Posts Tagged ‘budget cap’

Yesterday I met with Max Mosley for a long interview which is in today’s Financial Times.

He was in London briefly following this week’s world motor sport council meeting where the £40 million budget cap was voted through.

I posted yesterday on the letters exchanged between him and Luca Di Montezemolo Ferrari president. Ferrari are very angry about the budget cap plans and the ‘two tier’ system which might see two classes of car racing in F1 next year. Montezemolo’s letter hints at a possible legal challenge to the plans.

I asked Mosley whether F1 could survive without Ferrari.

“It could,” he said. “It would be very sad to lose them. They’ve been in the sport since the start, but if it’s a choice between that and a situation doomed to failure and which would collapse F1 …  We are not going to bend over backwards to keep them.”

Mosley described the budget cap move as “by far the biggest development in my time in the sport”.

He is confident though that this is a time for action, not for wait and see, as the economy struggles to recover from global recession and cars companies are losing £1 billion a month. But he accepts that it might go wrong and that this summer could see a damaging stand off between some teams and the FIA.

“If you are trying to make big changes things can go wrong,” said Mosley. “We may have a very damaging conflict, it’s possible, but we are prepared for that. We’d tough it out. We’ve got very little room to negotiate, but the message I’m getting from the board of two or three of the manufacturers is that if you can keep us in F1 so that the cheque we write is not more than €25 million, you can consider this a pretty permanent arrangement.”

In recent years the manufacturer-backed teams, like Honda, BMW, Toyota Mercedes and Renault have fuelled an arms race of costs, but the boards of those car companies take a different view, according to Mosley, especially now that the economic picture has deteriorated.

“We have contacts with the boards other than through the teams. The teams spin to the board. The CEO hasn’t got the time, knowledge or expertise to question it. But now because they are all [short of money] to throw away tens of millions on F1 is not acceptable.

“I hope and think that when a team goes to its board and says, ‘I want to go to war with the FIA, because I want to be able to spend £100 million more than the FIA want me to spend, then the board will say ‘Why can’t you spend £40 million if the other teams can do it?’ ”

Mosley believes that Formula 1 has “gone down the wrong track”, with the emphasis on endless costly developments, rather than genuine innovation.. He believes that the budget cap reverses that trend.

“The cleverest team is going to win, not the richest. It’s manifestly fair because it litterally is the one who makes the best invention who will succeed, Invention is cheap, it’s refinement that is expensive and F1 is now refinement orientated. It’s probably our fault for allowing rules to develop in such a way that refinement is the means of progress rather than invention.“

* Tomorrow I will post the second half of the interview, with some interesting observations from Mosley on Ron Dennis, an explanation of how the cap will be policed and thoughts on how long it will stay in F1.

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In response to the letter Ferrari president Luca di Montezemolo wrote on April 28th to the FIA president expressing concern about having two classes of F1 car and about a possible legal challenge to the budget cap, Max Mosley wrote back the following day.

He quotes FIAT boss Sergio Marchionne, with whom Montezemolo works closely and his belief that in an economic crisis such as we are in at the moment, only an extreme response will do,
“We are just going to slam the brakes on, cut everything back to essentials. It may be painful, it may be ugly. But if we want to do the right thing for this industry let’s do it now. Today my gut instinct is to be truly Draconian.” These are Marchionne’s words.

Mosley's letter to Ferrari

Mosley's letter to Ferrari

Mosley points out that the car industry is in serious difficulty and that F1, as an extension of it, is extremely vulnerable. Honda’s departure was a wake up call and another manufacturer could leave at any moment.

“If we are to reduce the risk of the Formula 1 world championship collapsing, we have to allow new teams in. We also have to reduce costs drastically. The matter is therefore extremely urgent.”

Responding to Montezemolo’s legal threat over rights that have not been respected Mosley writes,
“The only radical elements are those needed to close the gap that would otherwise exist between a low-budget team and other competitors. Thus if Ferrari chooses to continue with an unrestricted budget, the new regulations will not deprive Ferrari of any rights…I do not accept that these proposed regulation compromise any commitment that has been given to Ferrari in the past, unless Ferrari would somehow argue that it is entitled to prevent new competitors from emerging at a time when the sport itself is in danger.”

He ends with a flourish, “We are confident (as are our accountants and lawyers) that a budget cap will be enforceable. The cleverest team will win and we would eliminate the need for depressing restrictions on technology, which the existing teams are discussing with a view to reducing costs. I hope Ferrari will take the lead in agreeing the cost cap mechanism, thus freeing its engineers to work and preserving its shareholders’ money.”

Mosley has always wanted three things; to see the playing field levelled so small teams can compete with big teams, to have full grids and he has always felt that the costs were out of control, long before the credit crunch hit the global economy.

What he has done here, along with his technical strategy guru Tony Purnell, is to take advantage of the car industry’s troubles to create a window for killing those three birds with one stone. The two class F1 is not ideal for anyone, but Mosley is calculating that no manufacturer will go for the uncapped option it because it would be unjustifiable to shareholders.

Meanwhile the five independent teams, Williams, Red Bull, Toro Rosso, Brawn and Force India all welcome the budget cap at the £40 million level because to them it means survival, profit and the chance to compete against the big boys. It’s Christmas for them.

The teams formed their association, FOTA, to represent their rights, but here FOTA is in big trouble because the five independents are on a collision course with the manufacturers, so Max has also achieved a fourth aim, to undermine FOTA.

Many people dislike his methods, but think about it this way, if F1 didn’t exist and you were Ferrari or any other manufacturer and someone came to you and said, “I’ve got a great idea for a racing series; we’ll have 17 races in key markets around the world, great TV package giving your brand a media value in the hundreds of millions per year and it will cost £40 million and it capped, so you can innovate within that figure and beat the others.”

I’m sure if you started with a clean sheet of paper, in other words, you might well go for it on that basis. But it’s hard to see the Mosley/Purnell vision for F1 because we come from an era of £200 million budgets. But why does it need to cost £200 million to win?

Shouldn’t Ferrari continue to win races? If you have something very good and you distill it to its core strengths, you end up with something sensational. So surely the 350 best people at Ferrari must be the equal or better of the 350 at any of the other teams?

One of my readers, Martin Samm, made this very valid point today,
“What I (as a member of Joe Public) want is a series of interesting/exciting races – I dont care if they spent 40 million or 200 million, as I’m sure they’ll be as cutting edge as ever regardless; engineers tend to be cunning like that!”

Martin also points out this is all happening at a time when races are being won by two independent teams, Brawn and Red Bull. Most people find this very refreshing and a good thing for F1.

It’s really hard to know which way to go on this one, because it represents a huge cultural shift in F1. You can see Ferrari’s point and they believe that they have right – and the law – on their side.

The way is clear for a summer of messy legal challenges, which would throw 2010 into chaos. Ferrari will not go quietly on this one and they have gathered the other manufacturers around them for a council of war. They make the engines, of course, so the independents are dependent on them.

That is why Cosworth is sitting on the sidelines, waiting.

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Although Ferrari is refusing to comment on yesterday’s budget cap announcement, some letters between its president Luca di Montezemolo and FIA president Max Mosley have come to light.

These show Ferrari’s concerns and hint at arrangements between Ferrari and the governing body, which Ferrari feel have not been honoured.

Montezemolo ; Legal challenge to cost cap?

Montezemolo ; Legal challenge to cost cap?

On April 28th Montezemolo wrote to Mosley and other world council members,
unhappy that budget caps had been put on the agenda of a meeting which was called to hear the McLaren case.

He wrote, ” I have always been concerned about its introduction (cost cap) mainly because I consider that there are serious technical difficulties in making sure that any cap can realistically be monitored.

“There are..doubts as to whether or not two categories of teams should be created which will inevitably mean that one category will have an advantage over the other and that the championship will be fundamentally unfaor and perhaps even biased. In any event this would create confusion in the public’s mind, which would seriously lower the value of Formula 1.”

This is a view shared by all the F1 teams, that having capped and uncapped teams operating to two different sets of rules is unworkable. FOTA will discuss this at its May 6th meeting.

But Montezemolo then goes on to remind Mosley about the deal, which he signed in 2005 to commit Ferrari to F1 until 2012, the one which broke the idea of a manufacturers’ breakaway series and for which Ferrari allegedly received €100 million.

Montezemolo’s point is that under the Concorde Agreement the FIA “cannot pass or amend any regulation without it being approved by the F1 commission.”

When Ferrari did its secret deal and signed up to 2012, it demanded and was granted “all rights under the previous Concorde Agreement will continue to apply until 31 December 2010, exactly as if the Agreement itself remained in place.”

The language then gets quite legal, and Montezemolo says he ‘insists’ that the FIA respect the agreement they made.

Presumably this is a coded message that Ferrari would launch a legal challenge against the cost cap. The problem there is time. It would take months and that would delay the 2010 rules being published, which would throw the series into chaos.

Ferrari would only launch an action like that with FOTA backing, but that will be hard because half of the teams in FOTA agree with the cost cap, which guarantees not just their survival but that they will be able to compete with the big boys and make a profit at the same time!

I’ll post on Mosley’s response separately.

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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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In an interview with the Sunday Telegraph, FIA president Max Mosley has said that the £30 million figure, which was announced on Tuesday as the level for the budget cap due to be introduced next season, is merely the first round in a negotiation.

“It is provisional. I actually think it could be done for £25 million but that’s just my opinion. All my advisers think it should be more. When people calm down a little bit they will see that all of this is brilliant for Formula One. It won’t hurt the DNA of the sport – £30 million is still vastly more than any other series.”

Team bosses I have spoken to say that at that level the cars will not be the same as they are now and that no team would be able to employ more than 250 staff, roughly a quarter of the staff Toyota employs, a third of Ferrari’s and half of Williams’ staff.

It would bring every team down to around the staffing level of Toro Rosso.

He has gone for an extreme figure, when what he really wants is for the teams to accept the principle of budget caps. Mosley says that the response of the FOTA teams to Tuesday’s announcement was ‘weak’ and suggests that the teams are not as united as they claimed to be at the FOTA press conference in Geneva recently, where the famous “Road map for F1′ was unveiled.

Mischievously, where up until now it was believed that the teams were not consulted on the budget cap plans, he now says that he discussed them with some of the independents who stood to benefit the most, like Williams and Force India. His implication is clear, FOTA is an alliance that cannot survive because competitive animals are not designed to form unions with each other. Their individual desire for a competitive edge will always undermine their collective sense.

“They knew we were considering a budget cap, but I don’t think they expected us just to do it like that. The complaint was that we didn’t consult them. Well, we’ve been talking a lot to Force India and Williams, both of whom were very supportive. I’ve not spoken recently to [Red Bull owner Dietrich] Mateschitz but I would have thought it might appeal to him too.

“In any case, we had to do something. All we’ve had from the teams so far is ‘We’ve done a fantastic job, we’ve reduced costs by 50 per cent’. So what? It has come down from $300-$400 million to $150-$200 million? Well, that’s admirable, but I’m dubious as to whether they will still have $150-$200 million in 2010 and 2011.”

“The thing is; it’s just an option. If I’m wrong it doesn’t matter. If I’m right it will be the salvation of Formula One.”

Thought-provoking words to end on.

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