for staying in the sport for almost 60 years. In 2019, the total reached a staggering $68 million. More than Mercedes earned that year for winning the F1 constructors’ title!
However, Ferrari is not the only team that receives compensated for their historical affiliation with Formula One. Williams Racing is the second oldest team in Formula One, although they only receive $10 million each year.

CCB Bonus: In addition, four teams will get a Constructor’s Championship Bonus. Redbull, Mercedes, Ferrari, and McLaren are the teams. The incentives are not always distributed evenly, with the top performing/winning teams earning somewhat more than the other teams. This honour is granted to the teams that have won the most titles in the past.

Finally, there are certain ‘Other’ payments that are contingent on the signing of independent contracts. Mercedes earned $35 million for keeping their promise of winning two titles; Redbull received $35 million for being the first to sign something called the “Concorde” deal (more on that later), and so on.

Overall, the above method is clearly broken and favours older clubs far more than any income sharing arrangement should. This had been going on for a long time, and teams were becoming increasingly enraged with each passing year.

You’re not earning any money operating a Formula One team right now, and it’s unlikely you ever will. As a result, the new Concorde Deal was signed in 2021 and will continue until 2025; this agreement has been lauded by the F1 community while being criticised by the richest teams. Why? You guessed it, the agreement gives a far better answer to the above-mentioned uneven division of income, and it even sets a budget cap on the automobile itself.

Sponsorship:

The next significant source of revenue for F1 teams will be obvious, in-your-face sponsorships. This is very straightforward to grasp. You may have seen how a typical F1 vehicle appears; aside from the elegance of its shape, it is completely blathered with corporate logos and advertisements, the corporates who pay large sums to the teams to do so. They’re also visible on the driver outfits, and some of them are visible on team uniforms and merchandising, among other things.

As one might expect, successful teams are generally able to get high-paying sponsorships, such as Mercedes receives from Petronas and INEOS. However, teams at the bottom of the rankings earn far less, such as Williams Racing, which has Sofina and Lavazza.

Unfortunately, due to the secrecy of the sponsorship agreements, the statistics are not available in the public domain; nonetheless, it is reasonable to infer that the top four teams often make more than $ 40 million via these sponsorships.

For those of you interested in F1 marketing and sponsorship arrangements, I’ve included a link to each of the 10 F1 teams’ sponsorship partners website at the conclusion of the post; please help yourselves.

Other:

The following two “cash inflows” are not income for the team, but rather an infusion of working capital. One such source is investment injection from the parent business itself or the team’s owners/shareholders. Most teams accept this money from their owners since the owners want their teams to improve season after season.

The other form of revenue is driver-related income. This is more common with lower-earning teams who are starving for money, therefore they may hire relatively “untalented” drivers (*cough* Mazepin *cough*) who are prepared to pay the teams a large sum of money to drive their cars in competition.

Then we obviously have costs;

R&D:

Wind tunnel testing, track testing, and other general research and development of the car to make it run as fast as possible while remaining within the design and component use limitations established by F1 technical rules are among the expenditures paid under the R&D category. Every year, clubs spend between $58 and $60 million on R&D.

Salaries:

This includes driver wages (which, by the way, are huge for winning teams, with rumours claiming that seven-time world champion Sir Lewis Hamilton will earn little more over $ 50 million for the current 2021 season).

Pay also include team salaries ranging from top engineers, manufacturing shop executives, vehicle designers, and pit crew members. And they are well compensated for their efforts in ensuring that the car’s performance improves with each race. This is also why F1 is so popular; it is one of the most important job creators in the sports sector.

Directors/CEOs/Team Principals are also compensated well for overseeing the entire team. Toto Wolff, the Mercedes Team Principal, earns little around $ 10 million per year, according to one Essentially Sports report. Toto, by the way, after his racing career, became an investment banker and started a few investment firms, so it’s safe to assume he’s not too concerned about his salary from Mercedes.

F1 teams spend an average of $ 55 to $ 58 million on salaries, excluding Mercedes and maybe Ferrari, as it is a highly human-intensive business.

Manufacturing:

Production & Manufacturing is simply the process of creating some of the world’s largest automotive beasts. This is the most targeted expenditure of any F1 team since it is the fundamental guts of racing; really building a machine that can operate at over 200 mph at any one point during the year is a monumental effort.

This covers the manufacture expenses, including the engine, which is the most expensive component. Only FOUR automobile companies in the world now produce engines worthy of sitting in an F1 vehicle, and those engines for the 2021 season are:

Mercedes 1.6 V6 turbo engine, which is utilised by Mercedes, McLaren, Aston Martin, and Williams Racing.

Ferrari 1.6 V6 turbo engine — Ferrari, Haas, and Alfa Romeo

Honda 1.6 V6 turbo engine — Redbull racing and Alpha Tauri Renault 1.6 V6 turbo engine — Alpine F1 team

By the way, each of these engines charges its customers a hefty fee and serves as a tiny source of money for the engine’s creator.

If you follow the Grands Prix with bated breath, you have undoubtedly watched several collisions, some of them extremely hazardous, like as Haas’ Grosjean’s crash in Bahrain during the 2020 season. When there is even a minor collision or component failure, the vehicles are summoned into the pit and the component is changed. The cost of each component varies greatly, with the gearboxes of the vehicles costing close to $ 400,000, the front wings costing upwards of $ 150,000, the hydraulics costing more than $ 170,000, and some of the most unbelievably complicated steering wheels costing more than $ 50,000. And don’t assume that they just require one primary component and three to four backups.

This is where things have lately become intriguing. The most recent 2021 F1 regulations have imposed a financial restriction on vehicle building — a first in the sport. The present cost ceiling is set at $175 million, and it will be reduced annually from now on. To the teams’ benefit, the following costs are not included in this cap: all marketing costs, race driver fees, and the costs of the team’s three highest paid personnel; all corporate income tax and other non-F1 activities; property costs — such as the factory — employee bonus costs, and championship entry fees; and the cost of purchasing a customer engine supply deal — which has been capped at €1 million.

Even with the exclusions, the budget is extremely constrained. Especially for teams like Mercedes, who spent over $400 million (total) in its previous season to win its seventh title. Furthermore, failing to comply with the new requirements would result in a hefty fine.

OPEX — Operational (Ongoing) Costs:

The last section covers all additional costs incurred in running the team’s activities as a whole, which include:

Logistics, IT & Technology, Professional Services, Fuel Entertainment & other et al.

Each season, each F1 team spends around $ 50 million to keep its operations running.