SIBM B

Macro EconomicsAssignment

“Study on the impact of recession on the world of

Formula 1 Sports Globally & in India”

Aditya SetiaSection B

Roll No – 11113

24th February 2009Contents

Page No

1. Understanding Recession & Global Recession 3

2. Understanding the Sport of Formula 1 10

3. Formula 1 Revenue & Profits 14

4. Formula 1 Proposed Future 16

5. Impact of Recession on the World of Formula 1 Sports 18

1. “Can Formula One Outrace recession???” 18

2. Impact on F1 Sponsors 21

3. Why cut costs in Formula 1? 25

4. Formula One Recession Article featured in the Guardian, UK 28

5. The worst–case scenario…. 30

6. Formula 1 & Indian Perspective 33

7. Conclusion 35

8. Recession – An Optimistic View Point 36

9. Bibliography & Sources 38

2

Understanding Recession & Global Recession

“Recession is when a neighbour loses his job. Depression is when you lose yours”

-Ronald Reagan

In economics, the term recession generally describes the reduction of a country's

gross domestic product (GDP) for at least two quarters. The usual dictionary

definition is "a period of reduced economic activity", a business cycle contraction.

The United States-based National Bureau of Economic Research (NBER) defines

economic recession as: "a significant decline in [the] economic activity spread across

the country, lasting more than a few months, normally visible in real GDP growth,

real personal income, employment (non-farm payrolls), industrial production, and

wholesale-retail sales."

Causes of recessions

Currency crises

Energy crisis

War

Under consumption

Overproduction

Finance Crisis

Effects of recessions

Bankruptcies

Credit crunches

Deflation (or disinflation)

Foreclosures

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Unemployment

Global recession is a period of global economic slowdown. The International

Monetary Fund (IMF) takes many factors into account when defining a global

recession, but it states that global economic growth of 3 percent or less is

"equivalent to a global recession". By this measure, three periods since 1985 qualify:

1990-1993, 1998 and 2001-2002.

DEPRIVE a person of oxygen and he will turn blue, collapse and eventually die.

Deprive economies of credit and a similar process kicks in. As the financial crisis has

broadened and intensified, the global economy has begun to suffocate. That is why

the world’s central banks have been administering emergency measures, including

a round of co-ordinated interest-rate cuts on October 8th. With luck they will

prevent catastrophe. They are unlikely to avert a global recession. [The Economist]

According to the IMF’s World Economic Outlook, October 8, 2008, the world

economy is “entering a major downturn” in the face of “the most dangerous shock”

to rich-country financial markets since the 1930s. IMF expects global growth

(measured using purchasing-power parity), to come down to 3% in 2009, on the

verge of what it considers to be a global recession.

The World Bank said in December 2008 that the global economy will enter a

recession for the first time since 1982. International trade will decline from 2007

levels. The bank said it expects global GDP growth to decline to 0.9% in 2009 from

2.5% in 2008. Any global growth rate under 2.0% is tantamount to a recession

according to economist David H. Wang. Global trade is expected to decline 2.1% in

2009, the first decline since 1982, on reduced global demand and export credits.

Germany, Europe's largest economy, contracted by 0.5 percent in the third

quarter of 2008, putting it in recession for the first time in five years.

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Japan's GDP contracted at an annual rate of 0.4 percent from July to

September 2008, marking the second consecutive quarter of negative

growth. Japan's previous recession was in 2001, after the dot-com bubble

burst in the United States.

The Eurozone economy made up of the 15 countries that use the euro

contracted by 0.2% in the third quarter of 2008 following a 0.2% fall in GDP in

the second quarter.

In USA, GDP dropped 0.5% drop in the third quarter of 2008. A number of

economists surveyed by Wall Street Journal expect gross domestic product to

decline at an annualized rate of 3% in this year's fourth quarter and 1.5% in

the following quarter.

Despite the global economic forecast for 2009, the annual growth in greenhouse gas

emissions of 3% is only likely to slow modestly. It may even rise over the long term

because of the downturn's impact on global climate talks and the funding of

renewable energy projects.

Jan 2009: The IMF updated their forecast of global GDP growth in 2009 from over to

2% down to 0.5%.

This is one of the most tumultuous times on record in the global financial markets;

let us now look at some of the effects & measures of this global downturn in brief.

TRILLION-DOLLAR BAIL-OUTS

Huge amounts of money have been committed in financial support for banks.

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BILLION-DOLLAR STIMULUS PACKAGES

Governments are spending billions of dollars to kick-start economic growth.

Measures include tax cuts and building projects.

VICTIMS

The financial landscape has changed dramatically, with several giants of the business

world disappearing.

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UK BANK BAIL-OUT PACKAGE

The UK has spent £81bn to prop up Royal Bank of Scotland, HBOS and Lloyds TSB as

well as nationalised Northern Rock and parts of Bradford & Bingley.

The Treasury and the Bank of England have pledged hundreds of billions of pounds

of further support for the fragile banking system.

A £250bn credit guarantee scheme announced in October is being expanded to

encourage banks to lend more, with a commitment of up to £50bn.

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US BANK BAIL-OUT PACKAGE

There has been an array of measures to provide support to the battered US financial

system. A $700bn scheme approved last year, known as the Troubled Asset Relief

Programme, was used to help lenders like Citigroup and Bank of America as well as

the automobile industry. Major changes to the programme have been announced by

the new administration, including a partnership with the private sector to buy toxic

assets from banks.

ECONOMIES HIT

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World economic growth is expected to slow sharply, with the UK among the hardest

hit. Developing countries such as China and India should fare better.

LEGACY OF DEBT

As countries try to spend their way out of recession, debt levels are forecast to rise.

*Source – BBC World News

http://news.bbc.co.uk/2/hi/business

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Understanding the Sport of Formula 1

Formula One, abbreviated to F1, and currently officially referred as the FIA Formula

One World Championship is the highest class of auto racing sanctioned by the

Fédération Internationale de l'Automobile (FIA). The "formula" in the name refers to

a set of rules to which all participants and cars must comply. The F1 season consists

of a series of races, known as Grands Prix, held on purpose-built circuits, and to a

lesser extent, former public roads and closed city streets. The results of each race

are combined to determine two annual World Championships, one for the drivers

and one for the constructors, with both drivers and constructor teams required to be

holders of valid Super Licences, the highest class racing licence issued by the FIA.

Formula One cars race at high speeds, up to 360 km/h (220 mph) with the engine

revving up to 18,000 RPM. The cars are capable of pulling in excess of 5 G-forces in

some curves. The performance of the cars is highly dependent on electronics

(although Traction Control and driving aids are banned from 2007 onwards),

aerodynamics, suspension and on tyres; However the formula has seen many

evolutions and changes through the history of the sport making for distinctive looks

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and performance changes every time a modification to the specifications is

introduced.

Europe is Formula One's traditional centre, where all of the teams are based, and

where around half the races take place. However, the sport's scope has expanded

significantly in recent years and Grands Prix are held all over the world. Events in

Europe and the Americas have been dropped in favour of races in Asia and the

Middle East; Of the eighteen races in 2008, nine are outside Europe.

Formula One is a massive television event, with millions of people watching on TV

each race worldwide, the Formula One Group being the legal holder of the

commercial rights. As the world's most expensive sport, its economic effect is

significant, and its financial and political battles are widely covered. On average

about 55 million people all over the world watch Formula One races live. Its high

profile and popularity makes it an obvious merchandising environment, which leads

to very high investments from sponsors, translating into extremely high budgets for

the constructor teams; However, mostly since year 2000, due to the always

increasing expenditures, several teams, including works teams from car makers and

those teams with minimum support from the automotive industry or other F1 teams,

have gone bankrupt or been bought out by companies that want to easily establish a

racing team within the sport.

Formula One – Big Business

Beginning in the 1970s, Bernie Ecclestone rearranged the management of Formula

One's commercial rights; he is widely credited with transforming the sport into the

billion-dollar business it is today. When Ecclestone bought the Brabham team in

1971 he gained a seat on the Formula One Constructors' Association and in 1978

became its President. Previously the circuit owners controlled the income of the

teams and negotiated with each individually, however Ecclestone persuaded the

teams to "hunt as a pack" through FOCA. He offered Formula One to circuit owners

as a package which they could take or leave. In return for the package almost all are

required to surrender trackside advertising.

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The formation of the Fédération Internationale du Sport Automobile (FISA) in 1979

set off the FISA-FOCA war, during which FISA and its president Jean-Marie Balestre

clashed repeatedly with FOCA over television revenues and technical regulations.

The Guardian said of FOCA that Ecclestone and Max Mosley "used it to wage a

guerrilla war with a very long-term aim in view." FOCA threatened to set up a rival

series, boycotted a Grand Prix and FISA withdrew its sanction from races. The result

was the 1981 Concorde Agreement, which guaranteed technical stability, as teams

were to be given reasonable notice of new regulations.[16] Although FISA asserted

its right to the TV revenues, it handed the administration of those rights to FOCA.

Drivers from McLaren, Williams, Renault (formerly Benetton) and Ferrari, dubbed

the "Big Four", have won every World Championship from 1984 to the present day.

Due to the technological advances of the 1990s, the cost of competing in Formula

One rose dramatically. This increased financial burden, combined with four teams'

dominance (largely funded by big car manufacturers such as Mercedes-Benz), caused

the poorer independent teams to struggle not only to remain competitive, but to

stay in business. Financial troubles forced several teams to withdraw. Since 1990,

twenty-eight teams have pulled out of Formula One. This has prompted former

Jordan owner Eddie Jordan to say that the days of competitive privateers are over.

Michael Schumacher and Ferrari won an unprecedented five consecutive drivers’

championships and six consecutive constructors’ championships between 1999 and

2004. Schumacher set many new records, including those for Grand Prix wins (91),

wins in a season (13 of 18), and most drivers' championships (7). Schumacher's

championship streak ended on September 25, 2005 when Renault driver Fernando

Alonso became Formula One’s youngest champion at that time. In 2006, Renault and

Alonso won both titles again. Schumacher retired at the end of 2006 after sixteen

years in Formula One. Kimi Raikonen of Ferrari won in 2007 & in 2008 Lewis

Hamilton of McLaren became the youngest champion by grabbing the title in the last

race of the season.

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During this period the championship rules were frequently changed by the FIA with

the intention of improving the on-track action and cutting costs. Changes included

the qualifying format, the points scoring system, the technical regulations and rules

specifying how long engines and tyres must last. During 2006, Max Mosley outlined a

‘green’ future for Formula One, in which efficient use of energy would become an

important factor, this also lead to the end of the tyre war between Bridgestone &

Michelin, as Bridgestone became the sole tyre supplier to Formula One for the 2007

season.

Since 1983, Formula One had been dominated by specialist race teams like Williams,

McLaren and Benetton, using engines supplied by large car manufacturers like

Mercedes-Benz, Honda, Renault and Ford. By 2006, the manufacturer teams–

Renault, BMW, Toyota, Honda and Ferrari–dominated the championship, taking five

of the first six places in the constructors' championship. The sole exception was

McLaren, which is part-owned by Mercedes Benz. Through the Grand Prix

Manufacturers Association (GPMA) they negotiated a larger share of Formula One’s

commercial profit and a greater say in the running of the sport.

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Formula 1 Revenue & Profits

Formula 1 is a profitable exercise for most parties involved. The TV channels make

profits from broadcasting the races. The teams get a slice of the money raised from

the sale of broadcasting rights as well as from the sponsor's logos on their cars.

The cost of building a brand new permanent circuit like in Shanghai can be up to

hundreds of millions of dollars, but the cost of converting a public road such as

Albert Park into a temporary circuit is much less. However permanent circuits can

generate revenue all year round from leasing the track for private races and also

other races such as MotoGP. The Shanghai circuit cost over $300 million. The owners

are hoping to break-even by 2014. The Istanbul Park circuit cost $150 million to

build. Not all circuits make profits–for example, Albert Park made a loss of $32

million in 2007.

In March 2007, F1 Racing published its annual estimates of spending by Formula One

teams. The total spending of all eleven teams in 2006 was estimated at $2.9 billion.

This was broken down as follows; Toyota $418.5 million, Ferrari $406.5 m, McLaren

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$402 m, Honda $380.5 m, BMW Sauber $355 m, Renault $324 m, Red Bull $252 m,

Williams $195.5 m, Midland F1/Spyker-MF1 $120 m, Toro Rosso $75 m, and Super

Aguri $57 million.

Costs vary greatly from team to team; in 2006 teams such as Honda, Toyota,

McLaren-Mercedes and Ferrari are estimated to have spent approximately $200

million on engines, Renault spent approximately $125 million and Cosworth's 2006

V8 was developed for $15 million. In contrast to the 2006 season on which these

figures are based, the 2007 sporting regulations ban all performance related engine

development.

Formula One can be seen live or tape delayed in almost every country and territory

around the world and attracts one of the largest global television audiences. The

2006 Brazilian Grand Prix attracted an average live global TV audience of eighty-

three million viewers, with a total of 154 million viewers tuning in to watch at least

some part of the event. Official figures from FOM for 2006 that state Formula One

television broadcasts were witnessed by 580 million unique viewers during the 2005

season and average viewing figures for 1995–1999 were 50 billion. It is a massive

television event; the cumulative television audience was calculated to be 54 billion

for 2001 season, broadcast to two hundred countries.

In 2005, the Canadian Grand Prix in Montréal was the most watched of the races,

and the third most watched sporting event in the world.

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Formula 1 Proposed Future

Formula One went through a difficult period in the early 2000s. Viewing figures

dropped, and fans expressed their loss of interest due to the dominance of Michael

Schumacher and Scuderia Ferrari. Viewing figures are seeing some signs of recovery

due to the varied seasons since 2005. Ferrari's and Schumacher's 5 year domination

ended in 2005 as Renault became the top team in Formula One, with Fernando

Alonso becoming the new (and youngest ever at the time) World Champion. There

has since been a resurgence of interest in the sport, especially in Alonso's home

country of Spain, and Lewis Hamilton's home country of Great Britain. In 2006,

twenty-two teams applied for the final twelfth team spot available for the 2008

season. The spot was eventually awarded to former B.A.R. and Benetton team

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principal David Richards' Prodrive organization, but the team pulled out of the 2008

season in November 2007.

The FIA is responsible for making rules to combat the spiralling costs of Formula One

racing (which affects the smaller teams the most) and for ensuring the sport remains

as safe as possible, especially in the wake of the deaths of Ayrton Senna and Roland

Ratzenberger in 1994. To this end the FIA have instituted a number of rule changes,

including new tyre restrictions, multi-race engines and reductions on downforce.

Safety and cost have traditionally been paramount in all rule-change discussions.

More recently the FIA has added efficiency to its priorities. Currently the FIA and

manufacturers are discussing adding bio-fuel engines and regenerative braking for

the 2011 season. FIA President Max Mosley believes F1 must focus on efficiency to

stay technologically relevant in the automotive industry as well as keep the public

excited about F1 technology.

In the interest of making the sport truer to its role as a World Championship, FOM

president Bernie Ecclestone has initiated and organised a number of Grands Prix in

new countries and continues to discuss new future races. The sport's rapid

expansion into new areas of the globe also leaves some question as to which races

will be cut.

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Countries marked in green are those which host a grand prix in 2008. Those in red

have hosted a Formula One grand prix, according to the list of List of Formula One

circuits, while countries which are going to host F1 in near future are shaded yellow

(India and South Korea). Black dots show locations where races have taken place

and/or are going to take place. Note that for some areas where there were several

tracks in close locations such as Portugal and Austria, one dot may count for more

than one track. Countries shaded in gray indicate countries that have not hosted a

Formula One grand prix.

Impact of Recession on the World of Formula 1 Sports

“Can Formula One Outrace recession???”

As seen earlier the global recession or global downturn has effected & laid its mark

on all industries across the globe, from Manufacturing, FMCG, Travel & Tourism, IT,

Media to Services. The world of sports is slowly if not already been impacted by

recession too. Cricket both International & formats such as the Indian Cricket League

(IPL), Football (English Premier League) & other sporting arenas have been facing

lack of sponsorships, low viewership’s & even exit of some smaller teams in leagues.

Formula One being known to be the most expensive sport in the world is

undoubtedly going take a beating due to recession. The true impact of the global

recession on Formula 1 became clear prior to the commencement of the 2009

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season itself (F1 Season begins in March 09 & last till October 09) where Team

Honda, one of the older & larger players suddenly axed its F1 team & many sponsors

bailed out from the upcoming season.

It’s not clear how deep and how prolonged the recession will be, but we can get an

idea how it will affect F1 by looking back on what the 1989-1992 recession did to the

sport.

The Daily Telegraph offered this interesting comparison of the emerging global

recession of today with the last major financial downturn:

“The last recession, between 1989 and 1992, had a five-year impact on the car

industry,” says Professor Garel Rhys of Cardiff Business School. This year, around 2.2

million will have been sold in Britain, but Prof Rhys believes that will be 1.75 million

next year, and as low as 1.6 million in 2010. “I’m not being alarmist about this,” he

says. “I’m merely tracking the last recession – and this one’s worse.”

Recessions force companies like car manufacturers to make sudden, deep cuts in

expenditure, which is exactly what Honda did to its F1 team last week.

So what happened to car manufacturer involvement in F1 during and after the last

recession? Here’s a summary:

1989 – In: Renault (engines), Lamborghini (engines)

1991 – In: Porsche (engines; Out: Porsche (engines)

1992 – Out: Honda (engines)

1993 – Out: Lamborghini (engines)

1994 – In: Mercedes (engines), Peugeot (engines)

1997 – Out: Renault (engines)

2000 – In: Honda (engines), BMW (engines), Jaguar (team); Out: Peugeot (engines)

2002 – In: Renault (team), Toyota (team)

2004 – Out: Jaguar (team)

2006 – In: Honda (team), BMW (team)

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2008 – Out: Honda (team)

There are two patterns here: first, car manufacturers have largely switched from just

being engine suppliers to running entire operations.

Second, car manufacturers join F1 during general economic stability and prosperity,

and leave when financial conditions worsen. Granted, some have left because they

just can’t cut it at the top level: Peugeot in 2000 was an example.

And that’s what makes figuring out the Honda withdrawal difficult: did they go

because they were struggling, or because of costs? I’m leaning towards the second

explanation, but the coming months will show us whether Honda was just the first in

a series of manufacturer withdrawals.

*Source - The Daily Telegraph

Impact on F1 Sponsors

Looking at the above analysis shared by the Daily Telegraph let us now analyse the

current situation in 2009 & see how each team is coping with the global downturn.

F1 sponsors give $300m to F1 teams each year - but more and more of those

companies are reporting huge profit falls and staff cut backs. Some are even falling

back on their national governments for financial support.

Could we soon see a major reduction in F1 sponsorship? Here’s a look at how some

of the biggest names in F1 sponsorship are faring in the growing global recession.

Ferrari

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AMD - Electronics

AMD began to experience problems before the economic downturn, beginning with

its $5.4bn purchase of ATI. It has posted a loss for eight consecutive quarters and cut

staff, but in October announced $8.4bn of investment from Abu Dhabi.

Etihad Airways - Airlines

The very high oil prices earlier this year put huge pressure on airlines, forcing 30 to

close this year. Those prices have now fallen but reduced demands for passenger

seats and cargo continues to squeeze airlines. However the emerging Asian airlines

like Etihad are in the strongest position and in July the company made one of the

largest aircraft purchases ever, worth $20bn.

McLaren

Santander - Financial services

Reported a 4.7% increase in profit in the third quarter of 2008. Writing in the

comments last month, Shostak explained why Santander are weathering the global

financial crisis better than their rivals: Emilio Botín, as he says, only buys a bank

which he knows very well. This is his policy. Spanish banks only give credit to people

with solid guarantees. European banks have gone bankrupt while not a single

Spanish bank is in that situation.

The bigger concern for Mclaren about Santander was that they might take their

sponsorship to Ferrari along with ex-McLaren drivers Fernando Alonso. But with

Alonso now committed to Renault, who is already backed by another financial

institution ING, which now seems less of a threat.

BMW

Intel - Electronics

Intel’s stock price has fallen by half since December. But it still dominates the global

market for computer chips and CEO Paul Otellini has said that although sales will be

down in 2009 he believes Intel has cut costs sufficiently to be able to bear them.

Dell - Electronics

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The Texan computer giant has stopped hiring staff in the USA and asked employees

to take a week’s unpaid leave. Techcrunch estimates Dell has shed 8,900 jobs so far.

Credit Suisse - Financial services

Credit Suisse lost significant amounts on the loans it held and reported a third-

quarter loss of $1.1bn on Thursday.

Renault

ING Group - Financial services

ING’s sponsorship of Renault is due to end after 2009. However the Dutch bank has

received €10bn ($12.73bn) in support from the Netherlands government, which may

lead to questions about whether it is appropriate to continue its sponsorship of F1,

which extends beyond Renault to include the title sponsorship of several Grands

Prix.

In light of the recently announced cost reduction programme, ING confirmed not to

renew the three-year sponsorship contract with Renault F1 and to end its presence

in F1 beyond the 2009 season.

ING are the largest sponsor on Renault's books and, according to some estimates,

ranked with global mobile phone company Vodafone (backers of McLaren) as the

second biggest-spenders in the sport after Marlboro, who support Ferrari.

A Formula Money report estimated that ING paid some $86 million into the sport

last year, with $65 million going to Renault. It said that sum represented more than

half of the team's total sponsorship revenues.

ING's departure is also likely to have a negative effect upon the sport's overall

revenues. As well as backing Renault, who have double world champion Fernando

Alonso as their No1 driver, the group has been heavily involved in trackside

advertising.

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They are the official sponsors of the season-opening Australian Grand Prix in

Melbourne on March 29, as well as the races in Belgium, Hungary and Turkey. In

addition, the financial group had on-track branding at 13 of last season's 18 races.

Toyota

Panasonic - Electronic goods

Despite quarterly profits falling 19%, Panasonic still claims it will achieves 8% profit

growth for the entire financial year. It is taking over Sanyo in a deal worth a reputed

$8.8bn.

Hamleys, Mydiamonds, All Saints, - Toys, jewellery, and fashion

These three companies are owned by Icelandic company Baugur. Iceland’s economy

has been hit especially hard by the recession, with its government taking control of

three three largest banks. Bauagur has weathered the storm for the time being, but

still has £1bn of debt.

Royal Bank of Scotland - Financial services

RBS, like ING, has received aid from its national government, and its sports

sponsorship may now be seen as inappropriate given its support from the British

taxpayer.

Lenovo - Electronics

Lenovo, the world’s fourth largest computer manufacturer, yesterday announced its

earnings had fallen by 78% in the second quarter of the year. Its share price fall by

20% on the news, and it is cutting its global workforce of 23,200.

Air Asia - Airline

As with Etihad, Air Asia competes in a market under great pressure, but Asia is the

stronger area of that market at present.

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Allianz - Financial services

Yesterday Allianz posted a net loss of €2.02 billion ($2.56 billion) for the third quarter

of the year. Much of this was losses incurred by Dresdner Bank, which Allianz then

sold, amounting to €2.6bn in losses.

Force India F1 Team

Kingfisher - Airline

Facing similar circumstances to Etihad and Air Asia, but the difference here is that

Kingfisher is owned by Force India boss Vijay Mallya.

Samsung - Conglomerate

Samsung’s investments extend beyond the realm of electronics for which they are

well-known. Although that side of the business has recently given up its attempt to

expand by taking over SanDisk, other areas are still very strong. Its shipbuilding

business recently posted its largest ever profit.

Red Bull and Toro Rosso

These teams have few prominent sponsors. Red Bull and Toro Rosso are used to

promote Red Bull soft drinks. While many F1 stakeholders struggle amid the global

financial crisis, it seems the energy drinks company Red Bull remains in good

financial health.

The Austrian company, owner of two Formula 1 teams, revealed this week it sold

more cans of the drink in 2008 than ever before and is planning to expand into more

new markets this year.

Sales growth, however, slowed from nearly 17% the year before to just under 8% in

2008, and Dietrich Mateschitz told Austria’s Salzburger Nachrichten that revenue will

further slow to just 3-5% in 2009.

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The comparative health of the company, however, means there is “no pressure” on

Red Bull to fast-track the sale of its junior team Toro Rosso, Mateschitz insisted, and

he also welcomed the latest moves to cut costs within the sport.

“For both teams we can save 100 million euros,” Mateschitz told the newspaper.

Honda

For the past two years Honda has used its livery to promote its environmental

awareness message. The downturn has hit Honda bad & they have made an exit

from the sport. There are talks of potential buyers such as Richard Branson of Virgin,

but nothing has been confirmed at the moment, with less than a month for the

season to commence.

Who else will follow in Hondas footsteps??

Why cut costs in Formula 1?

Is it to give the smaller teams a chance? To make sure it isn’t the team with the

biggest wallet that always wins? Or is it to stop the car manufacturers from leaving

the sport?

F1 is faced with complaints that it is a frivolous, environmentally-unfriendly waste, as

the global economy teeters on the edge of a recession.

Cost cutting used to be about allowing the smaller teams to compete. But now the

justification is different. Now it’s about reducing the financial burden on the major

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manufacturers that comprise the majority of the F1 grid and supply engines to all the

teams. This could be a sign of a subtle and potentially very damaging change in

attitudes to Formula 1.

Car manufacturers were attracted to Formula 1 on the first place because it was

desirable – glamorous, popular, a technological tour de force.

Now the sports’ governing body is trying to help them justify their place in the sport

by making it defensible – not too expensive and not too damaging for the

environment.

Recently the FIA and the manufacturers sat down and brokered compromises on

various radical changes to the future of Formula 1.

Budget capping was mooted as one solution to escalating costs. Experts have always

been very cynical about this simplistic idea because they can’t imagine how it could

be enforced.

The proposed restriction on engine development has also been agreed, though

reduced from 10 years to five so that more environmentally-friendly power plants

can be introduced in 2013.

All of this is many years too late to spare the like of Arrows, Prost and Minardi from

going to the wall. It can only be out of concern that the car manufacturers might

leave that these new rules have been brought in.

Concerns are growing about the state of the global economy. The United States

Congress slashed taxes by $145bn last week in a bid to stimulate growth but on

Monday the value of the FTSE 100 index fell by 5.5% ($163bn).

FIA President Max Mosley has claimed that because he deals with the top directors

of the car makers, rather than their racing divisions, he is better placed to judge if

and when they might want to leave the sport.

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But should there be a recession I’m not sure that car manufacturers will stay in

Formula 1 because it’s costing them $150m instead of $300m.

This would not be so alarming if the teams had customer chassis and customer

engine supplies to fall back on. But the FIA fumbled its attempt to legalise customer

chassis in Formula 1. The Prodrive team, which might have been a model of how to

run a competitive outfit on a fraction of a typical F1 budget, now may never see the

light of day.

Customer engines are gone too. At the end of 2006 Cosworth, F1’s last independent

engine builder, left the sport. Not because their engine was un-competitive, but

because Williams, the only team using the V8 unit, needed the support of a

manufacturer.

This may prove a serious problem if the car manufacturers start leaving the sport in

large numbers.

Formula One Recession

Article featured in The Guardian, UK

Owning a F1 team is an expensive hobby. Last year, Honda burnt through almost

£150m and has little sponsorship revenue to speak of. The global slowdown means

there are few buyers willing to bankroll the sport. All around the world car

manufacturers, which have traditionally justified their participation as good

marketing, are teetering on the edge. Even wealthy playboys, once happy to shell

out to indulge their love of the fast lane, are now cutting back.

Tim Urquhart, analyst at IHS Global Insight and former editor of The Paddock

magazine, said: 'There is no business rationale for owning a F1 team. Now that times

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are tough for the major car manufacturers it's much harder for them to justify

spending vast amounts of money on F1.'

The talk now is which team may be next to pull out of F1. Urquhart said the most

likely was Renault. Its sponsorship deal with ING is thought to expire at the end of

next season and, given the credit crunch, it's unlikely the Dutch bank will renew it.

Carlos Ghosn, chief executive of the French car maker, has already promised to keep

Renault's involvement under review. The betting is that come next year he will hit

the brakes, which could put the team's 500 workers at its base in Oxfordshire out of

jobs.

But the crisis threatening the future of F1 racing affects more than a few petrolheads

and the 3,500 people directly employed by the industry. F1 is big business. By

historical accident, Britain is at the centre of the global sport. After the Second World

War Britain's disused airfields, redundant factories and underemployed engineers

combined to create what has become F1 today. Most of the teams currently racing

are based in the UK, along with their R&D operations. A whole network of industries,

such as component suppliers, engineering and design firms, have sprung up in

Britain, mostly in central England, to serve the sport both here and abroad.

F1 also helps to support a far larger motorsport industry in the UK, for example rally

car racing and all its associated industries. Estimates of the total number of jobs

dependent on motorsport in the UK vary between 45,000 and 110,000. Geoff

Goddard, professor in Motorsport Engineering Design at Oxford Brookes University,

estimates that it accounts for 1 per cent of GDP, not insignificant when compared to

car manufacturers, which represent about 5 per cent.

Goddard says: 'Motorsports is one of the few industries which only Britain exports.

It's an engineering success story - we're selling our expertise all around the world.

'F1 sits on top of this pyramid. And when F1 starts to stumble, everyone else below it

starts to get nervous.

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Car manufacturers not involved in F1 are also starting to cut back on their

motorsport spending. Audi, owned by Volkswagen, last week announced it was

pulling out of next year's American Le Mans 24-hour race, which means less business

for component suppliers in the UK. Chris Aylett, chief executive of the Motorsport

Industry Association, says that interest from sponsors is also waning: 'Sponsors are

few and far between in motor racing at the moment.'

Goddard, who used to be chief designer for the venerable British motorsport

engineering company Cosworth, says Honda's withdrawal from F1 is a serious blow

to the UK industry. 'Up to now, motorsport has been hanging in there. But when you

take a big chunk of spending away like this, many firms and suppliers will feel the

draught.'

The global appeal of F1 - and the emergence of Asian and Middle Eastern investors

prepared to bankroll it - had already set in motion a shift of the business away from

the UK. Developing nations like Malaysia, for example, now seem prepared to spend

more on F1 than UK-based teams are.

'This means the industry will gradually relocate to where the most investment is,'

says Goddard. 'Once you start to lose the capability and critical mass, it's hard to

bring it back.'

The worst–case scenario….

“Call it the credit crunch, call it the sub-prime crisis, whatever you call it, I call it

trouble.”

It’s hard to pinpoint exactly what the consequences of the developing global

economic downturn will be for Formula 1. But it’s hard to imagine them being good.

And to the pessimists it could look very bad indeed.

The car manufacturers

In 1989 the only manufacturer-run team in the sport was Ferrari. Renault and Honda

were both present as engine suppliers.

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Today the car manufacturers account for six of the ten teams and supply all the

engines & much of that transformation has happened since the turn of the

millennium. Consider when the each of the various manufacturer teams arrived in F1

in their current guises:

Ferrari 1950

Mercedes* 1995

Toyota 2002

Renault 2002

BMW 2006

Honda 2006

*As engine supplier to McLaren

The popularity of Formula 1 among the world’s car makers is undoubtedly part of

the sport’s attraction. But however vast their budgets are, they are subject to the

same financial forces as the rest of us.

The impact of the financial down turn on the car manufacturers is starting to become

clear. Toyota, which has been gradually edging ahead of General Motors to become

the world’s largest car manufacturer, revealed its profits in the first three months of

the year were 28% down - substantially below expectations.

Only last winter rumours were heard that Toyota would can its F1 project if solid

results didn’t materialise. All the manufacturers are in F1 to succeed - and they can’t

all win the world championship.

In the form of Max Mosley’s well-documented indiscretions, “they all have the

perfect excuse to leave”.

Withdrawal

Whatever slick and glossy marketing spin they use to market their involvement in

Formula 1, let’s be clear about one thing: for them F1 only has value as a marketing

exercise. Williams Grand Prix Engineering Limited are not using F1 to sell cars,

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they’re only in it purely to win it. Apart from Ferrari, who’ve been there since the

start, you can’t say the same of the other manufacturers.

If F1 ceases to make sense financially, the manufacturers will simply up and leave.

Renault did it in 1985 as a constructor and again in 1997 as an engine supplier. BMW

did it in 1987 as an engine builder as did Honda in 1992. Others have left the sport

and not returned, such as Ford and Peugeot, who currently feel other forms of

motor sport (rallying and sports car racing respectively) fit their marketing needs

better.

One might argue “yes, but most of them returned, which proves the enduring appeal

of Formula 1.” That may well be the case – but if several of them were to abandon

F1 at short notice, where will all the cars come from in the meantime?

On leaving the manufacturers couldn’t sell their old chassis to GP2 teams to run in

F1, because that’s not allowed & besides which they may not wish to leave their

intellectual property lying around for others to grab - when Opel left the DTM in

2005 it refused to let anyone use its old cars for exactly that reason.

In the 1990s F1 had independent constructors and engine builders to fall back on.

Today they are increasingly marginalised in Formula 1 - no independent constructor

has won an F1 race in four years.

Chain reaction

One manufacturer leaving could prompt others to do the same. If Honda left would

their fierce Japanese rivals Toyota stay long? What about BMW without rival

premium car builder Mercedes?

The loss of Super Aguri has left F1 with just 10 teams and 20 cars. This is believed to

be the minimum number of entrants Ecclestone is required to bring to Grands Prix. If

it fell below that, he may require two teams to each bring a third car.

If that responsibility fell to regular points-scorers like Ferrari and McLaren the likes of

Renault and Toyota could face the prospect of not scoring any points for the rest of

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the season while their rivals lock-out entire podiums. How well would that go down

in their board meetings?

Recovery

A recovery in the markets would not necessarily improve the situation in Formula 1

overnight.

As Ron Dennis has pointed out, because the most valuable F1 contracts tend to be

long-term deals, sponsors and the like may be forced to remain in F1 as the

economic going gets tough, and already be long gone as the wider economy begins

to recover. [Source F1 World]

The engine freeze regulations might add another unwelcome complication for

manufacturers returning to the series or new ones joining. Engine development is

presently banned for F1 teams. But if a new team were to join they could spend as

long as they liked covertly developing a 2.4-litre 19,000 rpm V8 and hand themselves

a whopping advantage when they do join in. Which would not go down well with

their rivals…

Admittedly this is a deliberately pessimistic outlook on the future. But I do think the

sport is vulnerable as the economic forecasts continue to worsen.

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Formula 1 & Indian Perspective

Formula One as a sport in terms of viewership’s has been in existence in India for

over the last 2 decades. In the recent times with the increase in globalization the

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sport has seen a great increase in the number of viewers, fans & fanatics that follow

the sport closely.

Narain Kartikeyan became the first Indian to drive a Formula 1 car & was inducted

into the Williams BMW Team. This led to big Indian Sponsors such as TATA, investing

into the sport. It also led to more exposure of the sport in the India & built a larger

base.

TATA has been associated with the sport for some time now as TCS is the IT partner

to Ferrari.

In the last 2 years we have seen a humongous jump in the following of the sport with

Vijay Mallya of UB Group & Kingfisher Airlines buying & owning a Formula 1 team,

Force India. This led to a mad rush of sponsors from the sub continent, such as ICICI

& a proud moment to see the Indian flag on a global platform.

The bosses at FIA, have taken a note to the potential India holds for Formula 1, in

terms of viewership, sponsors, branding & now even opening a track & hosting a

Formula One Race in India by 2011.

The recession has not impacted the sport in India a great deal. The viewership’s were

niche, though growing will continue to grow as people get more exposed to the

sport.

Force India Continues to splurge - In the time of recession one would hope that

teams cut down on unnecessary expenses and would focus on the game and also on

satisfying the millions of fans due to which they are still in business. But who can

predict Force India’s actions, they have roped in yet another actor (politically correct

term for actress) to promote their f1 outfit. Deepika Padhukone is set to be the new

face of Force India F1. While their brand ambassadors keep getting smarter and

more expensive every year, how much their performance has improved over the off

season remains to be seen.

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On the charts the Formula One Track in New Delhi which was projected to host a

race in 2011 seems to have taken a back seat during the down turn. The track

requires great amount of investments, one needs to build a state of the art track

along with supporting infrastructure such as pits, technical paddocks etc. A hosting

race country requires to match various requirements such as airport facilities to

bring in all the equipment, provide residential facilities, Hotels for the teams & fans.

Recession has certainly impacted this project as investments are drying up, but

looking at the brighter picture, Europe the hum of F1 has taken a greater beating &

hence hosting a F1 race in Asian countries such as India holds more potential. One

will certainly see F1 & India in closer relations in the near future…Recession or no

Recession…….

Conclusion

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The world of Formula 1 at the moment has not felt the entire heat of the global

recession. At the moment its first victim has been team Honda that has exited the

sport & withdrawal of sponsors ING to name a few.

This is just prior to the commencement of the 2009 season, we will need to closely

study & watch how the season folds out. Will more teams follow in Honda’s

footsteps & make an exit? Or will they be able to survive this global downturn &

survive in the Worlds most expensive sport?

FIA is taking measures to control the spiralling costs of the sport & also progress to

more eco friendly races in the future, but this could be dangerous & F1 thrives on

speed & glamour & on doing so they could take a risk of loosing its charm that

attracts the fanatics towards the sport.

Recession I feel will impact the sport, but as history has witnessed their will be a

recovery a shift in the business cycle & Formula 1 will again eventually out race

recession.

Recession – An Optimistic View Point

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The story is about a man who once upon a time was selling hotdogs by the roadside.

He was illiterate, so he never read newspapers.

He was hard of hearing, so he never listened to the radio.

His eyes were weak, so he never watched television.

But enthusiastically, he sold lots of hotdogs.

He was smart enough to offer some attractive schemes to increase his sales.

His sales and profit went up.

He ordered more a more raw material and buns and use to sale more.

He recruited few more supporting staff to serve more customers.

He started offering home deliveries.

Eventually he got himself a bigger and better stove.

As his business was growing, the son, who had recently graduated from college,

joined his father. Then something strange happened.

The son asked, "dad, aren't you aware of the great recession that is coming our

way?"

The father replied, "no, but tell me about it."

The son said, "the international situation is terrible, the domestic situation is even

worse. We should be prepared for the coming bad times"

The man thought that since his son had been to college, read the papers, listened to

the radio and watching TV, he ought to know and his advice should not be taken

lightly.

So the next day onwards, the father cut down his raw material order and buns, took

down the colorful signboard, removed all the special schemes he was offering to the

customers and was no longer as enthusiastic.

He reduced his staff strength by giving layoffs.

Very soon, fewer and fewer people bothered to stop at his hotdog stand.

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And his sales started coming down rapidly, same is the profit.

The father said to his son, "Son, you were right. We are in the middle of a recession

and crisis. I am glad you warned me ahead of time."

What can we take away from this story??

How many times we confuse intelligence with good judgment?

Choose your advisers carefully but use your own judgment

The tragedy today is that there are many walking encyclopedias that are living

failures.

We need to take a more practical approach to the situation & remain optimistic.

Bibliography & Sources

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1. http://en.wikipedia.org/wiki/Recession

2. http://en.wikipedia.org/wiki/Global_recession

3. http://www.economist.com/finance

4. http://news.bbc.co.uk/2/hi/business/

5. http://en.wikipedia.org/wiki/Formula_One

6. http://www.fia.com/en-GB/sport/championships/f1/Pages/SeasonGuide.aspx

7. http://www.fia.com/resources/documents/1797101136__Appendix_L_a.pdf

8. www.f1fanatic.co.uk

9. http://www.telegraph.co.uk/sport/motorsport/formulaone

10. http://www.guardian.co.uk/business/2008/dec/07/formula-one-recession

11. http://www.formula1.com/

12. The Guardian

13. The Economist

14. FIA

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