F1: The Most Expensive Sport and how Teams play this Game

Embarking on the high-speed circuits of Formula 1 (F1) requires more than just skilled drivers and cutting-edge technology; it demands substantial financial investments to keep the wheels turning. In the intricate world of F1, where teams compete at the pinnacle of motorsport excellence, understanding the financial intricacies becomes as crucial as mastering the racetrack. From legendary teams with historic ties to automotive giants to emerging forces backed by individual investors, join me on a journey through the financial engines that power the captivating world of Formula 1.

Formula One Teams: The Cash Burning Machine

Please note: all data is from 2019 and/or before. Some teams may have switched hands, are no longer in Formula 1, or have used new names. However the conclusion, in my opinion, will stay the same as the competitive balance among all teams will not change.

Ferrari

The Ferrari Formula 1 team is a subsidiary of Ferrari the manufacturer, and the team's financial data is consolidated with Ferrari's financial statements. Ferrari is a publicly listed company on the New York Stock Exchange. Being the oldest and most supported team in F1, Ferrari has the highest investment in the sport. In 2018, Ferrari's budget for the team was $410 million. The team's main sources of income include:

1. FOM Rev Share: Due to Ferrari being one of the most prominent teams in F1, it receives the highest revenue share amongst all teams, reaching $190 million, regardless of its position each season.
2. Sponsorship Income: Ferrari has sponsorship agreements with mega brands such as Philip Morris (parent company of Marlboro), earning $160 million in a year.
3. Brand Licensing: Ferrari's brand has a significant global impact, generating about $40 million annually through brand licensing deals.
4. Technology and Services: Ferrari, having top-notch automotive technology, earns around $20 million annually by providing these technologies and services to other teams.

Mercedes-AMG Petronas

Mercedes-AMG Petronas has two main entities: the team operating and managing company (Mercedes-Benz Grand Prix Ltd.) and the power unit supplier (Mercedes AMG High-Performance Powertrains Ltd.). The team company is 60% owned by Daimler AG, 30% by team principal Toto Wolff, and 10% by Niki Lauda.

1. FOM Rev Share: Mercedes-AMG Petronas receives $175 million from FOM's revenue share.
2. Sponsorship: With excellent F1 results, the team gets additional income, including $150 million from sponsors like Petronas.
3. Technology and Services: similar to Ferrari, the Mercedes F1 team also generates income from the provision of power units to other F1 teams such as Racing Point and Williams. Additionally, the company engages in the design, development, and manufacturing of power units for other racing events under the Daimler Group, such as the Mercedes team in the Formula E electric racing series, and contributes to the research and development of power systems for the parent company's road cars.
4. Daimler Group Support: Daimler supports the team financially and provides a loan of £73 million.

Renault (Now Alpine)

Renault Team is controlled by the French Renault Group, and as of the end of 2018, they had a loan of £110 million from the Renault Group. The team's total budget was $190 million in 2018.

1. FOM Revenue Share: Renault receives $60 million from FOM.
2. Sponsorship Income: Additional income comes from sponsors like Infiniti, contributing $40 million.
3. Renault Group Support: The Renault Group provides the remaining $90 million to cover the budget gap.

Red Bull Racing

Red Bull Racing team is owned by the Austrian company Red Bull GmbH. The legal entity of the Red Bull Racing team is Red Bull Technology Ltd. (Team Company), which wholely owns a subsidiary dedicated to the management and operation of the team, known as Red Bull Racing Ltd. (Operations Company).The Team Company possesses all research and development (R&D) resources, focusing on the team's technical aspects, with approximately 800 employees. In contrast, the Operations Company, responsible for managerial tasks, has a much smaller workforce of around 50 employees. Leveraging the ownership of both the Red Bull Racing and Scuderia AlphaTauri F1 teams, Red Bull is permitted to provide technical services to the smaller team within the confines of F1 regulations, aiming to reduce overall costs.Furthermore, the Team Company utilizes its R&D achievements from F1 to offer technical services to external entities while predominantly concentrating on developments related to F1 racing. 

1. FOM Revenue Share: Red Bull Racing receives $150 million from FOM's rev share.
2. Sponsorship Income: Additional income includes $100 million from sponsors like TAG Heuer.
3. Red Bull Group Support: The Red Bull Group provides a loan of $68 million for operational turnover.

Haas F1 Team

Haas F1 Team operates with a different model, as it predominantly buys power units from Ferrari and chassis from Dallara. The team's owner, Gene Haas, directly supports the team.

1. FOM Revenue Share: Haas F1 Team receives $55 million from FOM's revenue share.
2. Sponsorship Income: Additional income includes $15 million from sponsors.
3. Owner's Support: The remaining $60 million is provided by Gene Haas.

Racing Point F1 Team (Now Aston Martin)

Racing Point F1 Team, formerly Force India, faced financial difficulties in 2018, leading to Lawrence Stroll acquiring the team. Lawrence Stroll, a successful investor in fashion companies, provides direct financial support.

1. FOM Revenue Share: Racing Point F1 Team receives $70 million from FOM's revenue share.
2. Sponsorship Income: Additional income includes $25 million from sponsors.
3. Owner's Support: Lawrence Stroll directly covers the remaining $25 million budget gap.

Williams Racing Team

The core entity of the Williams Racing team is Williams Grand Prix Holdings PLC (Main Company), which comprises two branches: Williams Grand Prix Engineering Limited (Team Company) and Williams Advanced Engineering Limited (Technology Company). The main company is publicly listed on the Frankfurt Stock Exchange. Williams Racing, through its participation in the F1 World Championship, accumulates experience in technology and engineering research and development, and offers services to external clients for profits.Williams Racing has consistently maintained independent operations, being a steadfast advocate for FOM's initiative to limit technical investments across F1 teams. In the year 2018, the team had a budgetary expenditure of approximately $150 million, with revenues roughly matching the expenditure. 

1. FOM Revenue Share: Williams Racing receives $75 million from FOM.
2. Sponsorship and Technology Income: Additional income includes $75 million from sponsors and technology services.

AlphaTauri

AlphaTauri, like Red Bull Racing, is part of the Red Bull Group. The team has a budget of about $150 million.

1. ROM Revenue Share: AlphaTauri receives $55 million from FOM's revenue share.
2. Sponsorship Income: Additional income includes $30 million from sponsors.
3. Red Bull Group Support: The remaining $45 million is provided by the Red Bull Group.

Alfa Romeo

The Alfa Romeo Racing Orlen team, based in Switzerland, is one of the smaller teams in Formula 1 and is affiliated with an investment institution in Switzerland. The team has an annual budget of approximately $135 million. 

1. FOM Revenue Share: The team receives $45 million from FOM's revenue share.
2. Sponsorship and Services Income: Additional income includes $40 million from sponsors and sponsored drivers paying to drive for the team.
3. Services provided to third parties: Around $35 million.
4. Parent Company Support: The remaining $15 million is covered by the parent company.

McLaren F1 Team

The McLaren team is a historic Formula 1 team that has been competing in the F1 World Championship since 1966. The McLaren team is one of the three business lines of the McLaren Group, the other two being McLaren Automotive and McLaren Applied Technologies. McLaren Group generates 84% of its revenue from the automotive business, with only 11% coming from the F1 team. The McLaren team has an annual budget of approximately $220 million; the parent company, the McLaren Group, covers around half of the team's budgetary gap.

1. FOM Revenue Share: McLaren F1 Team receives $80 million from FOM's revenue share.
2. Sponsorship Income: Additional income includes $30 million from sponsors.
3. McLaren Group Support: The remaining $110 million is provided by the McLaren Group.

Formula 1: A Fair Game?

Similar to the North American professional sports leagues, the Formula 1 "league", known as FOM (Formula One Management), is responsible for consolidating certain rights, including broadcasting rights, league sponsors, and the sale of event promotion rights, to maximize bargaining power in commercial negotiations. After obtaining revenue, FOM retains a portion of the income and distributes the remainder among all the teams. In contrast to the uniformity of North American professional sports leagues, the income among F1 teams is tied to their performance, i.e. the better the positions, the more revenues shared. The significant disparity in capital behind different teams leads to a highly uneven playing field, impacting the overall spectacle of the F1 event.

Due to the nature of F1 as a series of "touring races," without a concept of home or away games, the majority of F1 teams rely predominantly on sponsorship as their primary source of income after the revenue received from FOM. The willingness of sponsors to support a team is directly linked to the team's performance in the F1 World Championship. The team's success or failure is also proportional to the consistent investment made over the years, further reinforcing the phenomenon of the "strong getting stronger."

In the early days of motorsports, the vehicles used were similar to regular cars in people's daily lives and did not undergo specific development; the main distinction was the more "enthusiastic" driving by racers. Through motorsports, individuals unleashed their imagination and creativity, continually innovating and iterating superior vehicle technologies. Many technologies found in consumer cars originated from the hands of racing engineers, gradually maturing and being applied in broader fields. Consequently, it became logical for automotive manufacturers to engage in motorsports, turning the racetrack into a manufacturer's "lab."

For a team to excel in motorsports, all resources needed revolve around the variables of "driver" and "race car." Like other professional athletes, drivers require years of rigorous training and considerable luck for the opportunity to step onto the F1 stage. Looking solely at the race car, achieving a perfect vehicle demands top-notch engine, aerodynamic design, computational capabilities, and equipment, among various technological factors. FIA (Fédération Internationale de l'Automobile) establishes highly detailed technical regulations for F1 events, requiring each team to design and construct their own race cars within the specified technical framework.

Companies like Mercedes, Ferrari, and Renault, being manufacturers themselves, possess comprehensive R&D capabilities, allowing them to invest in all technological aspects, from engines to chassis and aerodynamics. Other teams lacking the capability for engine development rely on engines provided by external manufacturers.

Especially evident when the Haas F1 Team initially joined Formula 1, in order to quickly compete with other teams, Haas entered into a comprehensive collaboration with Scuderia Ferrari to the fullest extent allowed by technical regulations. They used Ferrari engines and also learned and adopted various vehicle technologies from the Ferrari team. This level of collaboration is unthinkable in other professional sports leagues; different NBA teams cannot cooperate on the competitive level, as it would affect the fairness of the competition.

The presence of racing vehicles is both the most captivating aspect of motorsports and a paradoxical point affecting the quality of the on-the-track product. In all sports events, the closer the competitive levels of the opposing sides, the higher the excitement of the competition. Leagues need to prohibit any behavior that undermines fairness, such as the use of drugs or other means. Yet, detecting whether a race car uses "enhancements" is exponentially more challenging and time-consuming compared to the extensive efforts required for athlete drug testing. This is one of the recent reasons why some F1 teams not using Ferrari engines collectively protested against Ferrari, demanding public disclosure of the results of an FIA investigation into whether Ferrari engines violated testing regulations.

The difference in interests among F1 teams is a well-known fact. Typically, in professional sports leagues, competition among participating teams is restricted to the field, with cooperation limited off the field. In other words, teams cannot collaborate on the competitive level; otherwise, it violates the fundamental spirit of competitive sports. However, from business aspects, cooperation is maximized to reduce competition between teams, ensuring each team has a monopoly and uniqueness within a certain region. Each team relinquishes a portion of its equity to the league, which is responsible for collectively developing these commercial rights, enhancing the negotiating advantage of the league as a whole when dealing with other business entities.

The founder FOM, Bernie Ecclestone, initially adopted a strategy of "divide and conquer" when it came to teams. To attract Ferrari's long-term participation in F1 Grand Prix races, Ecclestone established special bonuses for Ferrari, ensuring they received a bonus just for participating. The revenue-sharing system of FOM created a situation where the strong became stronger in terms of competition; Ferrari's substantial resource advantage resulted in income several times that of other smaller teams, and the absence of a cost cap allowed Ferrari the opportunity to invest several times more resources each season to seize more race prizes.

To ensure the sustainable development of F1 in both competition and business aspects, FOM introduced a spending limit similar to the salary cap in North American professional sports leagues, starting in 2021, known as the Cost Cap. For instance, leagues like the NBA and NFL set a cap on the total salary that each team can spend on players to ensure on-court/on-field competitive balance. FOM plans to limit the spending each team can make on race cars per season, without restricting areas such as driver salaries and marketing spending.

Naturally, this rule was welcomed by non-manufacturer teams and resisted by manufacturer teams, particularly Ferrari. Setting limitations on spending for manufacturer teams may restrict the role of F1 as an experimental lab for automotive technology development. The fact that F1 serves as a hub for top-tier racing technology worldwide could be threatened. If FOM manages to gather 10 manufacturer teams for competition and another 10 non-manufacturer teams, with the primary distinction being the spending limit or the production of engines, it may lead to other contradictions such as insufficient spending or the existence of a promotion/relegation mechanism. The variable of having a race car makes ensuring the competitive balance in motorsports much more challenging compared to other major professional sports leagues that primarily rely on athlete performance.