Formula One Spins Off the Track

As backers cut their sponsorship in the downturn, the $3.9 billion motor-racing outfit is suddenly braking hard

By Mark Scott

Any business reliant for its funding on the struggling automotive or financial services industries should be prepared for a rough 18 months. No wonder, then, that Formula One—the world's largest and most popular automotive sport, with combined annual revenues of $3.9 billion—is suddenly skidding as some of its most important backers cut or curtail their sponsorship deals.

Fans still love the noisy, fast-paced sport, whose annual 17-race season is set to kick off in Melbourne, Australia, on Mar. 29. And Formula One retains a cachet not shared by the more blue-collar Nascar series in the U.S., holding its Grand Prix in luxury hot spots such as Monaco and attracting high-end sponsors such as Benson & Hedges (BTI), HSBC (HBC), and Emirates Airline.

But the global economic downturn is starting to take a toll on the carmakers and banks that make up the bulk of Formula One's corporate supporters. On Mar. 16, Japanese auto giant Toyota (TM) said it would slash its estimated $300 million annual F1 budget, although the company didn't reveal by how much. Late last year rival carmaker Honda (HMC) took the even more draconian step of pulling out of Formula One entirely, saying it could no longer justify the annual $430 million price tag of its F1 team.

Financial Meltdown

Struggling financial institutions—which support teams and provide the lion's share of sponsorship at Formula One events—also are pulling the plug. In January, Credit Suisse (CS) ended links with BMW's (BMWG.DE) F1 operations, and in mid-February Dutch financial giant ING (ING) said it wouldn't renew its sponsorship of Renault's (RENA.PA) Formula One team next year. Then, on Feb. 25, Britain's recently nationalized Royal Bank of Scotland (RBS) revealed that it would end commercial ties with the Williams Formula One team as of 2010.

"Formula One isn't immune to what's happening elsewhere in the economy," says Bob Mitchell, head of sports at London-based entertainment law firm Harbottle & Lewis. "The sport had been a cash cow, but now costs have to be cut."

With big-name sponsors dropping out, F1's governing body, the Fédération Internationale de l'Automobile (FIA), announced plans on Mar. 17 to do just that. On deck is a voluntary spending cap that would limit teams' annual budgets to $43.5 million from 2010 onwards. That's just one-fifth the amount Mercedes (DAI) spent last season to propel 24-year-old Lewis Hamilton to his first-ever Formula One title.

Under the FIA's proposals, teams will have a choice: Either they'll have to adhere to the spending cap but will gain more leeway to modify their cars outside current F1 design rules, or they'll be free to spend as much as they like but must face more stringent technical and racing restrictions.