One side of the #F1 cost reduction/cap debate

These ARE the views of Thejudge13

There’s nothing better after a hard session in court than reading a fat hippo rant. The gargantuan river horse has become a vital and much loved part of our community now we’ve tamed his tendencies to see all things through tinted energy drink glasses (most likely with a vodka or 2).

However, this time the giant amphibious beast has tried to bamboozle us with examples of complex inter-company accounting and economic structures which are not applicable to F1. In his second rant – which I have the privilege of reading prior to publication – we get more fabulous entertaining rhetoric and a convincing argument for Nihilism, though this has a number of positive suggestions with which I concur.

I will deal with rant 1 today and here is a summary of the points made.

1)      No one really knows how much Red Bull is spending – they claim to have 55 employees which of course is a nonsense, so how can you control their spend if you don’t really know what it is?

2)      Buffoons and fools like Toyota spent gazillions more than anyone else and won diddly squat, so the problem is not actually who spends what.

3)      Teams make stuff for other teams, so its far too complex to understand what cost/revenue is associated with what.

4)      Some teams are in countries where the government is not that bothered about collecting taxes (and are now broke) so their company accounting procedures are rubbish and/or too secretive

5)      The FIA are rubbish at everything they do, so they have no chance of doing add ups and take aways in a vain attempt to understand what the teams are spending. (on that we are agreed).

Before I delve into the appropriate ripostes to No.s 1-4, there is still something about this announcement that fascinates me. I alluded to the fact last night that the phrase – a ‘Global cap’ – is from way out in left field. If we are to believe Todt and his minions, the first step on cost control will be to define a maximum spend for F1 as a whole.

It could just be that le presidente has not for the past years been doing nothing, but with the finest financial minds on planet earth and plotting a finely honed plan to deal with F1’s impending bankruptcy which will see his name go down in history as the man who saved F1.

More of that later.

Let’s start with the premise, ‘a fool and his money are easily parted’. This may indeed be true, but it is no reason to justify a system of unregulated spending beyond your means, which in effect was the modus operandi of the global banks pre the recent crash.

So, we agree Toyota in F1 proved Japanese efficiency was not genetic…. though in mitigation of Toyota’s reckless spending, this may have been something to do with the bar bill of the person they appointed as the best paid F1 boss at the time.

Toyota does not disprove that 1 decently managed team spending 5,6,7,8 times another will destroy competitiveness… It goes without saying.

Secondly, of course no one knows how much Red Bull is spending, or Mercedes, or Ferrari.. why? Because nobody is asking the question. The inference that to monitor a teams spending, the FIA (or their accounting experts) should have to trundle through a web of international group companies accounts is ridiculous.

Even HMRC only asks British companies to make a declaration of earnings and tax payable. This question is not even being asked in F1.

The conclusion of this rebuttal and that of points 3 and 4 is simple. Regulate that all F1 teams produced a specified standardised list of all their income and expenditure – including inter company transfers – for inspection by specialised professional auditors.

In effect, an F1 team has to record its financial dealings as a single entity just as a baseball team does in North America.

Having started life as someone who did a number of group company accounting consolidations – some groups numbering up to 80 odd companies – I can tell you this can be done pretty easily.

Of course, the small eared, enormous mouthed one raises the spectre that teams lie, hide things away and may just be generally dishonest.

On that note we are again agreed. I have repeatedly stated this year that teams are not interested in complying the design regulations per se., however they are desperately keen to comply with the tests performed by Jo Baur and his 4-5 helpers at the FIA scrutineering division. The two are vastly different.

After interacting with F1 and its people for over 25 years, I had a fascinating experience in 2013. During a conversation with a relatively senior manager (a known name) in one of the teams, I began to divulge and opinion about a piece of technology I understood from a contact another team to be using.

The technology I believed to be outside the design regulations, but met the FIA scrutineering tests. If I’d been holding a hand grenade and about to pull the pin, this ‘director of….’ could not have run for the hills faster.

Who told you this”…”was it an employee of…”…”if so I can’t continue the conversation”…”if ever asked, you gave me this information unsolicited”….

Gobsmacked? You could have knocked me over with a swish of the Hippo’s rather whimpish and stumpy tail.

Yes and you guessed it, this person and just 3 others know who TJ13 is.

I learned from this encounter that the McLaren spygate saga and subsequent penalties awarded have put the fear of God into team bosses over receiving intellectual property from another team’s employees.

Simply put, teams respect the ability of the Jo Baur and FIA to ‘find them out’ if they are cheating. Though they can see the paucity of technology and resource at Jo’s disposal. If the standard of scrutineering was better, less cheating would occur.

Similarly, were the FIA to force the teams to declare in a standardised format their income and spend, and subject them to a bunch of forensic accountants with the threat of exclusion from a championship should they transgress – they will comply.

You can’t hide a $100m overspend, however complex the company structures.

So, in my Disney dream I petition… “Be bold Jean – gain our respect. Put a $150m cost cap on all teams and make them declare all their F1 income and expenditure”.

Worst case scenario, someone will try and get away with a few dollars more…..

34 responses to “One side of the #F1 cost reduction/cap debate

  1. Hahaha, I loved this piece, it has everything, even mistery, “(…) this person and just 3 others know who TJ13 is”, left me wondering if one day, 20 years from now, we will be finally revealed your identity.
    I can’t wait for the fat hippo’s lesson on nihilism, for which I’m a devoted follower -nihilism, not the hippo-.

    • i liked it a lot too, and nothing further to add to that right now. good stuff. I love the direct simplicity w/ which the judge make the point that if you establish a set of financial accounting rules that team s have to comply w/ per some spending/cost cap, they either comply and provide the info in the form requested, or they don’t – and if they don’t, the forensic accountants from external consultancy can really go to work!

    • I suspect the Judge’s ID will be revealed when he’s put out to pasture – i.e. ‘on gardening leave’… 😉

      Q: When Brawn has finished his ‘fishing leave’ will he then still have to do a spell in the garden as well…?

  2. Right Judge – here’s a few points of order.

    What is a ” inter company transfer ” ?

    By definition that would be between two or more companies owned by a common holding company.

    To use RBR as an example – I don’t know the exact status of RBR vs RBT – so please bear with me on this.

    If RBR and RBT are two completely separate individual companies that are not owned by a common holding company i.e. Red Bull itself – then one RBR is the customer, and the other RBT is the supplier.

    Therefore there would be no inter company transfer.

    Therefore RBR would only declare their expenditure ALONE – and not the expenditure of suppliers.

    How do you mandate what RBT charges RBR for it’s services ?

    Or what ANY supplier charges it’s customers ?

    Especially if this service is not exclusive to F1 ?

    What if Adrian Newey for example, just happened to be carrying out R&D solely on behalf of RBT at a cost of $10 million.

    Nothing specifically to do with F1 ( honest ) – but the results of this “research” happened to be applicable to RBR and would make their cars faster.

    So- RBT “sell” this to RBR for $1 million.

    RBT write off the other $ 9 million as R&D costs – coz remember this was nothing directly to do with F1, and they just happened to stumble upon something that just happened to be applicable to F1 i.e. RBR.

    So what figure goes in RBR’s balance sheet then ?

    $1 million or $10 million.

    I say RBR is a single entity, puts down $1 million as expenditure for this item, and has recorded its financial dealings correctly.

    And you or another team that has the facility, could do this sort of thing is many ways from an accounting point of view.

    And be under no illusion – the teams can afford much better accountants & lawyers than the FIA can.

    • friend, just b/c there are many ways to cheat for those so inclined, and just b/c the players have more resources than those commissioned to fight the cheaters, you do not abandon the fight before it’s even begun! what you’re describing IS analagous to doping in pro sport and the anti-doping agencies continue their work and they become more effective and efficient each year (more or less).

    • There would be no intercompany transfers on the set of accounts specified and requested by the FIA. The teams would have to provide a simple single set of numbers showing income and expenditure….

      If teams were discovered to be doing secret R&D – they get no constructors points for the year….

      As I alludedto above – which is harder to police – a whisper from a design engineer revealing secrets to another team – or a trail of money???

  3. So, a system that you can possibly game for small gains of insignificant amounts but at a high potential risk. All towards the purpose of bringing the sport’s spend delta into a narrow window of operation.

    I would be satisfied with this. Although, I can’t help but feeling that with the reduction of overall spend F1 may lose some of it’s luster. No longer will it be the pure do-whatever-it-takes-to-win championship.

    This takes my mind to a few different places, bare with me as this may be hastily put together. But one of the more interesting ideas I just had run through my mind is that of the sport’s overall speed with consideration of it’s safety. Because of the heavy regulations and the overall slowing down of the racing in F1, does this ratio of actual speed vs. potential maximum speed contribute to the safety increase in F1? Is there a way to mitigate this ratio while maintaining safety as a whole? And opening the regulations back up? As a fan of the technology used in F1, I would really like to see at least one season of open regulation. Just to see how clever the teams could really be when they only have to cater to god and mother earth.

    Instead of spending money on circumventing the rules, would it not be better to spend the money on true innovation of technology? (This may be half baked if safety goes completely out the window, but this is the pinnacle of Motorsport. And if I disassociate the notion of Motorsport Pinnacle from F1, and think of my ideal championship it would have to have more open regulations to allow the designers room to be brilliant rather than clever.)

    • The problem is that F1 isn’t and hasn’t been for decades the pinnacle of motorsports or even roadcars – technology wise.

      Your average family hatchback is far more advanced than an F1 car – FACT.

      • Pretty sure your average family hatchback doesn’t have pneumatic valve trains nor do they rev to 18,000 rpm. For that matter carbon ceramic brakes are a fairly recent introduction to the highest end production cars relative to their use in F1. Your assertion that family cars are more advanced than F1 cars sounds good, but is unsupported by reality.

      • The truth of F1 as the pinnacle is irrelevent. It is marketed as the pinnacle. Which must suggest that this is the aim for which F1 is striving.

        I am simply trying to match up my desire to see the pinnacle of innovation with the pinnacle of racing.

    • Here’s the thing. In order to achieve the brilliance that you seek, the first thing you have to remove is unlimited sums of money. As my moniker may indicate, I have some connection to the arts, as do many of my friends and family. One thing that has been patently true, is that shows with unlimited budgets almost always suck. Because they are never forced to make any choices w/r/t development and narrative. So everything stays and you have no cohesion. F1 has been stuck in a similar rut, because they can always spend another $10 or $20 million for another tenth. Once that stops being possible, they will be forced to actually innovate again. Just sayin’

      • Bringing the analogy back to F1, if any team lacks cohesion they are punished by poor results. For performance arts, there is no competition. There may be rivalry, but not direct competition in which you can measure yourself so absolutely.

        • Actually, on this side of the pond there rather is. Shows that do poorly close rapidly and with a loss to investors.

          My point being that real innovation will come when money is tighter and teams are forced to think outside their normal parameters in order to be competitive. With infinite money comes a certain lack of cleverness and for all that Newey has been brilliant, the other teams have failed to respond (you could argue 2012 McLaren, granted, had they not so thoroughly botched Lewis’ season). Partly because they can just throw money at problems instead of having to clearly think it through.

          IDK, kind of hard to put into writing what I’m trying to say here, but basically I think that the era of large budgets has dulled innovation quite a bit as competitors simply throw money at copying the shiny bits on the fast cars, rather than coming up with different solutions to the same problem. It hasn’t killed innovation, but I do think it has rather dulled it.

  4. applause

    yes it’s ridiculous how the first thing out of anyone’s mouth is “it’s too complicated”. nonsense. one of my best friends is a forensic accountant and F1 accounting would be cake compared to some of the massive multinational corporate shitstorms he is involved with.

    • .. Absolutely. As a 1st year grad chartered accountant I went on a big audit and was responsible to verify stock….

      Within 3 days I established it was overstated by 20% which of course increased profitability by $15m

      • All that proved was that you could count, and that whoever overstated the stock either made an estimate ( most likely when producing accounts ) or that they couldn’t count.

        You don’t need to be a 1st year grad chartered accountant to do a stock inventory.

        • Err. No. They wanted to post a bigger profit than was reality….

          Guess what, we were paid by the co. -as is normal in the Uk- and the managing partner on the case refused to change the stock figure… As per the clients wishes….

          • Err, Yes.

            The only thing I got wrong was the reason for the stock discrepancy in my original post.

    • @ AJ – sorry but I don’t understand your post.

      What exactly is ” too complicated ” ?

      There is no context to this statement …..

      • referring to the general comments in the f1 blogs about the news of global cap leading to per team spending caps.

  5. I think that if any team wants to lose 100’s of millions of £’s, then let them. We are treating these companies as being run by people who have no clue as to the consequence of their actions. If Lotus don’t make the grid in Aus this year, it will be because they chose to lose money and are paying the price. Football is going through a similar thing with Financial Fair Play which has just led to crazy sponsorship deals for teams so that they can spend more! My point here is that if the teams want to spend more, I’m sure they will find ways to do it.

    What I would rather see is a redistribution of the revenue, so that a back of the grid team can compete without the fear of going out of business. Split the 60-70% of the money up equally, the remaining 30-40% to be based on championship final position. I’m sure this, more than getting strict with how much can be spent, would encourage new teams and also create a more competetive championship. As things are, Marrussia may have some of the brightest minds in F1 that are being stifled by a lack of respective funds. Why are we fixated on governing something which sounds like a nightmare to do, when an easy fix is staring us in the face?

    • Simon, I didn’t have a chance to read your entire post but I agree that there MUST be more equitable distribution of MORE of the F1 income…to the teams and keep it out of CVC’s pockets and keep it in the sport.

      At the same time, costs or spending should be reduced or capped or whatever.

    • If you can kill Ferrari’s top slice of FOM revenue for distribution among the teams (2.5% of $750m) and shared 70% of the pot among the teams as a participation fee, this would deliver $47.7m

      The tenth team at present gets $35m (if they’ve been in the top 10 for 2 of the previous 3 years).

      I guess if you ask Marussia and Caterham though this makes a big difference.

      Under the current ‘prize’ system, the winning team gets 19 per cent and the other nine teams picking up 16, 13 11, 10, nine, seven, six, five and four per cent respectively.

      This delivers $45m down to $9m of the remaining 30% of the pot.

      Even were we to re jig this meaning the 11th team got say $5m bringing their share of cash up to just under $53m – add in some pay drivers and sponsorship – gets to around $75-80m

      This will not compete with the Ferrari budget some believe to be in excess of $400m and Red Bull’s won’t be far behind.

      Fairer distribution is great, but cost reduction is required for more equal competition.

      Or we have a de-regulated spend what you like series where Mercedes build massive engines that blow up frequently and cost billions and we end up with 2 teams left like in MotoGP

      • Yes, this is why I have been harping on the baseball model so much. If teams choose to spend above a certain level, then they are required to pay a percentage back into the sport (important point in F1 should be distributed primarily to teams in reverse budget order IMO) thereby maintaining parity at a minimum, and most likely bringing the back of the grid into much closer competition with the midfield. You could even make it progressive so the first x amount over is 10%, then 15% etc. That way, no one is being told they can’t spend the money, but if they choose to the teams with less budget will benefit as well as the sport.

        I do have a question for you, in baseball, the A’s were able to compete for the championship despite being massively underfunded compared to their rivals because they used new forms of data analysis to figure out what mattered most when it came to scoring runs and winning games. Do you know if any of the F1 teams currently do any analysis of this nature as to where to spend money on development and personnel? IF they don’t, I would think this is the sort of thing that could make a real difference for a midfield or backmarker team.

        • Matt, I don’t know if F1 teams are using a sabermetrics type process, since there aren’t so many personal performance statics for most of the personnel a team employees that they could really work w/ the same way that can be done w/ baseball players and their infinite stats. But I know absolutely just from what I’ve learned as a fan that teams do cost/benefit analysis w/ new parts development before committing the resources when possible, to efficiently distribute their effort.

          “this is why I have been harping on the baseball model so much” —

          I wonder if it would even be possible now that Concorde Agreement has been abandoned by the commercial rights holder (FOM) in favor of bilateral contracts w/ the teams individually and the FIA to implement the overspend_%_payback?

          If you’re not familiar w/ what I’m referencing, both the Judge and Dieter REncken (autosport+) have covered the radical shift in F1’s governance and how the teams have been disenfranchised, basically. Of course, the same questions could probably apply to this theoretical “global cost cap” FIA claim to introduce, so no reason not to discuss various ideas…

          You should contact Adam Parr via Twitter and pose your question to him. He’s reasonably accessible to the fans and may reply to interesting, pertinent questions. I wonder what his response would be to a proposal like what you explain from baseball. Are you on twitter? @Adam_s_parr is he. I’m @joepabike (iirc, hmmm 😉 Tell him i sent you! And use twitlonger if necessary. cheers!

      • “Fairer distribution is great, but cost reduction is required for more equal competition.”

        Sounds good to me. It’s a multi-pronged approach and it’s good to see that we’re converging upon this premise.

      • I agree with this.. the main thing is that Williams and Sauber in 2012 showed that you could be competitive and win a race for under $150m, with Sauber doing arguably better with just over $100m. They both have well developed infrastructure, but things like wind tunnels can now be shared between all teams (e.g. 6 wind tunnels, each team gets 50% time maximum).

        So in the long term, it could be argued for a cap in that region, making F1 self-sustainable as revenues top $1.5bn. But as long as there is an advertising gain to get from F1, outfits can invest each year for a mutual gain e.g. car manufacturers or Red Bull or get the rest from sponsors. Hence, they might disagree with having to pay others to even out the field, when their investment is mainly to promote themselves and show how good they are, as Red Bull have for the last 5 years I believe by outspending the other top teams by $100m, or are better at finding sponsors for their operation. Looking at how RB’s development rate is the best in the pack every year leads me to think this is credible. Red Bull also don’t have to pay for their engine development in house, but source it from Renault instead. If Ferrari really spend more than Red Bull and yet can’t beat them, as a total manufacturer, I think that would say more about Ferrari itself than Red Bull winning.

        So, first point is to make the smaller outfits more sustainable and thus the action more competitive. I would go further and say 80-20, with the 20 possibly going to whoever runs the show/to keep the FIA out of meddling too badly (that much should definitely keep them quiet!). So that’s $1.2bn to split rather than $750m. Perhaps if there are costs and actual marketing done by F1 it could fall to a billion, still an increase of over 25% from today.

        Even if just half is a participation fee and the other half to play for, that still guarantees each team almost $50m, with potentially another $50m for a championship win. Tweaks from the current day, but with more going to the other teams and the winners getting the same as today. So bottom teams can run more of their operation on prize money and less on rich owners/sponsors/pay drivers. Budget cap at $250m and we have a possible $150m addition a top team (e.g. Red Bull) could add in each year, and this could come down to $200m, $150m in time as cost saving areas are found and agreed upon.

        I heard it had been said that Red Bull’s operation pays for itself now that it is winning consecutive championships, but I can’t see how as the prize money for a WCC is only $100m, with Toro Rosso getting a lower midfield payout of like $50m. It’d be hard to ever have an operation fully pay for itself, unless cost savings were found across the sport (e.g. cheaper 3 second pit stop than 2.5 sec), but keeping Red Bull in check to other top teams ($250m) and lower teams more sustainable (nearing $100m) at least would be a good start to getting a 2 to 3 second spread across the whole field again.

        I’m pretty sure Matt that Marussia were pretty adept at working out how to get performance for each dollar spent. I remember they didn’t bother KERS at first, as they worked out that for that money they could get more performance elsewhere than via the easy bolt-on performance gain of KERS.

  6. A side point… I got confused reading the hippo’s rant in the News section of the News & Comment page – should it not have been in Comments, or as its own separate article…?
    Hear we have a (valid) comment presented as news, which the Judge debates in a separate article…
    Sorry, I just got confused there – for a while… I think I’m over it now… 😉

  7. The problem with a budgetcap is that it will not give a level playing field, if you use a windtunnel only for F1 then it is more expensive than when it is also used for other projects.

    A budgetcap does have one great advantage, it will be better to move the teams from the UK to eastern Europe, where you have more mechanics for your euros 😉

  8. $150m… how did you arrive at this figure?

    I like your thoughts on this subject. In addition, they were admireably expressed.

  9. Pingback: Daily #F1 News & Comment: Saturday January 4th 2013 | thejudge13·

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