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Economics of a Formula 1 Team

It is rather embarrassing to admit this, however, I fell in love with this beautiful motorsport, because of the series that everyone involved in the sport absolutely hates, yes yes, the dreadful series by Netflix: Drive to Survive.

Given my love for understanding the finance in the background, and for the sport itself, I wanted to understand the economics behind the scenes of a Formula 1 team. Now granted that all the teams operate differently, and have different budgets and varying earnings, we can definitely try to understand the basic fundamentals. Even more so, I’ll try to paint you a comparative picture of the teams making how much money in recent history, based on their final positions in the constructor’s championship.

To be clear, this article is not about the money made by the Formula One Association itself, but here’s a taste: In 2019, Formula One’s revenues were $2.022 bn, however due to the pandemic the revenues fell by $877 mn in 2020 to $1.145 bn. The fall was ~43%. If you want to read a little bit more on its 2020 performance, click here.

To state the obvious: Profit = Revenues – Costs. These two are the components that we’re going to examine here.

Because there’s loads of details and numbers and F1 jargon used in this piece, the consultant in me could not resist giving you a “high-level executive summary”:

Revenues

Revenue generated by F1 teams can be split into 3 to 4 buckets depending upon which team you analyze. They’re discussed briefly here:

1. Payments from the Formula One Management:

There are practically 5 heads under which the FOM pays the F1 teams.

  • C1 Payments: First is the basic guaranteed payments known as C1 payment. This amount is paid to all those F1 teams which have competed in the championship for the past two years. The relatively recent addition to the team roster, Haas F1 only received their first C1 payment back in 2018, having competed in F1 since 2016. The amount distributed is $ 36 million.

  • Prize Money: The second is the constructor’s championship prize money, which is distributed according to the team standings at the end of the competition. Back in 2019, Mercedes finished 1st and as a result they took home $ 61 million. Ferrari came in second and they won $ 52 million, while Redbull won $ 41 million. Williams racing stood last and therefore they took home a measly $ 13 million. Definitely not enough for a F1 racing team.

  • Heritage Payments: The next payment is also known as the Ferrari contract or the Long Standing Team. This payment is only given to Ferrari. Why? This payment is basically given to the oldest F1 team, which is Ferrari, for being with F1 for over 60 years. The amount in 2019 was a whopping ~ $ 68 million. More than what Mercedes earned for winning the F1 constructor’s championship that year!
    However, Ferrari is not the only team that gets paid based on their historical association with F1. Williams Racing is the second oldest team in the F1, however they get a much lower sum of ~ $ 10 million every year.

  • CCB Bonus: Additionally, four teams also receive something called Constructor’s Championship Bonus. The teams are Redbull, Mercedes, Ferrari and McLaren. The bonuses are not  always equal with the top performing/ winning teams receiving a tad bit more than the other teams. This is given because these teams have won the most championships in the past.

  • Other Payments: Lastly, there are some ‘Other’ payments which are dependent on independent contracts signed. Mercedes received $ 35 million for living up to their promise of winning 2 titles; $ 35 million to Redbull for being the first in signing something called the “Concorde” agreement (more on that later), et al.

All in all, the above system is glaringly flawed and favours the older teams much more than any revenue sharing agreement ideally should. This had been going on for a long time, and teams were getting angrier year after year.

Right now, you’re not making any money running a Formula 1 Team, and it is unlikely that you ever will. That’s why, the new Concorde Agreement has been signed in 2021 that will last until 2025; this agreement has been praised by the F1 community, while frowned upon by the richest teams. Why? You guessed it, the agreement provides a much much better solution to the unequal distribution of the revenues as above, and even more so, sets a budget cap on the car itself. More on that later. It goes without saying, like every other thing in this sport, the terms of the agreement have been kept completely secret with some teams not even discussing the agreement with any sports journalist/ publication.

2. Sponsorships:

The next big earnings for the F1 teams is quite glaring, in-your-face sponsorships. This is fairly simple to understand. You might’ve seen how a normal F1 car looks; apart from the beauty of it’s form, it is absolutely blathered with corporate logos and adverts, the corporates which pay fancy sums to the teams to do just that. They’re also visible on the driver uniforms and some of them visible on the team uniforms and merchandise, etc.

As one would guess, the winning teams usually are able to reign in high paying sponsorships like Mercedes earns from Petronas and INEOS, etc. However, the teams on the lower spectrum of the table earn much less, like Williams Racing have Sofina and Lavazza.

Unfortunately, the numbers are not available in the public domain given the confidentiality of the sponsorship agreements, however it’s safe to assume that the top 4 teams usually earn more than $ 40 million through these sponsorships.

For those of you interested in the marketing and sponsorship deals aspect of F1, I’ve linked each of the ten F1 teams’ sponsorship partners page at the end of the article, please help yourselves.

3. Other Sources:

The next two “cash inflows” are not exactly revenues for the team, but they rather act as working capital infusion for them. One such source is in the form of investment infusion by the parent company themselves or the owners/ shareholders of the team. Most of the teams take this money from their owner, because the owners want their teams to perform better and better every season.
 
The other source is driver-linked income. This usually happens in the lower earning teams which are usually desperate for money, so they may take rather “untalented” drivers (*cough* Mazepin *cough*) who are willing to pay the teams a huge sum of money to drive their cars in the competition.

Costs

Next up, we have the costs incurred by a F1 team, to survive in the competition. Costs incurred by the teams are usually under 4 buckets:

1. Research and Development:

The costs incurred under the R&D head include those of the wind tunnel testing, track testing and other general research and development of the car to make it go as fast as possible while staying within the design and component usage boundaries set by the F1 technical regulations. On average, teams spend around about $ 58 – 60 million on R&D every year.

2. Salaries:

This includes salaries paid to the car drivers (which are massive for the winning teams by the way, there are reports suggesting that the 7 time world champion Sir Lewis Hamilton will be making a little over $ 50 million for the current 2021 season).

Salaries also include the team salaries from top engineers, factory shop executives, car designers to the pit stop crew. And they are paid handsomely for their inputs in ensuring the car performance is better and better every race. This is also why F1 is loved so much, it is one of the biggest employment generators in the sports industry.

Directors/ CEOs/ Team Principals also make a more than decent salary for managing the team in its entirety. According to one Essentially Sports article, Toto Wolff the Mercedes Team Principal makes a little short of $ 10 million a year. By the way, Toto after his stint of a racing career, became an investment banker and founded a few investment companies, so it’s safe to say he’s not entirely worried about his pay from Mercedes.

On average, not considering Mercedes and maybe Ferrari, F1 teams spend somewhere between $ 55 to $ 58 million on salaries, being an extremely human intensive operation.

3. Production and Manufacturing:

Production & Manufacturing is just that: it’s the making of some of the fattest automotive beasts on the planet. This is the most focused expense of any F1 team, because this is the core guts of racing; actually making the machine that will run at over 200 mph at any given time during the year is a momentous task.

The production costs are covered in this including its biggest component: the engine. Now of all the car companies in the world, only FOUR make engines which is worthy of sitting in an F1 car, and those engines in the 2021 season are:

  • Mercedes 1.6 V6 turbo engine, used by – Mercedes, McLaren, Aston Martin and Williams Racing
  • Ferrari 1.6 V6 turbo engine, used by – Ferrari, Haas and Alfa Romeo
  • Honda 1.6 V6 turbo engine – Redbull racing and Alpha Tauri
  • Renault 1.6 V6 turbo engine – Alpine F1 team.

By the way, each of these engines cost their users a handsome fee and acts as a small source of revenue for the engine maker.

In case you eagerly watch the Grands Prix, you have without a doubt witnessed multiple crashes, some of them quite dangerous like Haas’ Grosjean crash in Bahrain in the 2020 season. Every time there’s even a small crash, or component failure, the cars are called into the pit and that component is replaced. Each component varies widely in cost, with the cars’ gearboxes costing close to $ 400,000, the front wings costing upwards of $ 150,000, the hydraulics over $ 170,000 and some of the most incredibly complex steering wheels costing over $ 50,000. And don’t think that they just need to have one main component and 3 to 4 backups. They need a lot of identical components, at all times, at all Grands Prix. So…yeah, these beasts are super expensive.

Here’s where things have gotten interesting recently. The most recent 2021 F1 regulations have put a budget cap on the car construction – first of its kind. The current cost cap is set at $ 175 million, and is set to reduce every year from here on. However, to the teams’ aid, some of the costs are not included in this cap: all marketing costs, race driver fees and the costs of the team’s three highest paid personnel; all corporate income tax and other non-F1 activities; property costs – such as the factory – employee bonus costs and fees to enter the championship; cost of purchasing a customer engine supply deal – which has been capped at €15m per season – as well as flight and hotel costs for race and testing travel do not count.

Even with the exemptions, the budget is tight, tight, tight. Especially for teams like Mercedes, which spent over $ 400 million in it’s last season (total) to win their 7th championship. Furthermore, failure in observing the new regulations will result in a massive penalty.

4. OPex:

The last bit covers all the other costs that are incurred in running the operations of the team as a whole, These include:

  • Logistics – I highly recommend you see this video on the absolutely insane logistics of F1
  • Freight
  • IT & Technology
  • Professional Services
  • Fuel
  • Entertainment & other et al.

On average, a F1 team spends about $ 50 million each season to keep their operations afloat.

So there you have it. All the components of the revenues and the costs of an F1 team are broken down and explained. Interestingly, out of the 10 F1 teams that competed in the 2019 season, none of them made any profits from running the team at all; they all broke even, except for Mercedes and Williams racing, which were in losses!! (Technically speaking, most of them were in losses were it not for their parent companies to chip in for their working capital infusion. But shhhh, you didn’t hear that from me.)

Sponsorship Partners of each F1 Team:

This post was written in collaboration with Asif Yahiya Sukri LLP. Asif Yahiya Sukri LLP provides unparalleled personalized financial services to a broad range of clients across different geographical locations. With a presence in the USA, India and the MENA region, they ensure that all of your financial decisions are made carefully and with your best interests in mind. They are innovators who understand what goes into building companies.

You can also reach out to them on info@aysasia.com

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