Mercedes' costs to soar 50%?

18/11/2009
NEWS STORY

One of Mercedes' most decorated figures has launched a blistering attack on the car company's decision to buy into Brawn GP and, according to Pitpass' business editor Chris Sylt, it's easy to see why when you delve deep into the investment required.

On Monday Mercedes and Abu Dhabi wealth fund Aabar announced that they will acquire 75.1% of Brawn GP from its boss Ross Brawn with Daimler taking a 45.1% stake and Aabar holding 30%. The deal will also see Mercedes sell its 40% stake in McLaren to the team's co-owners the Bahrain wealth fund Mumtalakat, entrepreneur Ron Dennis and Saudi tycoon Mansour Ojjeh. The driving force behind the deal is believed to have been Dieter Zetsche, chairman of Mercedes' owner Daimler, and it has now come to light that he didn't have support from all the company's top brass.

"We cannot understand why the board of directors has immediately started a new Formula One project," said Erich Klemm who is deputy chairman of Daimler's supervisory board as well as being chairman of Daimler's group works council, chairman of its European works council and chairman of its world employee committee. In short, Klemm is a union man and at a time when car companies are laying off staff he knows only too well that it doesn't look prudent to burn money on buying a new F1 team.

"In the (car) factories, every cent is being turned over three times. The employees are feeling the financial crisis with shorter working hours and loss of income," he said, adding that "in these economically difficult times, the company should invest in better marketing of its real cars."

Ouch! Just in case anyone missed his point, Klemm summed it up succinctly by saying that the car company's "exit at McLaren-Mercedes was a chance to completely leave the costly and controversial circus."

In his role as deputy chairman of Daimler's supervisory board, Klemm's duty is to check the actions and decisions of the management board and one wonders whether he might press for a U-turn on the Brawn acquisition if there is any possibility of doing so. It might be logical given the increased sum that Mercedes spent on this year's F1 season, let alone the higher amount which it might need to pump into Brawn.

As Pitpass reported last month, Mercedes increased spending on its F1 engines by 22% to 96.1m in 2008 as it developed this year's powerplants for McLaren. This of course is despite there being an engine freeze. To make matters worse, Mercedes' efforts were in vain since McLaren failed to retain its title.

As if this wasn't bad enough, the increased spending was largely down to development of the Kers energy recovery technology which the teams have agreed not to use next year so Mercedes' money literally went up in smoke. To cap it all, its engine division's highest-paid director, believed to be managing director Sten Ola Kallenius, got a nice pat on the back as his pay rocketed 44% to 630,000. No wonder Klemm wanted Mercedes out of F1.

Going from McLaren to Brawn seems to be out of the frying pan and into the fire when it comes to Mercedes' spending. A report in today's Telegraph by Sylt reveals that Mercedes' F1 costs are set to rise by 50% by buying Brawn. Some parts of the media mistakenly reported that the Mercedes' costs would be slashed by a massive three quarters as a result of the Brawn deal but in fact the opposite is true.

Zetsche did indeed say that it is Mercedes' intention to reduce costs to "a quarter of what they were within two years." However, crucially, his explanation for this is "the new terms and conditions for Formula One...The 'Resource Restrictions' set by FOTA and FIA effectively limit expenditure for the design, construction and running of the racing cars...In addition, there will be a significantly higher income available for a Formula One team generated by the commercial rights of the racing series following the signing of the new Concorde Agreement."

In short, if (and that is a very big 'if' given the teams' track record at sticking to spending less) Mercedes' costs do reduce it will not be because of buying Brawn. Indeed, using Zetsche's logic, Mercedes' costs would decrease by three quarters no matter which team it owned be it Brawn, McLaren or another one. In fact, its F1 costs are likely to soar by buying Brawn and there's good reason for this. If there's one thing that Brawn lacks now it is money and it sure knows the value of it.

The estimated $75m paid by Mercedes and Aabar for their stake in Brawn GP gives Ross Brawn one of the best returns on investment in the history of F1 since he paid just 1 for the team when Honda sold it in March this year. Since then, Brawn's lifeline has been the 65m which Honda reportedly paid him to ensure that it didn't close this year - a situation which would have led to a great loss of face for the Japanese car manufacturer. However, the key to Brawn's success was the amount Honda invested before it left F1.

To maximise lead time, F1's cutting-edge cars are designed and built the year before they are introduced. According to Brawn GP's accounts to 31 December 2008, Honda spent 166.5m on developing the car which won the title this year with Jenson Button at the wheel.

The budget is particularly embarrassing for Honda since it is the highest on record for any UK-based F1 team. Honda spent a total of 683.8m on its team since buying it in 2005 yet it only won one race. It pulled out of F1 in December last year to cut costs but it now faces the accusation that it left at the wrong time. Although its funding powered Brawn to victory it gave no exposure to the Japanese car company.

Honda's costs were particularly high because sponsors had fled the team due to its poor performance. Instead Honda's car was covered with the image of the 'earthdreams' charity which it established. The accounts state that 54,896 was donated through the charity in 2008 which is a far cry from the $103m the team's (BAR) livery generated from sponsorship in 2005.

This blank slate meant that Brawn had to start from scratch when it came to finding funding from sponsors and its efforts were clearly focussed on track. As a result, despite its success, the team has yet to sign any significant deals and its main backer, Virgin, is believed to be joining the rival Manor team next year after allegedly not wanting to pay the rate which Brawn wanted.

Brawn is understood to have only 9m of sponsorship committed for 2010 which, combined with its prize money for winning the world championship, gives it total revenues of around 53m. This leaves a 113.5m deficit in covering the costs of mounting a campaign to retain its world championship. As a 45.1% shareholder Mercedes would cover 51m of the deficit and it also carries the 96m cost of designing and building the team's engines. This gives Mercedes total annual F1 costs of around 147m - a 53% increase on the amount it has been spending on McLaren. Here it is in detail.

According to McLaren's 2008 accounts it had costs of 125.2m on revenues of 139.1m from prize money and blue chip sponsors such as Vodafone and Mobil 1. This gave the team a 14m pre-tax profit but Mercedes still had to foot the 96m engine costs.

Mercedes' departure will leave McLaren with a big burden. The team will have to pay Mercedes an estimated 200m for its 40% stake and will then have to pay it a further €5m annually for producing the engines which it previously provided for free.

In all, it is hardly the win-win deal which was trumpeted just a few days ago. In fact, perhaps the biggest irony is that despite the off-track squabble over sponsorship rates between Brawn and Virgin, Richard Branson may now have a way for his famous red and white logo to stay on the Brawn livery even when it changes colour under its new name of Mercedes Grand Prix.

'Why is this?' you may ask. Well, in addition to its investment in Brawn, Aabar also owns 32% of Virgin Galactic, the rocket programme which Branson hopes will take tourists into space. It raises the possibility of Aabar asking for the Virgin Galactic logo, which has already appeared on the Brawn car this year, to stay next year as part of its ownership stake in the team. It would give Virgin exposure on two teams. So whilst McLaren and Mercedes may lose out under the new deal, the unlikely winner may be Virgin.

Article from Pitpass (http://www.pitpass.com):

Published: 18/11/2009
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