26/03/2019
FEATURE BY MAX NOBLE
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