THE TEMASEK REVIEW

By Damon Yeo, Business Correspondent

This time last year, Singapore was not in recession yet and every single ticket for the first ever night race in Formula One was sold as the nation was abuzz with the excitement generated by the inaugural Grand Prix. A year on, amidst the global financial crisis, the “crashgate” scandal involving Renault and waning interest, Singapore prepares for the sophomore Singapore F1 Grand Prix.

So is Formula One actually a gold mine, where everyone reaps benefits from jumping onto the bandwagon, or is the sport just a gold-digger, ripping money off every participant?

Formula One is a Gold Mine

Financial figures generated by Formula One are staggering. In 2008, CVC Capital Partners, the parent company of the Formula One Group, earned US$1.06bn from the sport in 2008. (source: http://joesaward.wordpress.com/2009/09/09/formula-ones-financial-performance/)

Kimi Raikkonen, currently the highest paid F1 driver, earns $45million from Ferrari every year. Other prominent stars like Lewis Hamilton and Fernando Alonso endorse various products from financial services to video games to expensive watches.

As host, Singapore welcomed at least 40,000 tourists last year who snapped up official tickets for the F1 weekend. Many more have arrived on our shores without tickets, just to soak up the atmosphere. It is not possible to accurately quantify the tourism revenue generated for this event.

In terms of global reach, it is arguable that Formula One is only behind major football tournaments and the Olympics. It is broadcast to two hundred countries worldwide and an average of 600 million people tune in per race. High-profile sports channels pay millions annually to secure broadcast rights. (source: http://en.wikipedia.org/wiki/Formula_One)

In 2009, the race calendar covers races in four different continents and this will extend to five in 2010 as the Canadian Grand Prix is resumed after a short hiatus. Because of this, global brands come running in with huge sums of monies to have their names associated with the Formula One sport.

Since its participation in Formula One in 1950, Ferrari (a subsidiary of Fiat Motors) had become synonymous with the sport. With its prolonged domination of the sport, it has built a very successful brand of upmarket racing sports for the rich and famous. After its maiden victories in 2005 and 2006, Renault transformed itself from a mass production automobile company to a slightly more upmarket, more chic car brand. The value F1 had added to these carmakers is beyond dollars and cents.

Formula One is a Gold Digger

From another perspective, it can be said that only a selected group of people is truly reaping all the financial benefits of Formula One.

Essentially, there are three different groups of people who exert the most influence in Formula One.

On one end is Fédération Internationale de l’Automobile, better known in the English-speaking world as FIA. This is a non-profit organization based in Paris that governs all the classes of motorsports worldwide. In a nutshell, they make the rules and everyone else have to play by them.

 This body is represented by national bodies from over 125 nations worldwide, but ultimate power in the group is held by Englishman Max Mosley. Now into his fourth consecutive term as FIA President, Mosley is often seen to rule the federation with an iron fist. FIA may be “non-profit” in nature, the cosy relationship Mosley has with other big guns of the sports often raises questions.

 All commercial rights to Formula One are owned by the Formula One Group. The roots of this organization go back to 1974, when Formula One Constructors Association (FOCA) was formed. Englishman Bernie Ecclestone took over the leadership of FOCA in 1978 and has since transformed it to what it is today.

After several name and ownership changes, the Formula One Group now owns all commercial rights of the sport, from lucrative broadcast contracts, team name rights to hosting rights. Ecclestone cashed out on most of his investments from 2000 onwards and just owns about 10% of this Group today. He is currently worth nearly £1.5bn.

 The influence Ecclestone yields on the sport is second to none. He has ultimate decision-making powers on whether a circuit gains hosting rights for the following year’s F1 racing calendar. Suffice to say, he is the man to please for many government officials and prospective hosts globally.

The third group in this Holy Trinity is Ferrari. As previously mentioned, this race team is the only one to have been involved in every single season since 1950 and is the most successful with 16 Constructors’ titles. Given its longstanding history, it can be said that Formula One and Ferrari share a mutual relationship of need.

Frenchman Jean Todt was Team Principal for the team from 1993 to 2007 and is now CEO of the race team. He is known to share a very close relationship with Mosley and the FIA. In fact, he had been constantly endorsed by Mosley to become the next FIA President. (source: http://www.grandprix.com/ns/ns21651.html)

The implicit power-sharing arrangement serves the Tripartite very well. Every newcomer to the sport, be it a new host city or a new racing team, has to pay huge sums of money to the Formula One Group to have a share of the pie. Ecclestone’s group in turn redistributes the income to FIA and the other race teams, for which Ferrari have a lion’s share.

To put some numbers to this, it is reported that each individual race promoter pays an average of US$ 48m to the Formula One Group in 2008. (source: http://joesaward.wordpress.com/2009/09/09/formula-ones-financial-performance/)

This annual payment to the Group varies from host to host, depending on when contracts were agreed. The Singapore government is reported to have funded the Grand Prix to the tune of S$90million. (source: CNA)

The Future of the Sport

There are three main reasons why the future of F1 can be considered precarious.

The parent company of the Formula One Group is heavily debt-ridden. (source: http://joesaward.wordpress.com/2009/09/09/formula-ones-financial-performance/) Despite its significant revenue, large amounts are needed to service its loans. In a nutshell, the Group had been financing its expansion by using future earnings as “collateral”. This situation had prompted the founder of the company, Ecclestone, to say that even he himself would not invest in it now! (read more here) 

Secondly, the global financial crisis had meant that more and more car manufacturers are finding the amounts of money spent in F1 unjustifiable. Late last year, Honda pulled out. (source: BBC) BMW also decided to end their association with the sport in July this year. (source: Times)

This meant that only four major manufacturers are still in the sport (Renault, Ferrari, Mercedes and Toyota). Lotus (now part of Malaysia’s Proton Group) may be poised to return to F1 (source: BBC), but it can said that the sport can ill-afford another “big-name” withdrawal. This situation is perhaps why the FIA had decided to hand Renault a two-year suspended ban, instead of an outright ban – again demonstrating cosy relationship between FIA and the Formula One Group.

Finally, there is a real possibility that teams might cut ties with the Formula One Group to form a rival series of their own. In June, it surfaced that eight of the ten current F1 teams are ready to “cut the middleman” if their demands for higher share of the revenues are not met. (source: Sky)

A last-minute “behind-the-door” crisis talk between Ecclestone and the representatives of the breakaway group eventually averted this, but it is clear that relationships had been strained and there is no guarantee that such threats will not surface again.

What Do Uncertainties Mean to Singapore

Singapore has a contract to host F1 Grand Prix with the Formula One Group until 2012. If this Group goes bankrupt or if most of the teams pull out, the contract becomes void. Legally, the race promoters can make a claim of breach of contract against the Group, but it would be a long legal wrangle. Large amounts had already been spent to prepare the nation for this Grand Prix – all of which would go down the drain if the abovementioned disaster does happen.

Like the California Gold Rush of 1840s, the pioneers of F1 had thoroughly exploited the pot of gold that lie within the sport. Multi-millionaires had already been made and long-standing brand names had been created, fully utilising their first-mover advantage.

The latecomers in this Gold Rush will become slaves to the existing network and be fully exploited as they wrestle to try to pick what little is still left in the pot …..

About the Author:

Damon Yeo graduated from NTU Accountancy in 2004. He now works in the finance department of a prestigious bank in the United Kingdom.

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