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FEATURE BY MAX NOBLE
11/08/2021

Like the Moon dragging sea waters in tides they cannot fight, there are times dear reader when I follow-up an article because a coda is required to finish the piece neatly.

Sweet echoes of the original need to bounce as delicate musings one last time around the cathedral walls of the esteemed Pitpass Towers allowing the fearsome felines to hum in unison to the tip-tapping of keyboards.

Palace Pitpass is a merry realm spread across the world, held together by the dancing electrons tirelessly gluing us one to another via the internet.

This coda is an extended musing on the entire cost cap, international company structure, and slow-motion train wreck that is FIA rule making. Springing from the concepts, bouncing through the corridors of my mind after the "Magic Squares" article, I entreat you to settle back, and let these variations on a theme wash across your mind for a few minutes of light night musing...

There is no company simply called "Mercedes". The ultimate parent company is Daimler AG, which is frequently referred to as the Daimler Group. This group enfolds many companies, which over the decades have been liberally scattered across many aspects of transport, engineering, defence, and aerospace.

Daimler Group, and Mercedes-Benz (the road company) are both headquartered in Stuttgart in Baden-Württemberg, a fine rolling region of Southern Germany. Mercedes-AMG is headquartered a few miles further down the road in Affalterbach.

Those are just the headliners. Daimler also owns Fuso, Western Star, Freightliner, Smart, and Setra, plus a multitude of others across the transport universe. Then they have financing, and leasing companies within the empire, plus a most excellent museum experience set slightly back from the Neckar River in the centre of Stuttgart.

Daimler-Benz Aerospace used to exist as a wholly owned segment of Daimler AG, but then merged with Aerospatiale-Matra of France (a blast from the F1 past - Ed), and CASA of Spain to form EADS, which then changed its name to Airbus. Daimler Group then sold down its holding, with Airbus now having a web of international owners.

The Mercedes-AMG Petronas F1 team is headquartered in Brackley, UK, and is one-third owned by Mercedes-Benz, Toto Wolff, and the UK chemical company Ineos in equal measure.

Ineos? A huge chemical multinational founded by Sir Jim Ratcliffe. It comprises more than twenty stand-alone company entities with their own boards, and operating models. This includes a joint venture with PetroChina, headquartered in the Dongcheng district of Beijing, and an automotive adventure in the soon to be released Ineos Grenadier, which is a remix of the Land Rover Defender concept, that was to be built in Wales, but will now be built in Hambach, France, with engines supplied by BMW.

Cross-eyed yet?

So we have companies within companies, across Germany, France, the UK, the USA, Spain, and China, plus a cameo role for Wales, all interrelated to the Mercedes-AMG F1 team. Between them they address automotive, power trains, chemical coatings, fuels, lubricants, financing, and more.

Then we have them all busy across international borders, selling products, researching, and developing products, using one another's products, forming joint ventures, signing memoranda of understanding, and making full use of tax breaks, R&D dollar for dollar matching with governments, government incentives for relocation, employment, and partnerships with universities. Charity write-offs, marketing exercises, employee incentive plans, and adventures. Oh, and every accountants annual favourite, the "one-off restructuring cost."

Keep that beating heart of yours under control! The wild world of corporate law and accounting can be a wild ride dear reader, so please, with determination, keep reading!

Mercedes-AMG High Performance Powertrains is the former Ilmor engineering company, founded by Mario Illien, and Paul Morgan in 1983. This is now owned, independently to the Mercedes-AMG F1 team, by Daimler Group.

The amazing split-turbo technology in the Mercedes powertrain had its genesis in R&D performed by the Daimler truck division, which has a long tradition of producing turbos for truck engines. This technology was then further developed by Mercedes, prior to being moved into the powertrain company, which now works on it. With me so far?

So, having set this simple corporate landscape, let us set a hypothetical for our intrepid FIA forensic accountant to investigate for the cost cap.

Imagine, please, this scenario leading into the 2022 season...

Toto (for it is he, the ring jester above them all) to engine room, "Scotty! We need more power!"

Scotty (head of Powertrains) replies, "But Cap'n you'll burn the engines!"

To which Toto's riposte is: "Well then get moving on researching, designing, developing, testing, and producing a new one that is going to stomp on French, Austrian, and Italian butt next season!"

"On it Sir! Usual mix of accountants, tax experts, and lawyers available to support the team?"

"Of course. Toto out."

So Scotty forms his team focused on developing the next great engine.

First he's short of engineers for turbo research. Quickly Scotty calls the local university, and they have a couple of PhD students working on ceramic bearings who would love a secondment. They join the team. Then a quick call to Daimler Trucks, and yes, they have some next generation materials research they are happy to share to give the PhD folk a kick-start. In fact, they are also happy to use their super computer time to run simulations, and they already have test beds back in Germany that can be used to run prototypes.

Another quick call and Ineos confirm one of their American companies is working on synthetic oil with incredible high temperature characteristics, and they would be delighted to combine research by doing lubrications, and cooling CFD model, and then some lab work at their shared facility with UCLA. The Ineos lady also reminds Scotty to call the paints division, as she heard during a lead team video-call the other week that they have a new coating mimicking shark skin and as a result it improves surface flow, thus decreasing drag. Sounds like something to put on the race cars. Scotty promises to follow that up too.

Daimler Trucks meanwhile, is also using some local University students as research assistants, and has secured local government dollar-for-dollar budget matching for leading edge research. As the work is "blue sky" they also intend to apply for tax concessions for the cost of running the facility. Further aiding the situation the local state government recently dropped business taxes for them to remain, rather than relocating to Portugal. So the research department is running at a fantastic rate of return for them right now!

Scotty puts them in touch with the PetroChina research department over in Beijing so they can start considering fuel burn optimisation within the new generation turbo units.

Fast forward six months, and the global team is very pleased with itself. The final prototypes, built by another Daimler AG company, based out of Poland because of the great local tax rates, and low wage bills, are humming away during yet another successful race distance simulation on the test bench back in the UK. All the initial test bed work was done in Germany, based on the modelling performed at UCLA, but this final level of pre-production testing is performed at Mercedes-AMG High Performance Powertrains headquarters in Brixworth.

At the end of a highly positive engineering lead team meeting Scotty thanks all the staff, and confirms that the first production items are ready for fabrication. Initial casting will be done at the factory in Poland. The molecular surface treatment will be applied in Hamburg. The fluids will be provided by Ineos from their advanced synthetics research lab in Fort Worth Texas, while PetroChina will be using a teaming agreement with BP to produce the new fuel at their Humber facility in the UK.

All these items will then be delivered to Brixworth, where final machining, testing, and assembly will be completed. Mercedes-AMG High Performance Powertrains will then assemble the entire power plant, and deliver it to the Mercedes F1 Team, plus their other racing partners.

Tired, but filled with feelings of accomplishment, Scotty turns to the accountants, and lawyers who have to this point been playing Candy Crush and World of Warcraft down the far end of the conference room.

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READERS COMMENTS

 

1. Posted by Max Noble, 30/08/2021 23:51

"@Spindoctor…. Funny you should mention Colin…"

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2. Posted by Spindoctor, 30/08/2021 11:49

"Another highly enjoyable expose of the difference between us normal folks & those who inhabit the upper echelons of Mega-Corporates.
FIA's (& MM's) notions of a "cost cap" seem straightforward - analogous to Micawber's notion of "happiness" in David Copperfield: spend less than you get & it's wine & roses all the way. In F1 terms "level-down" expenditure & have a paddock full of happy bunnies all competing on equal terms....


FIA's nostrums always seem to make things worse.
The fallacy & idiocy is not that of simplifying a complex reality into something analogous to our own experience, but of believing such an exercise might work.
When F1 was a bunch of "Garageists" (& Ferrari) knocking-up F1 cars in their workshops, such methods would have worked - though Colin Chapman would have tried to avoid them! As soon as F1 became largely "Corporate" that all went out the window.

The brutal truth which @Max Noble reiterates most times when these issues crop-up, is that F1 is all about the pursuit of excellence & in that chase there is a clear relationship between outlay & return. The gains become increasing marginal at the limit & each .1 second costs more than the last. That's where the Hamiltons, Sennas, Verstappens, Leclercs et al come in.

If you want a "fairer" (& cheaper) competition numerous series are available: in Open-wheelers there's Indy, tin tops BTCC, or LeMans (not so much) etc.

If you want to see the absolute best in the world build the best possible car - within proscribed limits - driven by the absolute best drivers, it has to be uncapped stupidly expensive & completely unfair F1.
"

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3. Posted by sagosac, 27/08/2021 10:30

"YEAH !
"...You are about to witness seventh-Dan black belt international accountant Masters perform
sporting works of art on the FIA,
and the resultant displays of book-keeping genius will leave us all gasping in amazement"
WELL PUT !
Engineering genius was yesterday's USP of this sport, now exchanged with Accounting genius -- let's see what the crowd will prefer more -- any ideas ? anyone ? I have none, Sorry *COUGH*"

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4. Posted by Max Noble, 26/08/2021 23:16

"@ancient70! - agree with your general view, however the “cheating” issue is the beauty of the FIA trying to audit international counting… I’m confident the big companies can go “open book” with Inspector Hound, and the FIA will not be able to prove cheating “beyond reasonable doubt”, simply because the figures can be made to add-up correctly thirty-seven different ways… You are about to witness seventh-Dan black belt international accountant Masters perform sporting works of art on the FIA, and the resultant displays of book-keeping genius will leave us all gasping in amazement… I cannot wait…!"

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5. Posted by ancient70!, 25/08/2021 14:33

"I follow the big company discussions with great interest, and there seem to be two main possible responses to the cost cap from big companies:

1. Big C 1 says “spend whatever you need to win the championship, and make sure everything above the cost cap never reflects on our balance sheets”

2 Big C2 spends to the cost cap and then uses whatever pro bona resources it can, and declares it. I am not sure what the FIA stance is on this??

We all know these big corporations have a massive resource an capability list. This makes them mighty powerful, but at the same time also vulnerable. The boards of these entities get very nervous when rumours of cheating and financial irregularities start circulating. The case 1 option can backfire badly! Just ask the mighty VW!"

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6. Posted by noname33, 25/08/2021 5:49

"@Max Noble - I gave you a positive rating for that Roger Waters quote alone! :-)"

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7. Posted by Max Noble, 24/08/2021 11:25

"@noname33 - Glad you enjoyed the article :-) Superbird70 made a great observation about capping things you can measure. I feel this is a far better approach than a cost cap that will prove hard to measure. I always liken the Max M. Issue to glasses, watches, or Faberge eggs… Is it cheaper to make a disposable paper cup, or a Waterford cut crystal goblet? Is it cheaper to stamp out digital Casios, or hand-craft a Rafael Nadal Richard Mille? Is it cheaper to stamp out 10,000,000 M&Ms, or a single Faberge Egg…? A small engineering outfit like Haas can make a great engine that explodes 30 seconds after the race finishes far more easily than they can craft a work of art engine that lasts a third of a season… Makes me cry… As Roger Water’s noted… it’s not easy banging your head on some mad bugger’s wall…"

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8. Posted by noname33, 24/08/2021 8:18

"@Max Noble - 1. Great article. It fleshes out problems with this that I have, kind of, had since the first discussions of a cost cap.
2. In a previous comment you mentioned that you didn't understand why Max M thought it would be cheaper to develop and run an engine for a lot of races instead of one that would only be used in one (or a few).
This is also something that I have wondered over the years. Surely the cost saving of building fewer engines can not be offset by the additional cost to develop engines that have to last for a long, long time?

Sorry about that last sentence, English is not my fist language.
"

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9. Posted by Max Noble, 22/08/2021 9:58

"@Superbird70 - The first is already addressed as the total number of “fly away” staff is capped. I then agree with you that further caps limiting items we CAN measure is a far better approach than the “cost cap”. I’ll reflect, and if my musings gain enough substance I might be able to form Chapter three of this cost cap exploration…"

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10. Posted by Superbird70, 18/08/2021 23:28

"The numbers that can be controlled are bodies in the paddock. Limit team numbers to half of current levels. Limit the number of computers and and internet bandwidth by half as well. There has to be a cost benefit to reducing these numbers and maybe with fewer numbers to crunch we might be treated to the ocassional turbo detonation. Ahh memories of Montreal 1985."

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11. Posted by sagosac, 18/08/2021 8:35

"into the Bull's Eye !
nothing to further declare from my side => greenlighted !
"

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12. Posted by Max Noble, 17/08/2021 23:48

"@Steve W - quite… but “What is truth?” That’s the question. When the Inspector Hound from the FIA says to Toto “I’d don’t believe you.” All Toto has to say is. “I’m very sorry. Here are all the spreadsheets from accounts. Please let me know which bits you do not believe.” …and poor Inspector Hound has no objective truth with which to “prove” the numbers are wrong… because they all add up just as they should… but what *are* they?

Given multiple international currencies would be used by differing suppliers in differing countries, yet F1 runs in US dollars. As exchange rates vary by the minute… the time of day, and the day of the week you purchase involving a currency exchange will vary the figure. What if you then hedge the currency to avoid getting bitten, or peg the exchange rate one per month, and/or at the commencement of each contract…? What if Inspector Hound dislikes your exchange rate, or the day you fixed it? What if he says you cannot use the hedge as an off-set? THEN, is the cost of the exchange transaction included or excluded in the cost cap? It simply goes on, and on. I cannot see how the FIA can *objectively* prove the axiomatic truth of a single decimal point, or significant digit…

@Kenji - ok… :-) … Road car, and air safety are incrementally improved via R&D. Usually the faster the rate of expenditure, the faster the rate of progress… so spending wisely quicker gets you better results faster… Or save money on R&D, letting more people that would have been saved by faster spending die each year, but eventually get to the same output some years later… with a higher body count… Which do you choose?

It is they same for R&D in F1… the more tools, the more prototypes, the more supporting “research assistants” you give Mr Newey, the faster he gets to a proven end point. Reduce the money, and it simply takes him longer to get there… What we would have seen on the cars in 2023, we will now see in 2025… Wait long enough and there is no difference… which I think is what Haas is about to discover…

The FIA “I can measure it, therefore I shall control it.” Approach does not automatically mean that the controlling is a good idea, or as I’m suggesting in the case of the cost cap, that the measurement itself is so inaccurate as to be meaningless, because the FIA do not know what they are measuring. "

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13. Posted by kenji, 17/08/2021 12:45

"@ Max...Ideas are essentially free in one sense but that's only the 'premise' and does include the cost of the originator. Combine that with the implimentation and it's in the execution of those ideas that's most of the time immensely costly. There has to be level at which costs must be restrained otherwise the whole organisation becomes totally farcical. What amazes me is that the 'lesser' teams keep turning up for their bi weekly dose of 'race humiliation'. Either they are controlled by benevolent narcissistic billionaires that see it all as a entry into the gentrified upper echelons of the Paddock Club or else they are simply a bunch of financial illiterates who delight in spending other peoples money without any possibility of ever gaining access to the podium. Maybe, just maybe, the cost cap will bring about a more equitable track result but I do fear that the likes of Daimler/Marcedes et al will continue but at a reduced level. Surely that has to be good for all concerned...no?"

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14. Posted by Steve W, 17/08/2021 12:08

"All very interesting, but it's up to the teams to prove their season's costs to the FIA. If for any reason, the FIA believe they are being misled or lied to, they have the power to simply throw Mercedes out of the Championship. Then what?"

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15. Posted by ancient70!, 16/08/2021 11:34

"Hi Max, my remark on the OEM was specifically for F1. For sure Le Mans, WEC, WRC and WTCC al have their roots in “road cars”,although current LMP cars are pretty far removed. F1 has always had car manufacturers involved, but the reason was mostly for national pride and personal ambition, not win on Sunday and sell on Monday. Think Ferrari, Enzo Ferrari, Collin Chapman etc. OEM’s (not sure how much is still original in that O?) come in with the big money, and want to win and sell. But at the same time they want to develop technologies they can sell in a couple of years time. Thats where the spending spirals to stratospheric levels. Hopefully the cost cap can mitigate this effect. F1 in my view was never a technology creator, even as they still operate at a very high technological level. What the teams are very, very good at, is look whats out there that could make the car go faster, bring it in and develop it to suit their requirements. Take carbon fibre, they did not create it, but they sure use it effectively!"

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