Lewis Hamilton during the Japan F1 Grand Prix
Next weekend Britain’s Lewis Hamilton could secure his fourth Formula One title at the United States Grand Prix.
His Mercedes team is a staggering 145 points ahead of arch-rivals Ferrari despite the sport introducing rules this year which aimed to put the brakes on the dominance of a single outfit. They came at a hefty cost.
The new regulations were designed to make for closer racing by increasing aerodynamic and mechanical grip through the introduction of wider tyres and wings.
According to one of the teams it has “rewritten” the rulebook and the impact is just as noticeable off track as on it.
But if some had hoped the rules might stop Mercedes from running away with the F1 championship they will have been disappointed. Ironically, they have also forced up its rivals’ costs.
Only the frontrunners have had the resources to foot the bill from their cashflow whilst one of the outfits lower down the grid even had to get a driver to cover the cost.
Research has revealed that new regulations fuelled a £167.6m increase in the F1 teams’ costs in 2016. They rose 14.5% to hit a combined £1.3bn – the highest-ever total recorded in the sport.
F1 cars are designed the year before they race so the bulk of the investment in them is paid for then, too. It means that the cost of this year’s campaign is reflected in the teams’ 2016 accounts and the final one of them was filed last week.
Eight of F1’s ten teams have to file publicly-available accounts – the only exceptions are Ferrari as its outfit is run by the car manufacturer itself, and Swiss-based Sauber where firms don’t have to release their finances.
The costs of the teams’ operating companies came to an average of £165.9m in 2016, topped by Northamptonshire-based Mercedes which spent £274.9m excluding the investment in its engines.
F1 teams’ costs rose 14.5% to hit £1.3bn last year
It is the highest ever total recorded on the accounts of a British F1 team and even eclipses the turbocharged spending levels before the 2008 economic crash which drove Toyota and Honda out of the sport.
At the other end of the spectrum is last year’s new entrant Haas F1 which spent a third as much as the championship leaders.
Haas has managed to keep its costs down by taking advantage of a new rule allowing teams to buy in more parts than before. Haas uses a Ferrari engine with a chassis created by Italian manufacturer Dallara which also makes the cars for the F2 junior series.
Relying on suppliers reduces research and development expenditure which, along with staffing and engine costs, is one of their biggest costs – it rose across the board in 2016 as teams had to design cars to meet the new regulations.
They were introduced by F1’s governing body the Federation Internationale de l’Automobile (FIA) to address criticism that the outcome of races was clear before they started due to the dominance of Mercedes.
Haas has kept costs down by buying in more parts than before
With Hamilton at the wheel it has won both the constructors’ and the drivers’ championship for the past three years running. This year is set to be no different but there has been a far higher price to pay.
Writing in the introduction to its accounts Mercedes’ team boss Toto Wolff notes that there has been “an increase of £27.9m in operating costs mainly due to the impact of technical regulation changes and movement in foreign exchange rates”.
The 2016 accounts for Force India, also based in Northamptonshire, give more insight into the effort required to meet the new rules.
It says that combined with the change in tyre-sizes “our traditional method of retaining 50% of the previous season’s car and updating the remaining 50% is not possible for 2017”. Over 90% of Force India’s car this year is completely new.
Force India has helped cover its increased costs with cash from driver Nikita Mazepin
The team planned to cover its increased costs with income from an unlikely source: a driver contract signed with Russian youngster, Nikita Mazepin, “secured a cash injection ahead of significant regulation changes ahead of the 2017 season”, said Force India.
Mazepin was just 16 when he signed up last year and he has tested for the team twice since then, most recently in July after the Hungarian Grand Prix. He has ample resources to pay as his father Dmitry became a billionaire through owning the mineral fertiliser producer Uralchem.
Despite this, Force India still chalked up a net loss of £11.6m – the largest of any team in 2016.
The regulation changes even dented the bottom line of British manufacturing giant McLaren. Its went from a net £3.4m profit in 2015 to an after-tax loss of £3.2m the following year.
For F1 teams, victory on the track is more important than making a profit
Overall the teams made a combined net loss of £2m last year. Perhaps surprisingly this is nothing new as unlike most businesses, profit is not the barometer of success in F1.
Instead teams judge their performance on racing results and tend to spend all of their income on this in a bid for victory.
Some even pump in more than they make, with additional funds usually coming from owners’ pockets or debt. The theory is that it is better to win and make no profit than make money and finish low in the standings.
Victory on track increases a team’s ability to bring in more sponsorship,, as brands are prepared to pay more to be associated with a winner.
The teams’ revenue generally comes from three sources with two providing the lion’s share. They are fuelled by F1’s huge television audience (390m viewers last year). The first key revenue source is sponsorship which comprises around a third of the teams’ revenue,
Another third comes from prize money. F1’s parent company, which is owned by American investment firm Liberty Media, pays the teams around 66% of its annual profits as prize money and it came to $985.5m (£742m) in 2016.
Despite numerous failed attempts there are new proposals to introduce a budget cap for F1 teams
Payments from owners represent around half of the teams’ remaining revenue and the marketing benefit from the exposure on TV compensates for this investment.
If costs increase these payments often rise to compensate and last year Red Bull poured in four times more money into its flagship team. Its investment into Red Bull Racing hit £40.6m as costs surged 9.2% to £197m.
As its owner has deep pockets Red Bull Racing doesn’t need to rely on drivers who pay but income from them is the remaining source of revenue for F1 teams. They are a hallmark of teams at the bottom of the grid but their days could be numbered.
Despite numerous failed attempts F1 hasn’t given up on introducing a budget cap and recent reports suggest that Liberty Media will shortly present plans to the teams for introduction in 2021 when their current race contracts expire. But it will be the sport’s governing body, the FIA, that will ultimately decide on any changes
A limit of £114m has been suggested and this would level the playing field as the smallest teams are already below this whilst the frontrunners would have to scale back.
Although it may seem like a logical direction for the sport to go in it would make the recent boost in spending seem all the more pointless.
Source :  http://www.bbc.co.uk/news/business-41610963