Are Mercedes and Ferrari ripping off their engine customers?

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Brought to you by TJ13 contributor – Fortis

In life often those with much, simply want more – and why? Mostly just because they can get it.

The recent meeting of Formula One’s strategy group before the British Grand Prix continued with the seemingly never ending discussion on cutting escalating costs which particularly affects the sport’s smaller teams. FIA president Jean Todt, has now said he wants to cap the cost of the current V6 Hybrid Turbo power units and along with FOM, is currently evaluating proposals to deliver this.

Currently a power unit/gearbox combo is estimated to cost in the region of $17-22m and Todt wants to cut this cost this to $12 million for power units and to cap transmission spend at $1.5 million for the start of the 2017 season.

Both Mercedes and Ferrari are said to be willing to negotiate how much they currently charge their customer teams for engines and gearboxes but have made it clear they will not accept an FIA guillotine on the issue.

Mercedes Benz currently supplies three teams along with its works outfit and potentially Ferrari will also have three customers in 2016 when Haas F1 eventually joins the grid.

Both of these manufacturers have invested heavily into the new V6 turbo and ERS technology and so expect a contribution from their customers towards the cost of the R&D along with ongoing manufacturing expenses.

Ferrari’s team principal insists that Maranello is not willing to start subsidising cost for its customers. “Let me know another product somewhere in the world where you have to sell something at a set cost?” asks Maurizo Arrivabene. “We are negotiating to make sure we will offer the engine at the best possible price, but we can’t give a present to anyone.”

Mercedes are believed to be open to negotiations but also are not prepared to tear up the existing business model designed to recover elements of the R&D paid for by Stuttgart.

Toto Wolff adds his thoughts on the matter. “Mr Todt wants to try to reduce the engine prices for the customers and the smaller teams because the engine prices are quite a large chunk of the overall budget.

We take it very seriously, we’ll look into things, but unfortunately the situation is that we have set up a business case with these engines and we have an investment on the line. We acknowledge it’s an important bit, so we are sharpening our pencils and looking at the situation and we promise to come back with an answer as to whether it is feasible or not.

“But it would massively impact the situation because in a large corporation you set up a business case, justify your investment and then you sign contracts. If that needs to be adjusted or changed because the environment is becoming more difficult it is a huge challenge for such an organisation like ours. You need to come up with a solution, have a plan and justify why we are changing things. That’s the tricky bit.”

Behind the scenes at Ferrari, Sergio Marchionne Ferrari’s chairman, is a master of corporate re-engineering and has previously found many a creative way to allocate out to the greater organisation – one off ‘exceptional’ costs – and could do the same with the F1 V6 engine R&D.

This practice will also be common in Dailmer Benz.

Even if the FIA and FOM can enforce the proposed financial caps on engine and transmission costs, the strategy group continues to ignore the elephant in the room and the most significant reason as to why many of the smaller teams are struggling to make ends meet.

When finishing third last year in the F1 constructors’ championship, Ferrari were awarded 1000% more than the team finishing tenth of the F1 revenue set aside for F1’s competitors. Ferrari receives almost $150m a year for just turning up on the grid race to race.

Jean Todt may believe he can do nothing about the commercial arrangements signed between FOM and the teams, but it appears he can’t even force the big players in F1 to stop ripping off their customers for significant contributions to their automotive R&D spend – which will eventually result in technologies developed being applied in their road car division.

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28 responses to “Are Mercedes and Ferrari ripping off their engine customers?

  1. to be fair to Merc/Ferrari – if it was there business plan to recoup the R&D money then this was in-built to their budget planning, business exists to do what again – give money away?
    The issue was with a cost limit not being clearly imposed when the rules were introduced. So again, Todt is attempting (really, is he really?) to bolt the stable door after the horse has bolted (pranced to the bank perhaps)? You can really see the attraction to manufacturers to come into this terminally unstable environment.

    I can’t find fault with Merc/Ferrari (serious businesses) – the fault lies with the back of a cigarette packet approach to rule making/problem ‘solving’ in F1.

    The lets blame those nasty constructors for Sauber/Lotus/FI failing to pay suppliers/selling multiple seats/building newish cars rather than new cars only is just smokescreen to cover the culpable parties and more importantly to cover that rather large lonely mammal who nobody seems to be willing to acknowledge, stamping his feet in frustration with a placard declaring “fair distribution of revenue between teams (only, no dividends)” grasped firmly in his trunk.

    100% agree on that point!!

    • I think the point is being made that these auto manufacturers appear to be attempting to recover most of the R&D from selling engines. Yet the benefits will also be to the road car divisions. So spread a little more of it out there.

      Honda by comparison are not charging macca for engines at all. Which was the arrangement before they knew of the problems they are now facing

      • but didn’t uncle Bernie tell us that 0% of the technology would be transferable to road car design 😀 😀

        • Uncle Bernie would be right. A motor in a Polo costs about 900£ to manufacture. If we consider 16milion per year for an F1 power unit, per PU we’re at 4M. There are heatshields more expensive than a complete Polo engine. It’s very unlikely

      • I think capping the cost of customer engines is a good idea. Why should any of the current F1 engine manufacturers receive anything more for the product than the cost of the engine manufacturing expenses (physical capital depreciation, labor time, and raw materials)? Doesn’t the engine manufacturer still receive benefits from additional marketing exposure with more teams using its engine? Why should the customer teams contribute to the already inflated R&D costs. Shouldn’t there be a mechanism to put brakes on the R&D costs, including in the engine department?

        • Too right. The if the teams who buy their engines from Ferrari and Mercedes are having a problem paying, they can always go elsewhere – can’t they. It’s not like they’re being forced to use their current engines.
          All this fuss could be easily solved if Bernie was forced to spread the money around and stop being so fucking greedy. Look at what he puts into F1 – sod all and then how much he takes out – most of it.
          It would be interesting to know how much of this cost cutting crap is being created by the Dwarf, deflecting the attention away from what he’s taking out of the pot. No surprise Mosley has suddenly appeared when Bernie is under pressure.

        • Not only is capping the costs of engines a bad idea, it’s exactly the opposite way that the FIA will need to go about solving this problem.

          The reason why these engines are too expensive is because the regulations required the engines to be too expensive.

          Battery hybrid technology is immature and expensive. The appropriate place for road car manufacturers to develop expensive new technologies is at LeMans and in sports cars. Formula car racing is oriented toward chassis and driver.

          The primary reasons for modern racing regulations is to reduce costs and maintain safety.

          The root cause of these too expensive engines is the current regulations required them. So best (and traditional motorsport) solution is new engine regulations which require petrol engines without all the highly priced battery / hybrid technology.

          Efficiency can still be built in to the regs by requiring modern petrol engine technology such as VVT, DFI, etc. The regs can be designed to ensure similar power as now. Efficiency can be built in with fuel flow regulations, and weight limits.

          Those are rough ideas, but the guiding principle in designing the regs is to cut the cost of engines roughly in half, while making it enticing enough for both road car manufacturers and traditional racing engine manufactures (Cosworth, Judd, Illmor, etc.) to want to jump in. The goal should be at least 4 engine manufacturers, plus at least 2 or more additional companies coming on board soon.

      • And? Is a company really going to come in to F1 if they can only charge the manufacturing cost? R&D in these cases will be massively more than manufacturing costs so asking the manufacturer to absorb that cost themselves is not really feasible.

        The fact most manufacturers have a ‘works’ team who get free engines means that it isn’t just the customers who pay for the whole engine development. As others have said, what little of the technology developed does transfer to road cars will not give an instant return anyway – it may be 5, 10, even 15 years before a car goes to market with these innovations incorporated.

        I’ve said this before and I hope the Judge won’t mind me repeating, but I feel engine costs should come directly from the TV money without it getting to the teams at all. Maybe a manufacturer who doesn’t have customers only gets $20m a season. When you have 2 or 3 customers you get $15m per customer. Any over that gets an extra $10m per customer.

        Prize money can be reduced to suit but at least teams and manufacturers would know where they stood and any money would go in to the car only. If an engine supplier wanted to blow that budget they are welcome to but they can’t charge their customers more as a result.

      • The title and the summation using the phrase “ripping them off” is pretty loaded though, especially when there’s no break-down of figures and the only evidence presented is that the two highest performing suppliers have said that they don’t want to agree to a cost cap at 50-60% of what they currently cost (try and find any sector where the market leaders will be happy to agree to significantly dropping the price of their product to a considerably lower and completely arbitrary figure).

        My point was that without any idea of how much of the price of a power unit is aimed at covering some of the R&D costs, how can you really make that initial claim? Part of the price you pay for any product like that which has involved significant (and on-going) R&D will always be used to cover costs of the development of the existing product and the on-going evolution of it – that’s nothing new. As a side note, if we bear in mind the sums that Fat Hippo spent most of 2014 banging on about that went towards Mercedes’ investment in their new power units, they can’t really be recouping much of that money back anyway once you factor in what I would imagine would be fairly large sums that go towards manufacturing the units themselves (judging from the long lead times for parts/gearboxes)…

        There may be some cross-over to their road car divisions, but again without knowing how much of that there’ll actually be compared to the amount of proprietary parts of the engine they’re having to develop and produce which will only ever be useful for F1 (and subsequent cost) it’s impossible to say.

        Sorry if this seems like an OTT response, but the title screams clickbait which isn’t really what I come to TJ13 for…

      • @thejudge13

        We have both seen their accounts. Do you think a few million discount for customers would make much difference? 😉 I think Mercedes work on the ‘profit centre’ principle.

  2. I think the $17-22m engine cost could easily be covered if the “turning up” fee’s were fairly shared out.

    I don’t know where I stand on this price cap idea, it’s a bit too late to be bringing it in now, but if they’re going to do it they need to do it soon, before the inevitable opening up of engine development.

  3. Alternatively, if FOM ring fence a budget for teams to spend on gearboxes and engines, as well as salaries for the minimal team required to operate a F1 team, they would all have a secure basis to operate from, and additionally, FOM would be secure in being able to offer a sport with competitors going forward.

  4. If the manufacturers aren’t subsidising the engines at all, then the teams should be allowed to sell naming rights, with no requirement for the manufacturer to be referred to at all. So rather than an “Aston Martin brought to you by Mercedes Benz” engine, it could just be an “Aston Martin engine” that happened to be bought from Mercedes Benz.

  5. When the new engines were brought in, it fundamentally changed what it cost to participate in the sport, yet the contracts sharing out participation money didn’t change a whit. I’ve put it forth that it amounts to the terms of the contract being changed on the teams, without them being given the opportunity to renegotiate from their side. Feel like there is room there for FIA and FOM if they care to use it.

    Also FOM have not done a great job building revenue for the teams to help with the cost. Along with the massively asymmetrical revenue distribution this is where the teams start being unable to turn up with proper equipment etc, as we have seen. Again a fairly solvable problem, except the teams who benefit most also seem to decide whether or things will change, which is the last piece of the puzzle.

  6. $22m (estimated) for four or five engines and cogs…

    Just say it.

    “$22m for four or five engines…”

    Anything?

    Yeah, yeah… I know. Bleeding edge tech, batteries, blah blah blah.

    Something’s gone wrong.

    Pinnacle of MotorSPORT! SPORT! Didn’t have to be pinnacle of MOTORING TECHNOLOGY. Leave that to WEC. F1 doesn’t have to be bleeding edge; if indeed it’s even that. It has to be the BEST and FASTEST and most ferocious RACING.

    One more time.

    “$22m for four or five engines…”

    Yeaaaaaaaaah, no. Sorry. No comprehendeee. Un momento, por favor… Den katalabeno, signomi…Whatevs, brah….

  7. OK let’s see, CVC has recouped their initial investment in the sport to the tune of 500% and we are complaining that Mercedes and Ferrari are the greedy bastards!?

  8. That F1 commentators consistently aver, without rebuking from supplier teams, that the power units they supply other teams have 25-30 less horsepower than their own PUs would be evidence of a rip-off. And until any of the PU suppliers say otherwise, the “game” is, essentially rigged in favor of the PU suppliers (this is also applies to Renault).

    • @dwil

      Given the programming that goes into these power units and that customers have access only to binaries (and NOT the source code), I suspect that manufacturers reserve certain optimizations only for themselves or for favoured customers.

      If the customer gets only the binary and has no idea what’s in the PU’s source code, if we talk extremes, there is nothing preventing them from distributing binaries containing compiled code along the lines of:
      if(hated_customer==TRUE){
      wait(0.005sec)
      give_power()
      }

      So yes, customers will be getting identical bits of hardware. But unless the FIA recognizes the potential scope of the issue and attempts to impose software limitations, to somehow ensure that all engines from a manufacturer run identical drivers for the hardware, we will never know and the current extravagant gaps between manufacturers and customers will never really close…

  9. To be more exact I should say, “meaningful rebuking.” We do hear supplier team representatives say they provide exactly the same PUs to their buyers. However, the statements are almost always made in the course of a conversation, rather than in response to a direct accusation.

  10. Can we take Renault’s absence from these discussions as an unsubtle hint that information regarding them leaving the sport in the near future is imminent?

    • Given the Renault performance, any price paid for one is a rip-off.
      Honda, on the other hand, seems to be struggling to give theirs away.

  11. If the R&D costs have been recovered and the technology trickles down to the road cars, does that mean lower prices for the road cars?
    Although there are additional costs associated with adapting the F1 technology to the street.
    Not that I plan to run out and buy a Ferrari or McLaren any time soon.

  12. Currently every supplier has a works team, so there is some merit to a price cap, but this would halt any thoughts of an independent supplier like Cosworth entering F1.

    Assuming that works teams are selling the ‘B-spec’ engines, and an independent would sell only ‘A-spec’ engines, maybe they could be allowed a slightly higher selling price. – Just musing

    • Who in their right mind would pay a “for profit” independent engine builder a premium price? After Ford/Jaguar left F1, the only reason teams were interested in the Cosworth engines was their low price.

  13. “Toto Wolff adds his thoughts on the matter. “Mr Todt wants to try to reduce the engine prices for the customers and the smaller teams because the engine prices are quite a large chunk of the overall budget.

    We take it very seriously, we’ll look into things, but unfortunately the situation is that we have set up a business case with these engines and we have an investment on the line. We acknowledge it’s an important bit, so we are sharpening our pencils and looking at the situation and we promise to come back with an answer as to whether it is feasible or not.

    “But it would massively impact the situation because in a large corporation you set up a business case, justify your investment and then you sign contracts. If that needs to be adjusted or changed because the environment is becoming more difficult it is a huge challenge for such an organisation like ours. You need to come up with a solution, have a plan and justify why we are changing things. That’s the tricky bit.””

    Toto frustrates me sometimes. Yes, the engines prices are quite a large chunk of the smaller teams overall budget. That has been known for a while now.

    There are ways to solve the situation for the manufacturers and for the teams. They both have to work towards the solution. If the manufacturers come up with a solution and there’s no give and take from the smaller teams, it won’t work.

    There are ways for the manufacturers to absorb and minimize the research and development costs of the Formula 1 power units so that the costs can be lower a bit. They can use the exceptional costs model for the big initial development costs part. They can also look at shifting some of the costs to other departments outside of research and development…look at the parts of the power unit that could used in other areas of society besides cars. Are there technical/computer/IT aspects of the Formula 1 power unit that could be used in Mercedes car safety projects or in the cars that drive themselves? Are there parts can can be used in wellness equipment to get people more freedom and time out of hospitals? I think so…it just has to be looked at and there are governmental monies available to help defray the costs. It would really show the people that Formula 1 is relevant to society when the connection can be made. The Formula 1 power unit bits can be bridged to society and it needs to be done because it can bring down the cost of the customer power units. Formula 1 needed to go with the V6 hybrid in order to be able to justify the Formula 1 spend to the corporate boards. It’s forward progress.

    The smaller teams need to look at there business models and actively seek strategically aligned business partners to help fund their costs. The smaller teams really aren’t doing this. They are rely on drivers and their financial backing instead of looking at companies from around the world that make the team and their drivers more visible while also providing services and technology that would assist the teams on and off the track.

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