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Cap in Hand

FEATURE BY MAX NOBLE
26/03/2019

So the mighty Budget Cap is reeling like a late night drunk, toward, and then away from, the finishing line.

The very small detail that has leaked into the light of day has not been useful, and those of you who read A Crisis Carol - Coda will know that I have strong views on how enforcing the policing of this particular aspect of business will prove near impossible.

The FIA, Liberty and the teams are grappling with a many faceted problem. The current trend is to call these awkward issues Wicked Problems. In older times we might have run with the trusty statement "damned if you do, damned if you don't". For indeed, no matter what Liberty and the FIA do the chance of making every stake-holder happier than Batman in a blackout is zero.

From what we have learned so far it would appear that salaries, research and development and marketing are going to be outside the cap.

Please read that last sentence again... thank-you... As I have previously remarked the actual material the "Package previously known as a racing car" is built from is not that expensive. Yes more than a Lego or Airfix kit, but far below the cost of the international space station or a nuclear submarine. Yes, really.

Having staff is a massive cost, and the time they spend on things depends on the complexity and duration of the task being performed... so salary costs are driven by staff numbers and time, not materials. Not much saved here then.

Research and Development? Well, if each team is not one big science experiment what on Earth is it...? Over the years a number of team principals and chief engineers have noted that each package (aka car) is an evolving prototype from the first day it turns a wheel until the end of the season. It evolves every single day in set-up and allowed component changes. If that's not all R&D what is it? Another dry cup of savings here then.

Marketing then! Well what is the marketing budget? Is it what the sponsors spend? Is it what the team spends? Is it what a partner or supplier spends? Is it the total amount that the title sponsor gives, or is it just money spent on specific activities?

Is the Paddock Club Team Hospitality area a marketing expense, a hospitality expense, or a partner expense ("... that's not my chef don't ask me what he cost..."). Are you marketing to be hospitable, or being hospitable to gain marketing traction?

By trying to bind each of these we neatly highlight my concerns around how you police budget cap rules once in place. The Coda article expanded on this theme considerably, so I will not repeat myself. The core issue is, how do you know that what something cost is what it really cost, that the budget was correctly allocated from the "right colour of money" and that you ring-fenced those costs and those alone?

Consider our exciting new front wing update...

Premium grade carbonfibre weave - let's say $3,000

CFD work all R&D - we burned up $2m on super computer time. But it is R&D so need to include.

Eight genius staff pouring over the CFD results for a month - well that's around $384,000 in salary costs, but no need to include.

Post and packing to send it to the circuit: $100.

Mechanic to bolt it onto the car in fifteen seconds - oh, another salary cost, we can ignore that.

So actual cost for new front wing $2,387,100.

Cost as calculated for budget cap: $3,100.

A modest $2,384,000 difference (a 99.87% difference).

One can see why, after initial excitement, Claire Williams has put the Champagne back in the cellar.

And this is before Mercedes, Honda and Renault start using complex internal accounting and off-shore companies to bury cost where no accountant is likely to find it… ever.

So where would a real cost cap bite under these amazing rules?

Let's do some maths. Let's use the potential rules to build a minimum budget including all the materials, and excluding all the delights that Liberty have given you, well, the liberty, to exclude.

Right then! First the big ticket item that cannot be avoided $20m for engines. The manufacturers will bury real costs, but the cost to client teams is known and can be agreed for the season. So let's set it at $20m for both packages for the entire season.

Next, let's say the material cost to build each package comes out at $100,000 of raw materials, giving you the core monocoque, engine cover, wings, suspension etc. Now for a rough estimate we will assume that 50% of each package is replaced every five races, between a mix of breakages and new parts.

So over the season if we allow four partial rebuilds at $50,000 each per package, that gives us another $400,000 per year in materials for both packages. Adding $400,000 (parts for rebuilds) to the $200,000 for the initial package and that little lot adds up to $600,000. Let's call it an even million so it is not too tight. Add this to our season long engine supply cost and we have $21m.

There we have it! $21m to run a top flight F1 team, excluding salaries, marketing and research and development! Heck, Gene can turn a profit and VJ Mallya could run a dozen teams!

So based on the potential budget cap rules, as leaked so far, it would appear that any figure below $21m will cause the big teams a reality problem. Gee! To think they are muttering about $200m in the first instance, easing down to $150m.

That leaves a bit of wiggle room left for an up-date to the old super computer or simulator!

Like the rest of the engaged fan base I cannot wait to see what rule set actually gets to leave the lab and wander the streets in search of friends.

There lurching from bar to cafe to hospitality tent with a bemused look upon its face the Budget Cap Rule Set (Burp to his friends) will fall willingly into the open arms of any and all ready to embrace him with a smile. Which, based on the limited information available to date will most certainly include all large teams with multinational operations and large accounting departments.

Thank goodness there will be room within the cap for plenty of Champagne to celebrate the moment.

Learn more about Max and check out his previous features, here

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READERS COMMENTS

 

1. Posted by Spindoctor, 04/04/2019 17:01

"@Max Noble
Absolutely - Bikes are extraordinarily 'physical', and today's big star is one Marc Marquez, whose ability to do the impossible through extraordinary physical control has made him likely to be the next GOAT.

I am pleased that you brought-up the Pilots\Drivers\Riders. Nail & hammer in perfect harmony!
Perhaps my enthusiasm for MotoGP, and my diminished interest in F1 stems from this Human Factor.
As you rightly say: Hamilton in a Williams might finish 25 secs ahead of his teammate, but would still be 2nd to last.
Lorenzo, 'The Doctor', or Marc Marquez have shown that while the Bikes matter, the riders matter more. Just look at this year's graduates from the lesser classes: already near the top and mixing it with the old-timers."

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2. Posted by Max Noble, 04/04/2019 8:50

"@SpinDoctor - better late than never. :-) indeed. As I’ve noted elsewhere a budget floor rather than a budget cap would be easier to police and guarantee teams a minimum budget. Anything they make over that is their bonus...

MotoGP is like surfing and skiing in my mind. They are so physical that it is the skill of the rider or skier that makes a massive impact. Yes... I know the driver is a huge impact, but put Lewis in the Williams and it would be a repeat of Alonso in the McLaren. As a result sporting respect is focused on the human, and not the machine. Anyway - you’re quite correct. I hope Liberty are asking around successful sports. Not just looking at the Super Bowl and then living in their own “research” bubble..."

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3. Posted by Spindoctor, 03/04/2019 11:12

"A bit late to the party, but in virtually all Sport involving the use of tools or equipment, the guys with the deepest pockets generally win.
The crux of this argument (budget cap) is whether your prime interest is (loosely) "technology" and\or vastly complex devices & systems, or "Sport". In this context 'Sport' is not a synonym for overtaking nor spectacle.

As has been expanded elsewhere, verification of costs (to be capped) will be next to impossible. In UK we are in the midst of a variety of Accountancy scandals where supposedly 'respected' auditing firms didn't notice that various of their customers weren't actually thriving, but actually near-bankrupt. This doesn't say much for how easy it is to stop powerful companies from "cheating" (and see also Financial crash of 2007\8).

MotoGP seems so-far to have avoided too many problems without a budget cap.
They have hit what is for me a sweet-spot where despite some pretty sophisticated tech, the 'Sport' stands-out both in terms of attractiveness to punters, and dare one utter it "Sportsmanship" in its execution. A Motor Cycle is a hugely less sophisticated device than an F1 car, and despite recent developments (like the Ducati "Scoop") largely non aero-dependent, so there's no direct analogy.

What is clear is that the regulation, governance & promotion of MotoGP is vastly superior to that of F1. It manages, in Public at least, to present an harmonious image of collective rule-making and agreement, and to attract every major Motorcycle maker into the competition. Venues are happy as are punters... Surely F1 could at least consider asking Dorner for some advice?"

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4. Posted by Max Noble, 30/03/2019 7:58

"That’s aero surface... thanks autocorrect..."

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5. Posted by Max Noble, 30/03/2019 7:57

"@Oinksta - quite...! I feel an “earnings floor” is required, not a budget cap. If you guarantee a minimum income for a team that can be run competitively then the budget cap issue goes away. I also believe a freeing of the rules to be less prescribed and all more creativity would be an aid. Over the years on PitPass we’ve discussed more general rule bounds (size and weight etc) coupled with a few absolute statements (no more than X square metres of area surface, no more than two elements to a front wing... etc.

Sure we might be wrong and Mercedes might lap the entire field by lap ten, but as the current approach is not working, how bad could our approach be...?

"

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6. Posted by Oinksta, 30/03/2019 3:48

"Nice article as usual Max.

I am not sure why they even bother considering a Budget Cap.

It would appear relatively simple to circumvent a budget cap in any number or ways, such that short of the FIA having a level of discovery and access akin to a police investigation, and the resources to do so, finding such breaches of the cap would be nearly impossible. And if they did find a team had breached the budget cap, what meaningful penalty could be applied that would be an effective punishment, but would not also damage the sport as a whole.

As for the small teams, are they really that naive to think it will make a difference? Which makes me wonder for whose benefit are these discussions held?

Given the above, maybe everyone (Liberty, FIA, teams) should stop flogging a dead horse and put their efforts to something that might make a difference.

Novel thoughts by talented individuals do not cost the earth, however, as the rules governing allowable car designs are highly prescriptive, the opportunity to apply such ideas is severely limited. One possibility would be loosening the rules. This would undoubtedly benefit the big boys more, but may just give the little fellas a chance - maybe.

"

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7. Posted by Max Noble, 29/03/2019 7:36

"@Canuck and @imejl99 - Up coming article will be giving a view of revenue distribution via points and years of service... with you in the next few weeks right here on “free to air” PitPass... :-)"

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8. Posted by Canuck, 26/03/2019 23:17

"@alvarezh3 - yes I underst but still standood that your friction was drag-tional intended (I have yet to understand how mat paint produces less surface friction than high gloss - but that is an asside(sic)). But this does not take away from the road car application. Can you imaging what would happen to an old fellow like me if when I took my foot off the loud pedal and hit a 1G deceleration, let alone to impact to my rear bumper? As for tires I know they are not intended for road use, but the construction may be helpful in the construction of some road tires - such as performance or less rolling resistance. And Thanks for reading my comments"

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9. Posted by Max Noble, 26/03/2019 20:57

"@Lapps - my thanks for a chuckle... how true. :-)

@All - will “blow the dust” off the 2017 series of articles on reader submitted improvements and when we get our first view of the Liberty 2021 proposal I will do a comparison to see if the spirit (or indeed word for word direct copy....!) of the suggestions has been captured. Great discussion below. Thanks. :-)"

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10. Posted by alvarezh3, 26/03/2019 19:16

"@Canuck, Yes, I am aware of the reason form using low milage tires, but remember that I'm referencing this fact against it's usefulness regarding the needs of real world transportation, which the FIA claims F1 R&D is good for."

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11. Posted by alvarezh3, 26/03/2019 18:36

"@Canuck, thank you for the observation. It was not my intention to mean "friction" as that produced by a tire's contact patch. I should of used the term "drag" as that produced by the friction of air molecules when touching an object. Yes, friction is a good thing to have (at the tires) in order to start, stop and turn a vehicle. Hope this clarifies what I meant to express. Sorry, my bad."

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12. Posted by Lapps, 26/03/2019 17:33

"Hey Max
There is one incorrect word in your article. It’s the ‘enraged fan base’ not ‘the engaged fan base’.
Just saying. "

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13. Posted by Canuck, 26/03/2019 17:25

"@imejl99 - I agree with both comments - a same base payment to every team, with the rest of the distribution based on points.
@alvarezh3 - I agree with most of your comments except <the FIA wants the series to be a R&D experimental proving ground for the automotive industry (hybrid engines, bodies with low coefficient of friction, new tire constructions and compounds, etc.>
If they wanted to reduce COF and COD, no F1 car would decelerate at rate greater than 1G when lifting there foot of the loud pedal. As Stirling Moss once said he wish he had that rate when stepping on the brake. The tire rule of high wear was introduced in hopes of entertainment and strategy by adding additional pit stops.
As far as a CAP - The teams should state what they feel would be a just CAP and have it decrease yearly. the cap could be based on how much they feel they need for each step of presenting a car to a F1 destination. A fixed amount cannot be implemented immediately, it has to be on a sliding scale with an end date and end state in mind.
Some changes the FIA could make to reduce costs. Return to a steering wheel, not an onboard computer to adjust the F1 can every 10 meters of travel, this has no road car relevance. Introduce rear facing camera instead of mirrors, which some road cars already have and make it an Off the self unit. Take away the 'no active suspension' as road cars already have them and make this an off the self item also.

Another great article Max Noble but looks like alvarezh3 could supply you with great ideas. Thanks"

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14. Posted by Uffen, 26/03/2019 15:39

"All teams should easily sign up because it means nothing! It will have no effect. Good article, Max.
As for the comments by alvarezh3, I agree.
Automakers do not need racing to develop technology. They need racing for marketing. If Mercedes wanted to design, engineer and develop this (F1) engine configuration they could do so 7 days a week, 24 hours a day and not worry about sporting penalties delaying advances. Failures would not be made public and the engines would be made to run on street pump fuel. Same for non-F1 companies like Ford and GM and BMW, etc. "

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15. Posted by English Tony, 26/03/2019 12:25

"21 million? That's practically an F2 budget..."

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