Is gas-guzzling Formula One a better bet for carmakers than going electric?

In 2009, over a decade before plans for a football Super League shook up the sporting world, the Formula One elite were plotting a breakaway competition of their own.

Eight of the top racing teams, including those owned by Ferrari (IT:RACE) and Red Bull, were infuriated by what they saw as the autocratic leadership of Max Mosley, president of the sport’s governing body, who wanted them to agree to a £40m annual budget cap. Mosley must resign, the group threatened, or they would form their own league.

Mosley, who passed away last week, eventually stood down under the mounting pressure. But just before he died he got to see his own plan come to fruition. Under new leadership, F1 introduced a cap on team expenditure; effective as of this year’s season, the rules will prevent constructors from spending more than $145m (£102m) each on their cars.  

The development has spurred a flurry of investment into companies that for years were unable to compete with the huge research and development budgets commanded by F1 leaders Ferrari, Red Bull and Daimler-owned (DE:DAIX.N) Mercedes. From Aston Martin (AML) to McLaren, hundreds of millions in fresh cash is now being funneled into racing teams controlled by smaller carmakers.

Their owners may be betting that success on the track will revive demand for their consumer vehicles, which has been hit during the Covid-19 crisis and faces further challenges amid calls for the motor industry to ditch fuel. But is gas-guzzling F1 a better bet for their business than going electric?

Levelling the racing field

Mosley, son of the British Nazi Oswald Mosley, said he was drawn to motor racing because nobody gave “a darn” about his background. But while politics may not be a barrier to entry into the sport, money is.

Lewis Hamilton, currently the world champion, is an uncommon example of a driver not from a wealthy background — his father once had to work up to four jobs at a time to support his training. Hamilton has now won a joint-record seven F1 championships, mostly with Mercedes, helped in no small part by the hundreds of millions the team has ploughed into the series each year.

But the vast budgets of Mercedes and its closest rivals have severely limited the competitiveness of the sport and, for many, its entertainment value. The Mercedes team reported costs of £333m in 2019, some 54 per cent more than McLaren’s expenses of £217m, according to company accounts. The former has won every championship for the past seven years.

The $145m budget cap does exclude costs that do not relate to car performance, but should still help to level the playing field. A suite of investors are seizing on the opportunity.

The new Aston Martin team was launched this season following a 60-year hiatus, after billionaire Lawrence Stroll led a $500m takeover of the sportscar maker and rebranded his own Racing Point F1 constructor under its name. In December, investment firm MSP Sports Capital grabbed a 15 per cent stake in McLaren’s racing team, which alongside a cash injection of £185m will eventually rise to 33 per cent. A few months earlier, Dorilton Capital signed a £137m deal to acquire Williams, the legendary constructor that in recent years has slipped behind its peers.                                                             

The wave of investment being funnelled into F1 seems to buck the trend of the wider motor industry, which for the most part has been steadily bowing to pressure to clean up its act and focus its future on electric vehicles; many carmakers now see Elon Musk and Tesla (US:TSLA), not Hamilton and Mercedes, as their main competition. In October, Japanese business Honda (JP:7267), which supplies engines to the Red Bull team, said it would pull out of F1 to focus on building zero-emissions technology.

But as Aston Martin’s rivals jostle for pole position in the race to go electric, the iconic carmaker apparently sees F1 as the best opportunity to revive its struggling business. Under Stroll’s leadership it immediately paused further investment in electric vehicles, in the hope that success on the track will instead revive demand for its ailing sports car business.

“Our job is to make [the brand] younger, more dynamic, interesting ... culturally relevant for lots of people,” Jefferson Slack, Aston Martin F1’s commercial chief, recently told the Financial Times.

Winning the F1 championship itself also comes with significant financial incentives. Including prize money and sponsorship deals, the Mercedes team drew in £355m in revenues last year — equivalent to roughly a quarter of the Daimler group’s total income. 

But winning the race often depends on factors beyond the control of executive management. Aston Martin’s acquisition of champion driver Sebastian Vettel should help its chances — although eyebrows have been raised by the decision to hire Stroll’s son, Lance, as his teammate. With five races completed by the 10 teams in this year’s season, the pair currently sit in fifth place.

Meanwhile the McLaren team, whose parent company is planning a public listing, had been polling steadily higher each year before the budget cap was introduced, rising from ninth place in 2017 to third last year. Under the part-ownership of MSP, it is currently on track to win the bronze medal again in 2021.

“The cost cap now … makes for a compelling investment,” said Jeff Moorad, CEO of MSP, during a phone call on his way to watch McLaren compete in the Indy 500, a separate racing tournament in the US. But success will not be measured on how the team performs year to year, he said, as the buyout firm is taking “a long-term view” of the business.

Bonkers about F1?

Despite the controversy, the European football Super League would likely have been a shrewd business move by the sport’s largest teams, helping them to reach an even bigger audience across the US and Asia. In the end, of course, plans thwarted by the outrage of local fans on the continent.

As F1 looks to become a more global event, it should not have the same problem — the series already takes place across five different continents. US group Liberty Media (FWONA), which acquired F1 in 2016, has prioritised growing the tournament by expanding it beyond its strongholds in Europe and Asia, with plans to add a Miami Grand Prix next year.

While devastating F1’s finances last year, the coronavirus pandemic has also accelerated a digital revolution in racing, prompting the launch of a virtual tournament in which professional drivers faced off on the F1 video game. The series will probably try to continue capitalising on the rapid growth of esports in the coming years, as it looks to draw in the next generation of fans. 

“F1 has done a brilliant job of attracting younger viewers,” said Moorad. “I have got my own focus group of three sons aged 21 to 27, and they are bonkers about F1. They play the video game religiously.”

Continuing to attract young people like Moorad’s sons will likely be the key to success for Liberty Media, as well as for motor companies hoping to win new sponsors — and, as the next generation comes of age, customers for their cars.