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Formula One’s Financial Crisis
LI XIAO, JAN. 8, 2009

The global economic slowdown is bad news for F1 auto racing

Article mis en ligne le 17 juin 2009

Formula One (F1), the world’s most expensive sport, faces major changes next season as F1 teams and the sport’s sanctioning body, the International Automobile Federation (FIA), agreed in Monte Carlo on December 12 to enact cost-cutting measures.

To ensure its long-term survival, FIA President Max Mosley advocated the reduction of engine costs, banning in-season testing and sharing data about tires and fuel, which may cut team expenses up to 30 percent.

Although the FIA had already started planning cost reductions, the catalyst for their implementation was Honda Motor Co.’s decision to pull out of the sport early this month.

On December 5, Honda withdrew from F1, citing the world economic crisis and slumping sales. The Japanese auto giant has already reduced its earnings forecast, fired assembly line workers and cut production.

« We had no choice in the current financial conditions, » Honda CEO Takeo Fukui said at a news conference. He said it was unlikely Honda would soon return to F1 either as a team or engine supplier.

Worldwide slowdown

Honda is not the first team to withdraw from the sport, as Ford Motor Co. and Spyker Cars N.V. pulled out in 2004 and 2007, respectively. In May 2008, Japan’s Super Aguri team also dropped out. Unless the Honda team finds a buyer, F1 will have only nine teams when the season opens in Melbourne on March 29, 2009, the fewest in 11 years.

F1 ECONOMY : The Shanghai International Circuit and the Shanghai Welfare Lottery Center jointly issue a set of F1-themed lottery tickets with a total worth of 1 million yuan ($147,000) in Shanghai on August 7, 2007

The decision for these teams to pull out is economically driven. Then how much does it cost to run an F1 team in the pinnacle of motorsport ?
Each team’s budget usually consists of research and development, engines, tires, fuel, wind tunnel operation, operating cars at tests and races, wages, travel expenses and public relations. In 2004, total spending for the 10 teams exceeded $2.5 billion, including $900 million in engine expenses alone. According to Honda, it was no longer willing to bankroll an F1 team with a $500 million annual budget.

Following Honda’s announcement, there was speculation that the Suzuka International Racing Course, which was built and backed by Honda, would pull out as well.

To make matters worse, circuits have been leaving the races one by one. In October, the FIA dropped Montreal from the 2009 F1 season calendar, leaving Canada without a race for the first time in more than 20 years. Eight days later, organizers cancelled the coming French Grand Prix after the Federation Francaise du Sport Automobile pulled funding.

F1 in Shanghai

Shanghai has hosted five F1 Grand Prix (GP) after signing a seven-year contract with the FIA. However, the Shanghai International Circuit has operated under successive deficits since 2004. In 2008, F1 Chinese GP’s box office fell off badly. Only 130,000 spectators watched the race over three days, compared with 260,000 during the first F1 Chinese GP.

It is an open secret that Shanghai hosts the F1 Chinese GP at a loss. Yu Zhifei, the former general manager of the Shanghai circuit who introduced F1 to China, once predicted the Chinese event would become profitable after 12 years. In early 2008, Yu was arrested for corruption, which has cast suspicion on the long-term management of the Shanghai circuit.

Shanghai has a long way to go to recover its investment in holding the event. The circuit paid the FIA fees starting at $30 million in 2004 and increasing 20 percent per year. The local government provided figures showing that 2.645 billion yuan ($389 million) has been spent on the construction of the Shanghai circuit, 1.162 billion yuan ($171 million) is to be paid for the seven-year contract, and about 5 billion yuan ($735 million) is to be paid for TV broadcast rights. That means the Chinese event has to earn over 625 million yuan ($91.91 million) per year, which is impossible based on earnings in previous years.

The Website of Titan Sports reported that the F1 Chinese GP earned 300 million yuan ($44 million) in 2004, declining to 216 million yuan ($32 million) the next year. Before seven-time world champion Michael Schumacher’s retirement, his last show in the 2006 F1 Chinese GP boosted earnings to 400 million yuan ($58.82 million). In 2007, the number dropped to about 200 million yuan ($29 million) again. The F1 Chinese GP loses at least 200 million yuan ($29 million) every year.

Despite the heavy losses, the Shanghai Government supports the Shanghai circuit for the purpose of developing the macroeconomy. « Shanghai has made a deeper impression in the world and gained rapid recognition thanks to F1, » said Jiang Lan, General Manager of the Shanghai International Circuit. « Nowadays, holding a high-level sporting event like F1 is the best way to gain publicity and promotion. »

On November 7, 2008, the FIA announced the provisional 2009 F1 calendar, which shifted Shanghai’s GP from autumn to spring after a potential scheduling conflict with the Tennis Masters 1000 set for the week of October 12.

« The shifted schedule is better for us to operate the two events, » said Yang Yibin, Marketing Director at Shanghai Juss Event Management Co. Ltd. « After all, there is only one team to promote the two events in Shanghai. »

F1’s future

In a recent 163.com survey on Honda’s withdrawal, which drew 5,197 votes, 46.3 percent of respondents believed it was just the beginning of F1’s serious depression ; 28.73 percent even think the economic slowdown will kill the sport, with only 8.96 percent predicting a prosperous future for F1 racing.

To help the sport get out from under, F1 Chief Executive Bernie Ecclestone has proposed awarding drivers Olympic-style medals instead of points in an attempt to attract racers. Mosley wants all teams to use a « one size fits all » standard engine. Teams are resisting another proposal to move from 2.4-liter V8 engines to fuel-efficient 1.8-liter turbo engines starting in 2011, which could lead to a ban on mid-race refueling.

The use of lower-cost, longer-lasting engines and a ban on refueling would probably force the cars to slow down, critics warned.

What’s more, F1 has turned its focus to the Asia-Pacific region, which will host seven of the 17 circuits next season. The 2009 F1 World Championship calendar put the Gulf Air Bahrain GP on April 26 and the Etihad Airways Abu Dhabi GP on November 1. The two Middle East teams later published a joint agreement to cooperate on the promotion of the sport.

According to the Shanghai Oriental Sports Daily, the reason FIA so easily agreed to Shanghai’s shift to the spring is the huge potential market and economic strength of Abu Dhabi. The UAE capital’s inaugural F1 GP, which had been planned for April, is now set as the final race of the season, to the delight of UAE racing fans who want to see the title decided in their oil-rich city.

Ecclestone welcomed the debut circuit and its sponsor, Etihad Airways, saying, « Securing a title sponsor of this caliber two years out from the first event is further reinforcement that the region is full of excitement and anticipation for the Abu Dhabi Grand Prix. »

As for the future of the Shanghai GP, there has been speculation that Sinopec would no longer sponsor next year’s event. With the added influence of the economic crisis, it is uncertain whether Shanghai F1 organizers will renew the contract after 2010.

« We have been working well with each other, » said Qiu Changwei, Deputy Director of Shanghai’s Administration of Sports. « So we’ll probably renew the contract. »

Ecclestone also feels confident that the contract will be renewed. « We have a contract until 2010 with an option for five years after that, » the 78-year-old told the Financial Times. « We will talk to them about it, and meet up and see how we can help them. »

Qiu revealed an « assessment » is taking place, saying, « We’re still in negotiation-at least we hope they don’t increase the price anymore. »

Some suggested making Shanghai a night race for better TV ratings in Europe, but Qiu rejected the idea.

« Night racing in Singapore is good for tourism and it inspires us a lot, » he said. « At the same time, we will make decisions based on our own circumstances. »

Leon Sun, General Manager of Event Management at Juss Events, told Reuters, « I would say it’s likely it will stay after 2010. Formula One has only been here for five years. Building a spectator base is not easy, it’s a long-term operation. »

« Research shows there are more and more racing fans in China, so I don’t think we will say ’no’ to the F1 Grand Prix. »

It has been reported that Monte Carlo and Montreal are the only cities to profit from an F1 GP.