Global Downturn Hits Formula One

Posted by: Mark Scott on March 06

When Japanese automotive powerhouse Honda pulled out of Formula One motor racing last December, warning lights started flashing across this ultra-chic sport. The carmaker said it could no longer afford the estimated $423 million yearly price tag to put out a team. To make matters worse, corporate sponsors have slashed their F1 budgets, global auto sales — F1 teams including Mercedes and Renault use the sport as an advertising tool — have tanked, and the sport has agreed to cut running costs by 50% by 2010 to reduce companies’ overheads.

Despite this bleak backdrop, F1 got a little ray of light on Mar. 6 when Honda’s former team manager, Ross Brawn, said he was taking over the Formula One operation for an undisclosed sum. The announcement couldn’t have come soon enough. The new F1 season starts on Mar. 29, with current World Champion Lewis Hamilton hoping to repeat his victory from last season.

Yet unlike previous years when teams such as McLaren Mercedes and Ferrari outdid each other to spend increasing sums to capture the F1 title, the upcoming season is taking on an austere tone. That’s certainly a jolt for a sport that touts luxury destinations like Monaco and Singapore as crown jewels in its sporting calendar. But like it or not, cutbacks are coming that will reduce the average annual running costs for an F1 team from $141 million to $70 million.

First to go are expensive testing practices, such as wind tunnels to improve aerodynamics and bespoke engines. Teams also are looking to share technology R&D across the sport to keep to costs a minimum. "This is an unprecedented moment in Formula One history," the AFP news agency quoted Formula One Team Association president Luca di Montezemolo as saying at a Mar. 5 press conference.

Some of these reductions represent the natural deleveraging of a sport that has welcomed massive sums of money, particularly from emerging economies, over recent years. Others are moves to create a more level playing field so smaller teams can more fairly compete against the behemoths of McLaren Mercedes and Ferrari.

If these challenges enhance competition, spectators certainly won't complain. And for the businessmen looking to make a profit from F1, reducing overheads at a time of falling advertising revenue makes a lot of sense. But for a sport that prides itself as being a luxury brand in its own right, the upcoming cash-conscience season definitely could be a shock to the system.