The real reason why car manufacturers are pulling out of F1

03/01/2010

It's not a trick question and, according to a report in today's Telegraph by Pitpass' business editor Chris Sylt, the reason is very straightforward. In a nutshell, the five car manufacturers which owned Formula One teams last year needed to sell over 25,000 cars to break even on their investment in the sport but in the financial year to date they sold 1.7m fewer vehicles than in 2008.

Sylt's Formula Money company calculated the number of cars the manufacturers needed to sell in order to cover their cost of competing by dividing their budgets for the sport by the amount of revenue generated per car sold. The spending on F1 comes from a car manufacturer's marketing budget which is, in itself, a cost for the company. Its revenues from car sales give it the money to spend on F1 and cover other costs such as building the cars themselves. If sales fall then the manufacturers may slip into loss meaning that they are likely to cut unnecessary costs with F1 being at the top of the list since it is not core to their business of building cars.

Ferrari, which has been competing in F1 for longer than any other manufacturer, leads the field by a considerable margin when it comes to covering its costs. The Italian marque makes £244,000 (€275,000) per car sold and so only needs to sell 153 vehicles to break even on its £37.3m (€42m) investment in F1 (see box). In the nine months to the end of September 2009 it sold 4,680 cars, 346 fewer than in the same period the previous year. However this 6.9% sales fall was the smallest in percentage terms of any of the car manufacturers which owned F1 teams.

In contrast, Toyota's latest quarterly figures for the six months to the end of September 2009 show that it sold 1.1m fewer cars compared to the same period the previous year. This was the biggest drop of any of the car manufacturer team owners and in percentage terms it was almost four times Ferrari's fall. Toyota announced that it would pull out of F1 one day before it revealed the second quarter results in November.

The Japanese manufacturer could least afford a fall in sales since it was making the largest investment of any F1 team owner by pouring £158m (€178m) into the sport annually. Toyota needed to sell over 9,700 cars, more than any of its rivals, to cover its costs in F1.

Renault followed Toyota's lead last month by dramatically reducing its F1 involvement when it sold a majority stake in its beleaguered team to Luxembourg businessman Gerard Lopez, an early investor in Skype. It's little surprise that Renault ran from the sport after becoming embroiled in a race-fixing scandal which saw it lose team boss Flavio Briatore as well as lead driver Fernando Alonso and even its title sponsor ING. Crucially, to break even in F1, Renault needed to sell over 8,200 cars, more than any other manufacturer except for Toyota, but in the year to date its unit sales were down by 214,000.

The real exception is Mercedes. To cover its costs in F1 it needed to sell 4,184 cars - more than rival BMW which pulled out of the sport in July. Its annual budget was higher than BMW's and its most recent results show that only Toyota had a bigger fall in unit sales in percentage terms. In the first three quarters of 2009 Mercedes sold 197,704 fewer cars than during the same period the previous year - a 20% drop. However, instead of quitting F1, Mercedes' parent Daimler sold its stake in McLaren to its co-owners and promptly bought into Brawn GP.

"The Daimler board decrees, on the one hand, harsh austerity measures for the workforce, and has shifted some production to facilities in other countries. On the other hand it spends tens of millions on Formula One. It is incomprehensible to many workers," said Uwe Werner, chairman of Mercedes' Bremen works council last month. He wasn't the only one left scratching his head by the deal.

"We can not understand why the board of directors has immediately started a new Formula One project," said Erich Klemm, deputy chairman of the supervisory board for Mercedes' parent Daimler, shortly after the deal was announced. He added that "in these economically difficult times, the company should invest in better marketing of its real cars." F1 seems to be a long way from doing that.

Source: Formula Money

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