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Mercedes' most costly loss

NEWS STORY
25/10/2009

We all now know that Jenson Button won this year's drivers' championship and his Brawn team was the winning constructor but how many people will remember that it was powered by Mercedes?

The German car manufacturer has no sticker on the car and has hardly trumpeted its involvement. This is understandable given that Mercedes' flagship team is Brawn's rival McLaren in which it has a 40% stake. In contrast to Brawn's fortunes, McLaren lies third in the standings this year and has failed to hold onto the world championship it won last year with Lewis Hamilton. However, according to a report in the Financial Times by Pitpass' business editor Chris Sylt, this came at great cost to Mercedes.

In fact, despite the engine freeze, which the FIA told the world would cut costs, Mercedes spent more money on its engines in 2008 than in any of the past five years. The costs of Mercedes' HighPerformanceEngines division which designs, develops and manufactures the engines rocketed 22% to £96.1m last year.

To maximise the lead time, Mercedes begins work on the cutting-edge V8 F1 engines in the year before they are introduced so the bulk of its spending last year was dedicated to its 2009 campaign. Perhaps the most concerning thing is that according to Mercedes, the sharp increase in money spent on the engines was due primarily to the development of Kers which of course the F1 teams have agreed not to use next year.

Indeed although team bosses have previously hinted at the cost of Kers, this is the first concrete example of how much of a drain it has been on resources. It is highly ironic that the technology was introduced by the FIA, which claims to have cost-cutting as a priority, but perhaps even more ironic is the fact that it has taken the teams, which the FIA continually castigated in recent years for spending too much, to put an end to Kers costs by agreeing not to use it. This doesn't come as much consolation to Mercedes though since it makes its spending on Kers last year quite literally money which has gone up in brake smoke.

Mercedes' engine division spent more money on research and development than on any other area with £52.8m ploughed into it last year. Its second-biggest cost item was staff pay. In contrast to the job cuts which swept through the car industry last year, 14 new staff joined the engine division in 2008 to give a total of 439. They were paid a total of £24.6m and the earnings of the highest-paid director, believed to be the division's managing director Sten Ola Kallenius, accelerated 44% to £630,000. Not bad given that his engines have powered McLaren's Lewis Hamilton down from first to sixth place.

Mercedes' parent company Daimler wholly owns HighPerformanceEngines and provides its funding. The division has little of its own resources, with just £32,000 in the bank, and Daimler fuelled it with finance to cover the increased costs. It took out a £20.4m group loan in 2008 and by the end of the year it owed a further £10.1m to group undertakings, up from £2.9m in 2007.

Given the now-common cost cutting in the car industry, and the loss of McLaren's world championship, one wonders whether this money could have been better spent by Mercedes. Time will tell whether Daimler's board allows Mercedes to keep it up.

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