Archive for April, 2009

Reaction to the budget cap

The introduction of the £40 million budget cap poses serious problems for half of the F1 teams and the idea of a two-tier system is an issue for everyone.

The reaction I have had today from ringing around the teams is that the independents welcome the move to a budget cap and are pretty happy with the level. They acknowledge that the engines being left out of it for 2010 provides an element of the ‘glide path’ that was being discussed in recent weeks, as does the exclusion of driver salaries and marketing costs. With those added on, for a top team, it’s another £50 to £80 million.

However everyone is unhappy about the two -tier system, whereby teams can spend what they like but will lose out on the chance to have technical freedoms which the capped teams will enjoy, such as moveable front and rear wings and unlimited engine revs. This last one is a bit odd, because the more the engine revs the more it costs, so they can have the freedom, but they have to fit in into the budget.

Ferrari and BMW refuse to comment, but are clearly very unhappy. I get the impression that the manufacturer teams are getting together on this. They believe that there is still room for negotiation, that the story is not finalised yet. Time will tell. If the FIa refuses to budge we could have a serious fight on our hands and I’m not sure what kind of action the manufacturer teams would take.

They would prefer to act through FOTA, but that organisation is split down the middle on this issue, with the five independents in favour of the cap at this level and the five manufcaturers against it. The rallying point is the opposition to the two tier system and that will form the basis of the next FOTA meeting on May 6th.

Fresh from saving his team from sever punishment in Paris, Martin Whitmarsh said,
“As a member of FOTA, Vodafone McLaren Mercedes is of course supportive
of FOTA’s recent efforts to reduce costs in Formula 1.

“Equally, we recognise the excellent work done recently by the FIA in
the area of cost-reduction.

“Having said all that, we understand that some teams’ operational
budgets may still be unnecessarily high in the challenging global
economic situation in which we now find ourselves.

“Nonetheless, we believe that the optimal solution – which may or may
not include a budget cap, but which ideally would not encompass a
two-tier regulatory framework – is most likely to be arrived at via
measured negotiation between all parties.

“We at Vodafone McLaren Mercedes are happy to contribute to that process
as and when required.”

Frank Williams also highlighted the two tier system for comment, although his team believes in the cap and thinks that £40 million in the right level. Williams stands to make a profit of £10- £15 million on that basis.

“Williams has supported the introduction of a budget cap since the idea was first put forward early in 2008,” said Williams. “Since then FOTA has made tremendous steps forward on costs but the rationale for a budget cap has also grown even stronger.

“We would like to see all the teams operating to one set of regulations and under a budget cap in 2010 and that is the position we will be advocating within FOTA when we meet next week.

“We understand that this will represent a serious challenge for some of the teams but we expect that FOTA will work together to find a unified and constructive way to take the FIA’s initiative forward.”

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The details of the Budget cap have been released by the FIA.

It will start next season. The level has been set at £40 million with no ‘glide path’ from a higher figure to a lower one. It will present teams with an obligation to lay off a significant number of people quickly, which in itself is an expensive exercise.

The FIA has maintained the idea of a two tier championship, with teams able to spend more if they wish to, but the cost controlled teams enjoying greater technical freedom. This will greatly annoy Ferrari and BMW.

The FIA statement reads as follows:
“From 2010, all teams will have the option to compete with cars built and operated within a stringent cost cap.
The cost cap for 2010 will be £40m per annum*. This figure will cover all team expenditure except:

– Marketing and hospitality;
– Remuneration for test or race drivers, including any young driver programmes;
– Fines or penalties imposed by the FIA;
– Engine costs (for 2010 only);
– Any expenditure which the team can demonstrate has no influence on its performance in the Championship
– Dividends (including any tax thereon) paid from profits relating to participation in the Championship.”

Drivers being excluded will drive up their wages. But these may fall under the budget cap in future years. Engines being excluded means an additional £5million for customer teams and allows the manufacturers some latitude in reshaping their engine departments. Many will be providing customer engines to teams.

The whole plan is aimed at attracting new teams to the series and the field has been increased to 26 cars, so 13 teams can get an entry. Bernie Ecclestone has agreed to give the new teams a share of the prize money (normally they would have to serve a couple of years before getting anything)

“In addition to the payments which it already makes to the top ten teams in the Championship, Formula One Management, the commercial rights holder, has agreed to offer participation fees and expenses to the new teams. This includes an annual payment of US$10 million to each team plus free transportation of two chassis and freight up to 10,000 kg in weight (not including the two chassis) as well as 20 air tickets (economy class) for each round trip for events held outside Europe.

“To be eligible for this, each new team must qualify as a “Constructor” and demonstrate that it has the necessary facilities, financial resources and technical competence to compete effectively in Formula One. ”

The technical freedoms the capped teams may enjoy are as follows:

“1. Movable wings, front and rear.
2. An engine which is not subject to a rev limit.

The teams will also be allowed unlimited out-of-season track testing with no restrictions on the scale and speed of wind tunnel testing. ”

To put pressure on the existing teams to comply , the FIA has said that entries must be in soon,

“Applications to compete in the 2010 FIA Formula One World Championship are to be submitted to the FIA during the period 22-29 May 2009. Teams must state in their application whether they wish to compete under cost-cap regulations. ”

The team’s association, FOTA is meeting in London on May 6th. Their response will be very interesting, with Ferrari particularly furious.

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Good week/Bad week

Good week for:

Kimi Raikkonen – the 2007 champion has bought a £20 million dream home on the outskirts of Zurich, where he can shut the door behind him and not give another thought to slow Ferraris, KERS or the media. Ice cream anyone?

Honda – Despite seeing the car it paid for winning three out of four races, the company says that ditching the F1 programme will help it stay profitable in 2009.

KERS – After lots of wobbles as teams lost confidence in KERS in China, in Bahrain it was proven to be a ‘must have’ for any wheel-to-wheel battler. And as for the starts….

Paris Hoteliers – An unexpected bonus as the extraordinary world council called to hear the McLaren case fills loads of rooms. No need for a Spring break offer when these high rollers come to town.

Bad week for:

BMW – finished last and second last In Bahrain, “A catastrophe,” according to Nick Heidfeld. How must they regret not throwing everything at trying to win last year’s championship?

Sebastien Bourdais – finally beats his rookie team mate, only to find it’s because young Buemi had a bit of BMW debris jammed in his front wing for the whole race, meanwhile Bruno Senna is measuring up for blue overalls.

Nelson Piquet – got the dreaded ‘vote of confidence’ from Renault boss Flavio Briatore last weekend. In football he’d be out within a month. In F1, he’ll probably be out within a month too.

Mercedes – Parent company Daimler loses £1 billion in first quarter of the year. F1 programme not directly threatened, yet, but it certainly won’t help.

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Yesterday’s news from the FIA world council was the appetiser, but today comes the main dish, the real story; the announcement of the full budget cap plan, which is set to redraw the business model of Formula 1.

It will be the first time in the sport’s history that the amount a team can spend is controlled. You could argue that this should have happened years ago, before the manufacturers drove the costs through the roof.

The teams have already been informed of the details but are not willing to comment ahead of the official announcement. My understanding is that the cap is in the £40-45 million range, which is slightly more than the original £30 million voted through at the last world council in March, but low enough to attract new teams. To operate on that basis a team would have no more than 350 employees, roughly a third of what Toyota employ and less than half of McLaren’s staff number. There is going to be a massive laying off of highly skilled people once this comes through.

Team numbers will be slashed under budget cap

Team numbers will be slashed under budget cap

The clever twist in the original plan was that teams who did not want to be capped, could spend what they want, but the capped teams would have more technical freedoms to achieve parity of performance. This would give rise to a two-class F1, something Ferrari and BMW in particular find completely unacceptable. There could be some refinement to this element, to give Ferrari and BMW something to work with.

As he left the FIA office in Paris, FIA president Max Mosley, the architect of the budget cap plan said,

“Everything is going ahead as planned. It’s a little bit more than £30 million but we have been successful.

“”I suspect when they see the figures everybody will come in under the cost cut, which will come in straightaway. I certainly hope so,” Mosley said. “The budget is a little bit more than 30 million pounds, but it’s important we get it in place because if not then we are going to lose a lot of the teams.”

“I think when [Ferrari] do see it they may find it attractive. Like everybody else they need to save money. They have to think of their shareholders’ money and not just spend like in the old days.”

The interesting line here is the one about the cap coming in immediately. As budgets are already set and partially spent for 2009, this must mean for 2010. We’ll see what the mechanism for changing it is.

The alternative is to run ‘uncapped’, but face spending more money to have a less competitive car, which makes no sense, and would be hard to justify, especially when Mercedes has just announced a loss of over £1 billion for the first quarter of 2009.

Ferrari are very unhappy about all of this and in a clever piece of news management, president Luca di Montezemolo has let it be known that he will be at the Le Mans 24 Hours in June, giving the starting signal. This is a reminder of a time in the 1980s when Enzo Ferrari was so unhappy about a rule proposal from the FIA that he commissioned the build of a Ferrari Indycar. Montezemolo wants the FIA to think that he could take his brand elsewhere. BMW indicated at the weekend that they would not be interested in a two tier budget capped F1.

Montezemolo: Taking Ferrari to Le Mans?

Montezemolo: Taking Ferrari to Le Mans?

It’s likely that there will be a brief window in which the teams are obliged to make an entry for 2010, probably quite soon too. All of them have commercial agreements in place with FOM for the next two seasons, but they still have to make an entry with the FIA and there are other teams waiting in the wings to fill up the places.

At the same time Bernie Ecclestone is looking for a commitment; he’s saying in the Financial Times today that if the teams do not sign up to the Concorde Agreement, then he may cut their prize money.

The teams may wish to react together as FOTA, rather than as individuals. It will be interesting to see which way that one plays out, because FOTA unity has been severely tested lately over the diffuser issue and I know that at least six teams are in favour of a budget cap of around £50 million, so how unified could they be today as a group on that basis?

Mosley canvassed the teams for their view on the right level for the budget cap last week, but gave them only 24 hours to reply. The teams are due to meet as FOTA on May 6th in London. The budget cap and standardised KERS are on the agenda.

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Today’s verdict by the World Motor Sport Council to issue a three race ban for McLaren, but to suspend it for 12 months has received a fairly balanced reaction.

Given the original incident, where Trulli was allowed to pass Hamilton behind the safety car in Melbourne, what happened in the stewards’ room there and in Kuala Lumpur and what has transpired since with McLaren going out of its way to demonstrate that it has accepted mistakes were made and changed the governance of the team, this is a well balanced and light judgement. To go further would have been excessive.

McLaren pleaded guilty and the human cost at the team has been very high, with the departure of Ron Dennis, the architect of McLaren’s success and of Dave Ryan, one of its most dilligent and loyal employees for over 35 years. Lewis Hamilton has taken a huge blow to his prestige and integrity, which will take many years to redress. No doubt many of the team’s major sponsors have been in contact expressing concern that the team’s questionable sporting integrity might damage their brands by association.

FIA president Max Mosley saw no need to labour the point on this matter and said he was satisfied that a real and lasting change had been made at McLaren with the departure of Dennis and the appointment of a new chairman, a captain of industry, Richard Lapthorne.

Mosley said, “In the end there were decisions taken by the people who are no longer involved. That being the case, it would have been unfair to go on with the matter.

“We think it’s entirely fair. They’ve demonstrated there’s a complete culture change and under those circumstances it’s better to put the whole thing behind us.

“Unless they do something similar, that’s the end of the matter.”

Mosley suggested that the decision to lie to the stewards in Melbourne and to continue the deceit in Malaysia was down to sporting director Dave Ryan and implied that the FIA felt Dennis had been involved. Although Whitmarsh told journalists in Malaysia that no-one more senior than Ryan had been involved in the matter and Dennis strenously denied that his decision to move away from the race team had anything to do with the case, the implication in Mosley’s words is that he feels he was involved.

The press attending that conference at which Dennis made his announcement on April 16th was notably light on F1 journalists, they were either general media or media from the motoring side and those who were there were not fully aware of the facts of this case, so did not question Dennis as rigorously on the F1 side as they might have done.

Mosley added that he was impressed with the attitude of team principal Martin Whitmarsh and the way he has conducted himself since the controversy.

“Martin Whitmarsh made a very good impression,” said Mosley. “He’s straightforward and wants to work with us. We’re all trying to do the same thing, which is make the championship successful. Martin fully understands that and we reacted accordingly.”

McLaren team boss Whitmarsh said, “I would like to thank the FIA World Motor Sport Council members for affording me the opportunity to answer their questions this morning,” said Whitmarsh.

“We are aware that we made serious mistakes in Australia and Malaysia, and I was therefore very glad to be able to apologise for those mistakes once again.”

Compared to Dennis, Whitmarsh is a very uncomplicated man with a light touch and he has decided to go the non-confrontational route with the FIA, something Dennis could not contemplate. How that leaves him and the team in the future will be interesting to watch.

As will his reaction to the budget cap, which is likely to be announced tomorrow.

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McLaren race on as ban is suspended

The FIA World Motor Sport Council announced at lunchtime today after a brief hearing in Paris that McLaren will not be forced to miss any races this season, nor will it lose any constructors’ championship points. Instead it has decided to suspend the sentence it planned to hand down, namely a three race ban.

Interestingly, given that this is the second time in two years that McLaren has faced disrepute charges, the suspension is for a period of one year. It’s hard to imagine that they would do anything like this again – and the team was at pains to show that it has changed culture with the departure of Ron Dennis and Dave Ryan and the appointment of a new chairman, Richard Lapthorne, from industry.

The FIA statement reads,

“Having regard to the open and honest way in which McLaren Team Principal, Mr Martin Whitmarsh, addressed the WMSC and the change in culture which he made clear has taken place in his organisation, the WMSC decided to suspend the application of the penalty it deems appropriate.

“That penalty is a suspension of the team from three races of the FIA Formula One World Championship. This will only be applied if further facts emerge regarding the case or if, in the next 12 months, there is a further breach by the team of article 151c of the International Sporting Code.”

McLaren and Lewis Hamilton were disqualified from the fourth place they attained at the Australian Grand Prix, where the lying incident in the stewards’ room occured.

Whitmarsh wrote to the FIA pleading guilty to all charges last weekend. He is determined to get away from the polemics of the Dennis era and the antagonistic way the team dealt with the FIA.

In light of all that has happened between the FIA and McLaren since it first came to light that the team had a 700 page Ferrari dossier in its possession, it now feels as though things have calmed down. McLaren has a good chance of fighting for the drivers’ world championship this year. Lewis Hamilton has only 9 points to Jenson Button’s 31, but his car is improving very quickly. With the five points he lost in Melbourne, he would be on 14 with three quarters of the season to go. As it is, I think he can fight for the title this year.

As for the damage to Hamilton’s reputation, he has gone down in many people’s estimation over the incident. It was a lose-lose for him as one the one hand he looks bad because he lied to the stewards, allegedly because he was told to by the team. On the other hand, by doing what he was told, he appears to be a product of the team and not his own man. He has to just park it and move on, there’s nothing he can do about it now, but I’d expect him to act more individually in the future.

No doubt to reach this verdict there has been some horse trading behind the scenes in terms of commitments that Dennis will never return and that his influence is negated, despite retaining a 15% shareholding in the company. And I wonder if there was some dealing on the proposed budget cap as well. We are due to find out more about that at some point soon.

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There seems to be a division of opinion about what is going on between Brawn GP and Sir Richard Branson’s Virgin Group.

There are stories that a deal has been done for this year and next, while there are strong suggestions coming out of the team that other parties are interested and Branson should pony up some more serious money if he wishes to go forward.

Branson was in the Bahrain paddock at the weekend, holding a press conference to announce that Rubens Barrichello and Niki Lauda had both paid €200,000 to fly into space on the Virgin Galactic spaceship. Lauda, who is on crutches after a hip replacement, is due to take a turn at flying the craft.

The Real Honda website, which has close links with the Brackley team, is reporting that a deal is done for Virgin to sponsor the car for the season at less than £1 million.

However in the Times today, Brawn CEO Nick Fry gives a very interesting quote,

“Richard has made an offer. The issue for us is whether or not it is the best offer we can get.”

Fry goes on to say that,
“We’ve got between 20 and 25 companies talking to us either about sponsorship or some wanting to buy into the team. Ross and I need to come to the correct decision, not the quick decision.”

Branson has a track record of getting the maximum exposure for the minimum spend. Already the media value to his brand of the exposure from the first four races plus his appearances in Australia and Bahrain is estimated at £10 million. That proves to him on the one hand that F1 and Brawn in particular, is a great way to get exposure, but it also shows him that he can do it very cheaply.

But this is not going down very well with the powers that be in F1 and Brawn is now coming to the point where they are asking him to invest serious money for the long term.

They have a ‘budget to impress’ in Ross Brawn’s words, from Honda to get them through the 2009 season, but they need more money to develop the car to stay ahead of the rest and win the world title and they also need money to get started on next year’s car.

The word I heard in Bahrain is that Brawn are looking for a three year commitment from any prospective partner. The discussions with Virgin have revolved around the rest of this year and a commitment to fund the development of the 2010 car.

Discussions will of course have been hanging in recent weeks, waiting for the FIA to set the level of the budget cap. Many teams are nervous about sponsors’ reactions if the budget is set at £30 -50 million, as they fear the sponsors will be asking for the price to come down proportionately.

However the price they pay is not related to the team’s needs, it is related to the media value of the exposure they get, based on camera time, press cuttings and so on, something Branson and his team will be all to aware of given their success in that area in the last month.

The budget cap will redefine the business model of F1 and if the price is low enough it may make it attractive for Virgin to consider more than a sponsorship, but to buy an equity stake in the team. F1 teams are set to become profitable under a budget cap, so as an owner/partner you still get your exposure and you make money too. Time will tell.

As Honda the team was very close to a deal with Emirates airlines, a deal which was linked to the Earthdreams concept. But it never happened. The team has not been the market leader in attracting sponsors at any time in its history. As BAR they didn’t really need sponsors as the whole thing was bankrolled by a tobacco company. When it became Honda and BAT pulled out, the same attitude continued.

Fry and his new commercial team are under pressure to deliver a full roster of sponsors to take the Brawn team forward and make sure that this year’s championship leading performance is not a flash in the pan.

An announcement about Virgin’s ongoing involvement is expected at the Spanish Grand Prix in a few weeks time.

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