In the wake of Formula 1 losing Caterham and Marussia from the Austin grid, DIETER RENCKEN highlights the problems that made such a scenario almost inevitable
To lose one Formula 1 team was utterly predictable; to lose another within a week is downright unforgiveable - and it can be traced to revenue and governance structures that this writer warned - in September 2012 - were absolutely unsustainable.
Worse, the futures of Lotus, Force India and Sauber are far from secure - as AUTOSPORT's True Cost of F1 feature, to be published in this week's magazine, makes unequivocally clear. Toro Rosso, the other 'minnow' operation, survives only as nursery school for Red Bull Racing, for which it receives commensurate funding.
When the sport earns around £1.2bn a year and yet over 50 per cent of the grid faces serious financial issues, it's clear there is a major problem with the way that income is distributed.
It is argued that revenues disbursed to teams have almost doubled over 10 years, but this overlooks the fact that in 2005 the teams collectively received just 23 per cent of revenues while the rights holder hoovered up the rest. The 'pot' was increased to 50 per cent in 2006 after much rancour.
F1 teams' commercial terms improved in 2006, but little has changed since © LAT |
That pot is still roughly 50 per cent, save that three of the largest teams (Red Bull Racing, Ferrari, McLaren) share another 12-odd per cent between them. Thus to imply the teams now share more than ever is disingenuous, for once (before 1998) they shared close to 90 per cent, whereas now all but the CCB (Constructors' Championship Bonus) trio are no better off than they were in 2006.
Indeed they are arguably worse off, for the playing field is heavily tilted against them.
Some argue that Caterham and Marussia are not deceased but in administration, but the legal process in the United Kingdom is governed by the Insolvency Act 1986 - which governs relevant F1 clauses - pointing to the fact that both teams are insolvent. They are now run by entities with zero experience of F1, a highly complex business.
Equally, those who squint at the sport through antique rose-tinted monocles suggest an average of two teams have annually departed F1 during its well-nigh 65-year existence. That conveniently overlooks the fact that the commercial and playing fields were level, whereas now they jeopardise all but the Big Three.
Then, as the examples of Toyota, BMW and others attest, not every exit is linked to insolvency. Other teams mutated: Toleman became Benetton, which begat Renault, which adopted the Lotus roundel after Genii Capital acquired the operation; Mercedes operated as Tyrrell, British American Racing, BAR-Honda, Honda, Brawn and then Mercedes Grand Prix.
Force India raced as Spyker, Midland and Jordan in its 23-year life. That's 12 'departed' entities, yet covered by three current teams. In fact, of 2014's entry list, only Ferrari, McLaren and Williams remain unchanged. That the duo now in administration entered under three names respectively in five years surely points to a wider issue.
Caterham (nee 1 Malaysia Racing, formerly Lotus Racing) and Marussia (nee Manor Grand Prix, formerly Virgin Racing) signed up in 2009 - together with HRT (then Campos) and still-born USF1 - on a wave of optimism created by then-FIA president Max Mosley, who, as part of his open hostility towards manufacturer teams, promised budgets capped at £30m per annum.
However, by the time the teams appeared in March 2010, Mosley was gone from office - but not before his administration formulated F1's horrifically expensive hybrid engine regulations.
The budget cap was not imposed - the sport's contentious Resource Restriction Agreement was adopted instead - and in one swoop the three 'newbies' were forced to double their budgets even before taking to the track.
It was a disaster in the making, as HRT's demise and the regular dilution of Marussia's share capital proved. Caterham only avoided intense scrutiny by a) its shareholders stumping up; and b) being registered in Malaysia, which operates opaque accounting conventions.
Cost-cap plans attracted three new teams to the grid for 2010 © LAT |
However, another nail was driven into their respective coffins early in 2012, when FOM offered differentiated commercial terms to ten of 11 teams for the period 2013-20, leaving Marussia out in the cold despite the team holding a valid entry.
So we had a situation where one of the 11 teams would receive no prize money at all, and still nothing effective was being done to reduce expenditure across the board. As disclosedhere and here in April FIA president Jean Todt voted for cost-cutting measures (including caps), but was eventually overruled by Ecclestone and the privileged teams.
But, if FOM and the CCB teams bear responsibility for the present situation, the past and present managements of Caterham and Marussia can be considered culpable too. Time and again over their lifespan they have failed to stand up for their rights.
For example, when Marussia was denied commercial terms, it had every opportunity of approaching the EU on monopolistic grounds. Instead management vacillated every which way, hoping FOM would take pity - which the commercial rights holder did, having, though, first exploited Marussia's presence in TV broadcasts. The pay-off? A token £7m in annual payments, which proved insufficient to cover the team's travel/freight bills, and which came only after intense pressure from FOTA (an organisation that is now defunct, owing to the seeming inability of teams to work together for the common good).
By the same token, having a share structure so labyrinthine that even Marussia directors confessed to not fully understanding its different voting layers smacks of unnecessary complication. In its final throes the team had a communications department that did all but communicate as management went into lock-down. It was clear after Sochi that Marussia was headed south.
Still, Marussia was better off than Caterham, which suffered management hyper-activity: In 2009 founder Tony Fernandes, who got rich off the back of a Malaysian state-brokered foot into the aviation business, owned not a single motor racing asset, yet within five years his group entered F1 and GP2, sniffed about GP3, embraced Moto2, and raced at Le Mans.
As though all this diversification was insufficient, Fernandes acquired Queens Park Rangers (from Ecclestone and partners), purchased Caterham to provide a name for his F1 team after failing to secure the Lotus name, and entered into a joint venture with Renault to produce a Caterhamised version of a planned Alpine sports car. Any wonder management focus was everywhere bar F1?
After FOTA's demise in February the days of tiny teams were numbered, and by March it was clear Fernandes had lost interest. However, by June he had found Envagest, a mysterious Swiss-Arab buyer whom this writer found difficult to take seriously, and confusion was rampant from day one.
Said a senior member of the Colin Kolles-led buy-out team in August: "No one knows who owns what, or even how big the payroll is. We operate out of the same building as other [Caterham] companies without clear-cut divisions."
New team boss Christijan Albers was soon heading out the door, ostensibly because he found the travel schedule of the end-of-season flyaways too onerous. Since the F1 calendar was in the public domain long before he took the job, this reasoning seemed a little odd. He was replaced by his deputy, Manfredi Ravetto.
In recent days, before Envagest handed over control of the team to the administrators, an unsavoury public war developed between it and Fernandes, one that covered neither party in glory and served only to further tarnish F1's standing in commercial circles.
With Marussia and Caterham in administration, the extent of their debts can be revealed. Marussia, despite allegedly receiving a cash injection from Russian majority shareholder Andrey Cheglakov two years ago, is currently burdened by £30m in debt, including a reputed £15m to Ferrari for engines; McLaren is also in the queue, having provided technical services to the team.
Caterham Sports Limited, supplier to the race team and the primary company under liquidation, currently carries about the same, with Red Bull Racing (gearbox, hydraulics), mutual engine partner Renault, and McLaren (electronics) listed as creditors. There is a certain irony in the fact that so many of these creditors, who are unlikely to recover all the monies owed, are among the CCB cadre who had the opportunity to support cost-saving measures that could have kept both teams in business.
Just 18 cars will head for Austin's Turn 1 this weekend in America © LAT |
What happens next? First, the teams will miss at least the next two events before hoping to regroup ahead of the season finale. This is not a dispensation generously granted by FOM, but is included in contractual obligations, which state: "A Team shall be considered to have failed to participate in the FIA F1 Championship ... if it has failed to participate in more than three (3) events in the same [championship]..."
The only sanction, according to a source, is the loss of a proportionate amount of 2014 FOM revenue, i.e. missing two races out of 20 means a loss of 10 per cent in revenue.
Ecclestone suggested that "[Major teams] would supply a third car to [troubled] teams, so if, for example, Sauber disappeared, a team could do a deal with Sauber". As outlined here, and subsequently verified by three team principals, that is certainly not the case.
In fact, one team boss recalls a similar system being proposed by Ecclestone - saliently for customer cars, not third cars - during a meeting in London in January 2013, where it was shouted down by many, including a senior FOM figure, who called it "unworkable".
However, at the heart of much of this confusion are clauses that on one side commit teams to entering third cars if grids drop to below 20 cars, while broadcaster and race promoter contracts have 16-car triggers. By the same token, suggestions that Marussia could qualify for £40m in FOM monies if it places ninth in the championship are wide of the mark: Last year Sauber, which placed seventh, earned £32m.
A draft race contract seen by this writer states: "The Commercial Rights Holder shall use reasonable endeavours to ensure either that at least sixteen cars participate in the Event or [new team clauses] are observed by the parties thereto", and it is believed TV contracts contain identical clauses.
Said one team principal, speaking on condition of anonymity: "Either Bernie has forgotten his own contracts, or some journalist has made things up as he or she went along. But either way that was never, I repeat NEVER, discussed for third cars, and is also not contained in our bi-lateral contracts."
Not a single expression of sympathy for the many men and women who now face a bleak Christmas have been expressed by the sport's commercial controllers, who will no doubt luxuriate in plush chalets during the festive season. Until these decision-makers take practical action to make the sport's economic model sustainable - instead of floating universally loathed, pie-in-the-sky ideas such as third cars – other teams remain in grave peril.
In the wake of Formula 1 losing Caterham and Marussia from the Austin grid, DIETER RENCKEN highlights the problems that made such a scenario almost inevitable
To lose one Formula 1 team was utterly predictable; to lose another within a week is downright unforgiveable - and it can be traced to revenue and governance structures that this writer warned - in September 2012 - were absolutely unsustainable.
Worse, the futures of Lotus, Force India and Sauber are far from secure - as AUTOSPORT's True Cost of F1 feature, to be published in this week's magazine, makes unequivocally clear. Toro Rosso, the other 'minnow' operation, survives only as nursery school for Red Bull Racing, for which it receives commensurate funding.
When the sport earns around £1.2bn a year and yet over 50 per cent of the grid faces serious financial issues, it's clear there is a major problem with the way that income is distributed.
It is argued that revenues disbursed to teams have almost doubled over 10 years, but this overlooks the fact that in 2005 the teams collectively received just 23 per cent of revenues while the rights holder hoovered up the rest. The 'pot' was increased to 50 per cent in 2006 after much rancour.
F1 teams' commercial terms improved in 2006, but little has changed since © LAT |
That pot is still roughly 50 per cent, save that three of the largest teams (Red Bull Racing, Ferrari, McLaren) share another 12-odd per cent between them. Thus to imply the teams now share more than ever is disingenuous, for once (before 1998) they shared close to 90 per cent, whereas now all but the CCB (Constructors' Championship Bonus) trio are no better off than they were in 2006.
Indeed they are arguably worse off, for the playing field is heavily tilted against them.
Some argue that Caterham and Marussia are not deceased but in administration, but the legal process in the United Kingdom is governed by the Insolvency Act 1986 - which governs relevant F1 clauses - pointing to the fact that both teams are insolvent. They are now run by entities with zero experience of F1, a highly complex business.
Equally, those who squint at the sport through antique rose-tinted monocles suggest an average of two teams have annually departed F1 during its well-nigh 65-year existence. That conveniently overlooks the fact that the commercial and playing fields were level, whereas now they jeopardise all but the Big Three.
Then, as the examples of Toyota, BMW and others attest, not every exit is linked to insolvency. Other teams mutated: Toleman became Benetton, which begat Renault, which adopted the Lotus roundel after Genii Capital acquired the operation; Mercedes operated as Tyrrell, British American Racing, BAR-Honda, Honda, Brawn and then Mercedes Grand Prix.
Force India raced as Spyker, Midland and Jordan in its 23-year life. That's 12 'departed' entities, yet covered by three current teams. In fact, of 2014's entry list, only Ferrari, McLaren and Williams remain unchanged. That the duo now in administration entered under three names respectively in five years surely points to a wider issue.
Caterham (nee 1 Malaysia Racing, formerly Lotus Racing) and Marussia (nee Manor Grand Prix, formerly Virgin Racing) signed up in 2009 - together with HRT (then Campos) and still-born USF1 - on a wave of optimism created by then-FIA president Max Mosley, who, as part of his open hostility towards manufacturer teams, promised budgets capped at £30m per annum.
However, by the time the teams appeared in March 2010, Mosley was gone from office - but not before his administration formulated F1's horrifically expensive hybrid engine regulations.
The budget cap was not imposed - the sport's contentious Resource Restriction Agreement was adopted instead - and in one swoop the three 'newbies' were forced to double their budgets even before taking to the track.
It was a disaster in the making, as HRT's demise and the regular dilution of Marussia's share capital proved. Caterham only avoided intense scrutiny by a) its shareholders stumping up; and b) being registered in Malaysia, which operates opaque accounting conventions.
Cost-cap plans attracted three new teams to the grid for 2010 © LAT |
However, another nail was driven into their respective coffins early in 2012, when FOM offered differentiated commercial terms to ten of 11 teams for the period 2013-20, leaving Marussia out in the cold despite the team holding a valid entry.
So we had a situation where one of the 11 teams would receive no prize money at all, and still nothing effective was being done to reduce expenditure across the board. As disclosedhere and here in April FIA president Jean Todt voted for cost-cutting measures (including caps), but was eventually overruled by Ecclestone and the privileged teams.
But, if FOM and the CCB teams bear responsibility for the present situation, the past and present managements of Caterham and Marussia can be considered culpable too. Time and again over their lifespan they have failed to stand up for their rights.
For example, when Marussia was denied commercial terms, it had every opportunity of approaching the EU on monopolistic grounds. Instead management vacillated every which way, hoping FOM would take pity - which the commercial rights holder did, having, though, first exploited Marussia's presence in TV broadcasts. The pay-off? A token £7m in annual payments, which proved insufficient to cover the team's travel/freight bills, and which came only after intense pressure from FOTA (an organisation that is now defunct, owing to the seeming inability of teams to work together for the common good).
By the same token, having a share structure so labyrinthine that even Marussia directors confessed to not fully understanding its different voting layers smacks of unnecessary complication. In its final throes the team had a communications department that did all but communicate as management went into lock-down. It was clear after Sochi that Marussia was headed south.
Still, Marussia was better off than Caterham, which suffered management hyper-activity: In 2009 founder Tony Fernandes, who got rich off the back of a Malaysian state-brokered foot into the aviation business, owned not a single motor racing asset, yet within five years his group entered F1 and GP2, sniffed about GP3, embraced Moto2, and raced at Le Mans.
As though all this diversification was insufficient, Fernandes acquired Queens Park Rangers (from Ecclestone and partners), purchased Caterham to provide a name for his F1 team after failing to secure the Lotus name, and entered into a joint venture with Renault to produce a Caterhamised version of a planned Alpine sports car. Any wonder management focus was everywhere bar F1?
After FOTA's demise in February the days of tiny teams were numbered, and by March it was clear Fernandes had lost interest. However, by June he had found Envagest, a mysterious Swiss-Arab buyer whom this writer found difficult to take seriously, and confusion was rampant from day one.
Said a senior member of the Colin Kolles-led buy-out team in August: "No one knows who owns what, or even how big the payroll is. We operate out of the same building as other [Caterham] companies without clear-cut divisions."
New team boss Christijan Albers was soon heading out the door, ostensibly because he found the travel schedule of the end-of-season flyaways too onerous. Since the F1 calendar was in the public domain long before he took the job, this reasoning seemed a little odd. He was replaced by his deputy, Manfredi Ravetto.
In recent days, before Envagest handed over control of the team to the administrators, an unsavoury public war developed between it and Fernandes, one that covered neither party in glory and served only to further tarnish F1's standing in commercial circles.
With Marussia and Caterham in administration, the extent of their debts can be revealed. Marussia, despite allegedly receiving a cash injection from Russian majority shareholder Andrey Cheglakov two years ago, is currently burdened by £30m in debt, including a reputed £15m to Ferrari for engines; McLaren is also in the queue, having provided technical services to the team.
Caterham Sports Limited, supplier to the race team and the primary company under liquidation, currently carries about the same, with Red Bull Racing (gearbox, hydraulics), mutual engine partner Renault, and McLaren (electronics) listed as creditors. There is a certain irony in the fact that so many of these creditors, who are unlikely to recover all the monies owed, are among the CCB cadre who had the opportunity to support cost-saving measures that could have kept both teams in business.
Just 18 cars will head for Austin's Turn 1 this weekend in America © LAT |
What happens next? First, the teams will miss at least the next two events before hoping to regroup ahead of the season finale. This is not a dispensation generously granted by FOM, but is included in contractual obligations, which state: "A Team shall be considered to have failed to participate in the FIA F1 Championship ... if it has failed to participate in more than three (3) events in the same [championship]..."
The only sanction, according to a source, is the loss of a proportionate amount of 2014 FOM revenue, i.e. missing two races out of 20 means a loss of 10 per cent in revenue.
Ecclestone suggested that "[Major teams] would supply a third car to [troubled] teams, so if, for example, Sauber disappeared, a team could do a deal with Sauber". As outlined here, and subsequently verified by three team principals, that is certainly not the case.
In fact, one team boss recalls a similar system being proposed by Ecclestone - saliently for customer cars, not third cars - during a meeting in London in January 2013, where it was shouted down by many, including a senior FOM figure, who called it "unworkable".
However, at the heart of much of this confusion are clauses that on one side commit teams to entering third cars if grids drop to below 20 cars, while broadcaster and race promoter contracts have 16-car triggers. By the same token, suggestions that Marussia could qualify for £40m in FOM monies if it places ninth in the championship are wide of the mark: Last year Sauber, which placed seventh, earned £32m.
A draft race contract seen by this writer states: "The Commercial Rights Holder shall use reasonable endeavours to ensure either that at least sixteen cars participate in the Event or [new team clauses] are observed by the parties thereto", and it is believed TV contracts contain identical clauses.
Said one team principal, speaking on condition of anonymity: "Either Bernie has forgotten his own contracts, or some journalist has made things up as he or she went along. But either way that was never, I repeat NEVER, discussed for third cars, and is also not contained in our bi-lateral contracts."
Not a single expression of sympathy for the many men and women who now face a bleak Christmas have been expressed by the sport's commercial controllers, who will no doubt luxuriate in plush chalets during the festive season. Until these decision-makers take practical action to make the sport's economic model sustainable - instead of floating universally loathed, pie-in-the-sky ideas such as third cars – other teams remain in grave peril.