23/11/2011
NEWS STORY
There is no doubt that Mercedes has had little success on track this year but, perhaps surprisingly, new data shows that it has found a winning formula to get financial results from the sport.
The Stuttgart-based car manufacturer slashed the amount it spent in F1 by half last year according to a report by the Financial Times in Germany where Mercedes was attacked for re-investing in the sport almost two years ago to the day.
The report, written by Pitpass' business editor Christian Sylt, reveals that in 2009, when Mercedes' parent company Daimler, owned a 40% stake in the McLaren Group, it spent £34.8m on the team and another £88.4m on developing its V8 engines. At the end of 2009 it agreed to sell its McLaren stake to its co-owners Bahrain's sovereign wealth fund Mumtalakat, the Saudi-based TAG conglomerate and the group's executive chairman Ron Dennis. Instead of exiting F1 Daimler bought into BrawnGP and according to its latest accounts, last year it spent a total of £73.1m on F1 with just £230,000 of this paid directly to its team. It is a reduction of £50.1m on its F1 investment the previous year.
Interestingly, although the McLaren Group received a total of £35.7m from Daimler in 2009, it made a £94.4m profit so, financially, it could be said that it didn't really need Daimler's money. Presumably Daimler had a contractual obligation to pay the money to McLaren and since Mercedes had extensive branding on the F1 cars it got a tangible benefit for it. However, remarkably, Daimler did not recoup one penny of its costs since the McLaren Group decided not to declare a dividend to distribute its £94.4m profit. This is likely to have been a majority decision by the shareholders who held the 60% majority of McLaren and, under these circumstances, Daimler would have been powerless to get money out of the team. If so, it is little wonder that it wanted out.
BrawnGP won the 2009 championship but buying it was a daring gamble for Daimler because in the 12 months prior to its acquisition there had been an exodus of car manufacturers from F1 due to the economic downturn. Renault had reduced its involvement whilst BMW, Toyota and Honda pulled out completely with the latter selling its team to Brawn and his fellow managers for just £1.
Daimler owns 60% of its team with the remainder in the hands of Abu Dhabi's sovereign wealth fund Aabar. The price has never been disclosed but it is believed Daimler paid around £70m. Brawn previously owned 54% of it so the sale made him a rich man. Although we now know that it has also paid off for Daimler, at the time the deal was signed it seemed to have a slim chance of being profitable.
When its acquisition of BrawnGP was announced in November 2009, Erich Klemm, deputy chairman of Daimler's supervisory board said that the "exit at McLaren-Mercedes was a chance to completely leave the costly and controversial circus... We can not understand why the board of directors has immediately started a new Formula One project."
The criticism became even stronger when the team, now renamed Mercedes GP, hired seven-time world champion Michael Schumacher in December 2009 on an estimated £6m annual salary. Uwe Werner, another supervisory board member, reacted by saying that "the Daimler board decrees, on the one hand, harsh austerity measures for the workforce, and has shifted some production to facilities in other countries. On the other hand it spends tens of millions on Formula One. It is incomprehensible to many workers."
At the time of the acquisition Dieter Zetsche, Daimler's chairman, said it was Mercedes' intention to reduce costs to "a quarter of what they were within two years." It was hard to see how this would be possible since, as Pitpass reported, the team then only had around £9m of sponsorship committed for 2010 which, combined with its prize money for winning the world championship, gave it total revenues of around £53m. This was £82.1m less than BrawnGP spent on its 2009 championship-winning campaign, and £79.3m less than McLaren's costs in the same year, so it initially looked like Daimler would need to invest more money in F1 than it had been doing. Two years on, we now have proof that this was not necessary.
In 2009 the Formula One Teams Association (FOTA) implemented the Resource Restriction Agreement (RRA), a series of measures designed to stop more manufacturers pulling out of the sport. It reduced budgets and the effect of the RRA has steadily increased every year since it was introduced. It limits areas such as staff numbers, size of computer storage space and the amount of days cars can be tested on track. Daimler banked on this driving down costs and when it bought BrawnGP Zetsche said "the background to this decision are the new terms and conditions for Formula One." He added that "the Resource Restrictions set by FOTA...effectively limit expenditure for the design, construction and running of the racing cars."
Combined with FOTA's decision to drop the costly KERS system, the RRA reduced costs in 2010 for both Mercedes GP and the team's engine division Mercedes-Benz High Performance Engines. At the same time, Mercedes GP's revenue was boosted by signing major new sponsorship deals with companies including Deutsche Post, IT firm Autonomy and Malaysian oil giant Petronas. With new revenue streams, and costs reducing, Mercedes was in a position to spend less in F1.
"This positive financial performance has been achieved by the successful expansion of the team's sponsorship portfolio...and containment of the cost base within the limits set by the Resource Restriction Agreement," says Mercedes GP's company secretary Caroline McGrory.
Daimler got an estimated £110m for selling its 40% stake in McLaren. Deducting the cost of buying its stake in BrawnGP, and adding its £50.1m saving last year, left Daimler with a theoretical £90.1m profit from the transaction. Although it vindicates the decision financially, it has coincided with a drop in performance.
The team has not won a race since Daimler took over and it dropped to fourth in the standings in 2010. Mercedes GP's best result this year has been a fourth place finish at the Canadian Grand Prix and it currently still lies fourth in the standings with just one race remaining until the end of the season.
The team made an after-tax loss of £950,000 in 2010, a major reversal on its £98.5m net profit the previous year which was fuelled by a large one-off severance payment from Honda. As this was not repeated in 2010, revenue plummeted by almost £110m to £124.6m despite the boost in sponsorship income.
Total costs decreased slightly, falling by £9.1m to £126m, as staff numbers were cut by 46 people to 487 slashing more than £5m off the wage bill. The highest paid director, believed to be team principal Ross Brawn, also took a pay cut from £4.7m to £2m.
Staff numbers were also reduced at Mercedes' engine division, where the departure of 30 people brought the total down to 424. It means that, overall, 911 staff work on Mercedes' F1 programme but this number is set to increase in 2012 as part of a plan to bring back victory to the team.
In April Renault's former technical director Bob Bell was appointed to the same role in Mercedes GP. He was joined in October by Geoff Willis, a 20-year veteran of F1 who was previously technical director of the HRT squad. In December, yet another former technical director, Aldo Costa, will join Mercedes GP. Costa will take over as the team's engineering director and he comes from Ferrari where, together with Brawn, he worked on five drivers' championship campaigns.
Just adding these staff members alone will add to the team's costs but McGrory is hopeful of giving its finances a further boost. "The relationship with Mercedes-Benz and Aabar, combined with ongoing sponsorship from prestigious international companies like Petronas, has placed the company in a positive position to secure future commercial income in a challenging global economic environment."
McGrory adds that the team will also benefit from the fact that costs will not be rising. "During 2010 the teams made a further demonstration of their commitment to cost constraint by indicating their intention to extend the term of the Resource Restriction Agreement through to at least 2017 which will help to provide the long term stability that the sport needs as the global economy continues on its path to recovery."
The aim of building up the team's staff is to compete with the power of Red Bull Racing which has won F1's drivers' titles for the past two years running with cars designed by Adrian Newey, arguably the sport's best designer.
Brawn says that the team will hire as many staff as possible. "There is the RRA limit, and we are looking to move to that absolute limit," he says. This, combined with the return this year of KERS, could cancel out the savings it made in 2010. If it leads to victory on track it will be well worth it but it is another gamble which Mercedes needs to win.