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F1nvestor - Super Aguri; An inconvenient truth?

FEATURE BY MARK GALLAGHER
13/05/2008

The demise of the Super Aguri Formula One team is a sad reflection on the fact that the sport has backed itself into a financial corner that it seems either unable or unwilling to get out of. With the exception of Williams, the current business model of Formula One leaves no room for team owners other than car companies or billionaires who are each happy to subsidise their teams to the tune of hundreds of millions of dollars; teams for which the concept of genuine third-party income exceeding expenditure and thus running like a proper business appears to be a hypothetical concept.

This is a serious state of affairs, and one that time and again appears to have little done about it apart from lip service being paid to the idea of reducing costs. Engines and gearboxes may last multiple races, driver aids get banned and technology frozen, but I have yet to hear anyone report that their expenditure has dropped and sent a cheque back to head office at Toyota, Honda, Mercedes et al. Meanwhile the crass and obscene expenditure on ever more complex and, to the sponsors, fans and media, irrelevant aerodynamic development continues unabated. The cars look more like batmobiles than ever, and corner with such prodigious speed that it raises questions over safety.

There is, undoubtedly, an unswerving belief among the powers that be that the major teams will always find the cash, that the car companies are tied in for the foreseeable future and that Formula One is better off without the tail end Charlies. To me, though, this is pure hubris and it's not impossible to see how our fast-changing world could one day side-step the best laid plans of Formula One's chiefs and cause a seismic shift.

Consider that, at USD$120 a barrel, oil is at an all-time high with UK consumers paying USD$2.40 per litre, or USD$10.80, per gallon at the pumps for diesel, slightly less for petrol. Yes, US visitors to Pitpass, that is the price today and it's coming to a gas station near you…

Worse still, global demand is not dropping at these prices, it is rising; driven by demand in the Middle East and China. It's now being forecast that oil will hit USD$200 a barrel within the next six months, 400% higher than the OPEC nations were working on as recently as two years ago.

What the impact of this will have on car sales in Europe, North America and oil-poor Japan will be is anyone's guess, but I doubt people will be rushing out to buy new motors when they can hardly afford to fill their tanks. At the premium end of the market, the more fuel thirsty models from Mercedes and BMW may remain unsold on forecourts, while at Toyota, Honda and Renault increased demand for smaller, fuel efficient and hybrid models may require them to invest heavily in advanced technologies which will have little to do with Formula One and everything to do with keeping the car industry relevant.
As I have written before, companies like Toyota and Honda do indeed have a great deal of money and can well afford Formula One. Cash is one thing, however, but changes in their business imperatives could easily cause senior executives to question the wisdom of continuing to spend hundreds of millions on Formula One at a time when they need to refocus their businesses; and particularly when on track success continues to elude them.

Car companies aside, major sponsorship categories within Formula One also have their problems, and none more so than the financial services sector. I doubt many executives at RBS, ING, Credit Suisse and Banco Santander have enjoyed the start of the Formula One season as the global credit crunch has seen share values dissolve and one major UK bank face a 1920's style collapse and the need to be nationalised.

Fred 'The Shred' Goodwin, CEO of RBS, is a long standing fan of Formula One and his bank's money has helped Frank Williams weather the difficult years since BMW jumped ship, but RBS has recently had to ask existing shareholders to participate in a major rights-issue in order to bolster their financial position. Having spent a colossal amount of money beating Barclays to the acquisition of ABN AMRO last year, RBS has been hit hard by recent events, and there have even been suggestions in the financial media that Goodwin may have to step done. This was unthinkable not so many months ago but, as I said, we live in a fast changing world. An RBS without Goodwin could prompt a Williams team without RBS.

A Formula One over-reliant on the health of the car industry and financial services sector is a Formula One which needs to find ways to spread its risk.

Even Ferrari must wonder what the future holds. When Marlboro finally tires of spending a lot of money not to show its brand identity, it will be interesting to see which global brand finds USD$100m to spare each year.

Red Bull owns one and a half teams, but is selling its share in Toro Rosso which, like Super Aguri and indeed Red Bull Racing, has struggled to find any worthwhile sponsorship to mitigate its costs of competing in the sport. I left RBR in March 2005 and, three years later, have not seen the major co-sponsorship arrive in the team that Dietrich Mateschitz would like to have scored. It's not surprising that the added pressure of keeping a second team going has caused a rethink.

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