Formula 1 teams operate differently compared to normal businesses , where profit indicates business success.Most of these teams are owned by big corporates with deep pockets like Mercedes which sells cars or Red Bull which makes its revenue from energy drinks. For these companies profit is not their goal but rather racing results and they outspend others to ensure victory. These companies bank on marketability and racing results, which indicates success of the technology they are testing out on the track. Good results in the race track ensures good cash flow from sponsors and advertisers and can increase the monetary valuation of the teams in the long run irrespective of profitability. In the event of a future sale of a team this definitely helps.
Revenue Composition of f1 teams
Citing from an article published on forbes by researcher and author ‘Christian Sylt’ and some other sources , I have listed out the main sources of income for F1 teams.
Ø sponsorships : Sponsorships make up a 3rd of revenue from formula 1 teams. Formula 1 has a global appeal and a great TV audience.Brands advertise heavily taking these into account.
Ø Funds from owners : Owners pump money in a bid to win the championships every season.What drives this investment is the returns generated from marketing.
Ø Price money
- ¨ 36 $ mn paid by FIA to teams that have been in the competition for the past two years.
- ¨ Constructors championship bonus from rankings of the previous season
- ¨ Constructors championship bonus from rankings of the current season
- ¨ Revenue generated from signing contracts or achieving major company targets
- ¨ Commercial Revenue: Teams are entitled to a percentage of the commercial revenue that F1 makes
Data Source: Forbes.com
Cost composition of F1 teams
Car component costs:
Total cost for a single F1 car ranges from $ 12-18 mn with the engine making up almost 90 % of the total build cost.
Ø Engine : Engines make up a significant part of costs incurred by an f1 team.A single engine costs roughly 11 $ mn dollars.Since the engine is so delicate , crashes lead to more heavy expenses.
Ø Nose Cone, Steering Wheel and Wings > =$ 280,000
Ø Fuel Expenses + Hydraulics >= $ 320 ,000
Ø Tyres and Gear Box >= $ 400,000
Ø Exterior body i.e the chassis – $ 650,000 $ to $ 700,000
Data source : thesportrush.com
Main costs for an F1 team a season
Ø Personnel Costs:
- No of employed personnel varies across teams and can range from 300-900.Their compensations and salaries add up to a good chunk of operational costs almost 35-40 percent for big teams.
Ø Operational Costs :
- Logistics: F1 races are held all across the globe each season and the locations vary from Vietnam to Berlin. What this means is that teams have to transport all their heavy equipment and thousands of personnel for each race , making up huge costs in logistics.For an average team this amounts to 8 $ mn per season.
- Maintenance , Repairs , fuel and telecoms: For cars that pace at 200 miles per hour the body is so delicate that in the event of a crash the most likely outcome is a total loss.For constructors this means huge costs in repairs and replacements.
- F1 entry fees , membership fees , fines and sanctions
- Charges related to property leases, rental of cars and test circuits
Ø Manufacturing expenses + R&D:
- Car build costs mentioned above are covered
- Includes investment in new production machinery, new hardware, new software and track equipment.
- R & D includes wind tunnel testing and track testing of newly developed technologies
- Custom Engine Supply
- Acquisition of Key components for the build