Dissecting the F1 financial crisis

Bernie Ecclestone

Let's get this out of the way from the start.

Saturday, when Bernie Ecclestone shockingly uttered the words "my" and "fault" in respective succession his motivations were not entirely altruistic. No, Formula One's commercial rights holder knew who exactly who held the leverage in the pending standoff surrounding Formula One's cash crisis: not him.

With the 2005 U.S. Grand Prix six-car debacle still fresh in everyone's minds, and with Caterham and Marussia both missing the Austin race, Ecclestone knew he was staring down the barrel of a public relations disaster. So, when rumors began spreading that the Lotus, Sauber, and Force-India teams were considering a boycott of Sunday's United States Grand Prix to draw attention to the economic plights of smaller Formula One teams, Ecclestone could not take the risk the threats might be idle.

Thus, as any good leader would, F1's longtime to supremo sought to minimize what damage had already been done. And with an incredibly out-of-character display of transparency, Ecclestone managed to deflected the focus surrounding the sport's financial crisis from the teams onto himself, in noting the situation is "probably my fault."

Which to some degree, it is.

Ecclestone and his company Formula One Management in conjunction with the sport's governing body, the FIA, have allowed the economics of the sport to spiral out of control on their watch. However, to simply attribute F1's current economic situation to Ecclestone, the FIA, or the convenient and oft-repeated big-teams-preying-on-small-teams narrative grossly misses the point.

Rather, it was something that Ecclestone later noted during his meeting with the media that better illustrates what in fact is the problem with Formula One:

"We have to decide the best way to sort this whole thing out," said Ecclestone regarding the sport's present economic situation. "Frankly, I know what's wrong but don't know how to fix it."

Yes, you read that correct. Ecclestone was not only forthcoming and apologetic, but to a certain degree vulnerable. Not only did he admit his sport was in crisis, he also admitted he was at something of a loss when finding a way to address the problem.

Why is that?

Well, to understand why Ecclestone has no solution to the problem, we have to understand what the problem is. And the problem is probably best-illustrated by this very important fact: not everyone thinks there's a problem.

Now Sauber, Marussia, Caterham, Force-India and Lotus have all made their position clear. Those teams clearly believe there is a problem with the current financial state of the sport, and that opinion is shared by many others including Ecclestone.

That opinion, however, is not necessarily shared by McLaren, Ferrari, Red Bull and Mercedes. In other words, Ecclestone can't address whatever issues are plaguing the teams, because the teams are greatly divided amongst themselves regarding

a) the extent of the problem and
b) the fact there is even a problem at all

So what you're saying is the financial problems facing F1 are not the teams versus Bernie and the FIA, or the fact Bernie hoards too much money? You're saying the financial problems of F1 are a function of great division amongst the teams?

Yes.

But not so much the fact the teams are philosophically at odds with each other, rather the fact, the teams have fundamentally different objectives. And because the teams have fundamentally different objectives, Ecclestone can't enact a policy that makes everyone happy.

To illustrate this let's take two teams, Caterham and Ferrari.

On track, Ferrari and Caterham fundamentally have similar goals. Sure, there are different expectations between the two teams but both teams want to win the race, or at the very least finish in the best position possible. Of course, Caterham doesn't have the on-track record, or romantic history of Ferrari. But both are competitors seeking to do their best – on the track.

Off the track, however, the contrast between Ferrari and Caterham couldn't be more apparent. This can be illustrated by looking at the fundamental makeup of the two organizations.

Scuderia Ferrari is the racing division of Ferrari, which is a subsidiary of Fiat Chrysler Automobiles. In other words, Scuderia Ferrari is simply one component of an $87 billion automotive empire. Scuderia Ferrari exists in essence to market the Ferrari brand which is synonymous with speed, power and luxury.

Now, the Caterham ownership situation is something of a confusing matter. But for brevity's sake Tony Fernandes who founded Air Asia was the majority shareholder in the team before its apparent sale (that's another matter altogether) during the summer. And while Fernandes is an extraordinarily wealthy man, Caterham is a not an auxiliary of a conglomerate which is an auxiliary of a conglomerate.

Caterham is a privately-owned business, which is seeking to well, stay in business. Whereas Ferrari has two World Champions on the payroll, Caterham relies on drivers to bring money to the table, not for the sake of bringing glory to Caterham. Rather, so Caterham can actually race.

Let that sink in. The goal of Scuderia Ferrari is essentially to bring glory to Ferrari. The goal of Caterham is to stay in business.

Ironically, in 2014, both have fallen short of those goals. Putting aside the differences in budget, the fact that two competitors in the same arena have such fundamentally different goals, should tell you all you need to know.

What has brought about this difference?

Well, let's first acknowledge that racing generally and Formula One specifically have both never been about the little guy. Fernandes, who is the ‘little guy' by F1 standards, is reported to have a fortune exceeding a half-billion dollars. Although, many of us aspire to such riches, when millionaires race automotive consortiums and energy drink empires, they lose. And in this case, they're not just getting smoked on the lap charts, they're hemorrhaging large sums of cash, as well.

But as for the specific problem facing F1 now, it might be helpful to go back a few years. Because ironically, the origins for this current state of division in Formula One can be found in uncharacteristic period of unity amongst Formula One teams.

You might remember that there was great division during the 2009 season between the Formula One Teams Association (FOTA) and the FIA over amongst other issues proposed cost cap for F1. Without rehashing all the details, the teams were relatively united in their opposition to a cap, and went so far as to threaten a breakaway series.

Ultimately, the cost cap was scrapped. FOTA, the FIA and Formula One Management came to a consensus and the sport moved forward.

But let the record show a lot has changed since 2009. And by going back and looking at the structure of the now disbanded FOTA, we can see how the sport was so fundamentally different. Below, is the order of finish in the 2009 Constructors' Championship:

Brawn-Mercedes

Red Bull-Renault

McLaren-Mercedes

Ferrari

Toyota

BMW Sauber

Williams-Toyota

Renault

Force-India Mercedes

Toro Rosso-Renault

First off, there were five engine manufacturers, all of which had if not works teams in name, then certainly de facto works operations. And while yes, you had privateer operations, Force-India for example, was very new to the sport at the time.

Also, in addition to the factory teams you had two Red Bull operations. So, in essence, Formula One in 2009 was composed primarily of the conglomerates. Red Bull, McLaren, Toyota, BMW, Mercedes, Ferrari and their various auxiliaries fought one another for supremacy.

But weren't the auto makers cutting costs back then after the global financial crisis.

Yes, and in the cases of BMW and Toyota their method of saving money was not to enter into an alliance with other OEMs, and agree to cost-cutting measures. Rather, their solution was to simply not compete at all. In other words, once Toyota and BMW found the costs not justifying the benefits, they took their money someplace else. Both left the sport after the 2009 season, citing, surprise, surprise, costs.

So, you're saying that the model which was agreed to in 2009, was the product of a Formula 1 that is fundamentally different than the Formula 1 of 2014?

That's exactly what I'm saying.

In 2009, the teams had similar goals because with a few exceptions, the teams were incredibly similar. They were overwhelming auxiliaries of larger conglomerations. And for a conglomeration which has say $114 billion in revenues (Daimler, 2012) $400 million isn't a drop in the bucket per se, but it is less than 1% of annual revenues. At the time, these companies obviously did not want a price cap in place to hamstring their ability to defeat competitors.

But as previously mentioned Toyota and BMW left after the 2009 season. Renault has scaled back its involvement. And whereas the middle-rear of the field in 2009 had teams such as BMW Sauber, Renault, Toyota and Toro Rosso, in 2014 that part of the field has been replaced by private teams. Sauber, Lotus (which has experienced a host of financial issues), Caterham, Marussia, and Force-India now comprise the lower-half of a de facto F1 caste system. Yet these teams are still competing against the upper-tier of the caste system which is comprised of the conglomerates that have remained: McLaren, Mercedes, Ferrari and Red Bull.

And that's not all that's changed

Keep in mind, Formula One has endured some struggles in recent years. Sebastian Vettel's dominance last year, Mercedes' dominance in 2014, something of a down period for Ferrari, and high ticket prices are but a few factors that have made worldwide consumers, who have become more and more discerning in recent years, somewhat disenfranchised with F1.

This season, the world's premier form of motorsport has received criticism for its revised regulations, which have produced cars that many including myself believe are visually less appealing cars, and certainly lack the awe-inspiring sounds long synonymous with F1.

Making matters worse, the sweeping changes to the regulations resulted in a significant increase in costs. Red Bull Team Principal Christian Horner estimated the costs of the new regulations to be about $33 million for his team. And when you consider that an ancillary consequence of those high costs was negative PR for the sport and the notion that the sport had lost its way, the changes certainly see ill-fated in hindsight.

In short, not only have the costs risen dramatically, but the revenues have declined, largely because interest has declined. Yet, Formula One has continued with a business model, which although was only consummated a mere five years ago, is incredibly antiquated with respect to the current state of the sport.

So, what can be done?

In the short term, there likely needs to be dare I say some sort of bailout to ensure teams such as Sauber and Force-India make it to the end of the season.

In the long term, there are certainly many items that need to be discussed such as customer cars, budget caps and the like.

However, the first thing that needs to happen is teams such as Mercedes, Red Bull and Ferrari need to acknowledge there is in fact, a problem. And while those teams (particularly Ferrari and Red Bull) like to moan about the engine regulations (they're not necessarily wrong), they need to first acknowledge that if Formula One is going to continue to benefit their companies as it has in the past, they need the Caterhams, Marussias and Saubers of the world on track racing with the reasonable chance to be competitive. And while there is a temptation to merely dismiss the smaller teams as not fit enough for the cutthroat world of F1, the simple truth is that under the current structure it is a struggle for teams to pay their bills, much less field competitive cars.

Just don't hold your breath

Judging from initial reactions, the teams are far from reaching this acknowledgement. Horner, for one, dismissed Ecclestone's suggestion that the big teams might consider lending a hand to the smaller teams. According to Horner, Red Bull Racing has a contract in place with the commercial rights holder and everything is essentially business as usual.

To be clear, I am not criticizing Horner per se. Horner's first allegiance is Red Bull and in speaking on behalf of his company, I understand he is not going to agree to a drastic change in his company's revenue publicly.

That said, Horner and anyone else for that matter are kidding themselves if they seriously think it's business as usual. It clearly wasn't business as usual for Ecclestone this weekend, nor was it for Caterham and Marussia. Although Sauber, Lotus and Force-India are expected to finish the season, their long-term prospects aren't exactly secure.

Now, I can't say what exactly will secure the long-term future of those teams and financial health of the sport. But carrying on with the very policy that caused the problem, or just refusing to acknowledge there even is a problem, are most definitely not the answers.

Brian Carroccio is a columnist for AutoRacing1. He can be contacted at BrianC@AutoRacing1.com