Warning! Very long entry alert! This morning, I was woken up by my dad, who had some rather worrying news.
Honda F1 have decided they want no further part in F1 (
with BBC video of the report) due to
the amount of money it costs in a low-sales economy. Needless to say,
it's been the talk of the Formula 1 Home forum, as it has been elsewhere in the F1-related internet.
The leavetaking of manufacturers when things get tough (and
things really are tough now) has been predicted ever since the manufacturers began to return en masse to F1 in 2000. More recently,
Williams chief executive Adam Parr predicted this scenario in October.
In fact, we should have predicted something of this kind yesterday. Shuhei Nakamoto was transferred to Vice President of the motorcycle division of Honda. For all the stick he may have received for his lack of aerodynamic understanding in F1, he did well for himself in the motorcycle world. Clearly he is also a valued employee because vice-presidency of such a key department in Honda's empire constitutes a promotion. Perhaps he was only in F1 at all to widen his experience and give him a taste of high-level management.
The big clue that should have given it away was the fact that no replacement was announced, nor was the usual message along the lines of “a replacement will be announced in due course” appended to the end of the press release. Combined with the cancellation of Christmas and the 2009 launch, it does indicate that the senior management had advance notice (if perhaps only slightly advance notice) and acted accordingly. After all, it is hard to have a jovial Christmas party if everyone at the tables, including the hosts, is already on the path to redundancy and a miserable New Year. Launching a car that is never going to race (even in the modified form that Renault are suggesting in their case) is simply ridiculous. Before today's announcement, none of this made sense. Now it all fits the pattern of a management settling the team's affairs in case no buyer can be found.
It turns out that the team found out its fate after
an emergency meeting yesterday with senior Honda Company management. This followed
the Honda factory in Swindon shutting down for the first two months of 2009, a move
echoed by Honda factories elsewhere. Combine that with the
1000 redundancies announced for the Swindon factory at the start of December and a general impression that the F1 programme was unsustainable with that backdrop emerges.
What wasn't predicted at that point was the timescale of the sale. Always before, several months, or occasionally years, were allotted for the sale of a team before all hope was lost on it.
Such sales were made as quietly as possible so as to extract maximum value and reduce disruption to the team. Even Ford gave Jaguar two months' grace, and that was considered irresponsibly short notice at the time. Happily, Red Bull were shopping for an F1 team at the time, so it simply forced its hand earlier than might otherwise have been the case.
How long have Honda allotted for the sale of its team?
It would appear to be Christmas, though given that
this is the date redundancy letters will be sent, a deal made soon afterwards would probably still be able to salvage a decent proportion of the team. That's a very short time to sort out the paperwork and due diligence. The latter will be done extremely carefully because the cause of the credit crunch (bad debts hidden behind seemingly innocuous ones) will have made purchasers particularly wary of financial trickery. The sheer improbability of Honda committing any trickery will not be relevant to buyer confidence with regard to checking, only perhaps to whether a favourable check enables a sale.
I think that Honda, despite the short timetable, has a considerably better chance of securing the future of its team than Squadra Toro Rosso. Unlike the latter, it has a fully functional factory at Brackley, capable of making components for every aspect of an F1 car. This will stand it in good stead in 2010, when customer cars are formally banned (assuming that Max Mosley doesn't do another U-turn on the matter). With minor modifications, it may even be possible for it to expand to other series if that is what a new buyer desires. The windtunnel finished being recalibrated last year and is very much the equal of rivals' tunnels further up the pit lane. It has a large staff made close-knit rather than argumentative (at least as far as I can see on the outside) through the adversity of two years of poor results. Also,
Bernie's confirmation of Fry's statement that there are already three organisations with a serious interest in buying Honda F1 will help a lot. It's easier to secure a sale to an interested party than to try to conjure up a buyer from seeming thin air. I will say Bernie's attitude to this is a vast improvement over his dismissive mocking of Jaguar when it needed to sell in 2004.
Financially, it's in a relatively strong position too. It has no debts of its own and as of the end of its last financial year an existent (albeit modest) reserve. Its fixed costs are relatively high, but Toyota's and Ferrari's are higher and when cost-cutting already initiated by Honda is taken into account, some British-based teams may be more expensive.. It's selling the team for £1, which should help get potential investors through the door. It's
the running costs that are the real problem, but that's a problem every F1 team faces. When you consider that part of the money Honda spent in the previous financial year covered Super Aguri's costs, and that item of expenditure is no longer present, it is not really in any worse shape than the average F1 team.
Against all that, there is the question of who would buy
any F1 team at this time. Super Aguri couldn't find a buyer earlier this year, though to be fair Honda didn't help matters by blocking two different buyers from purchasing its satellite team (somewhat ironic now). Also in mitigation, Super Aguri was a customer car team, which was not a sustainable business model due to the regulations. Again, it sheds light on the notice that certain members of the team might have had – why would a board fund a B-team when the existence of the A-team may have been in doubt even back then?
Squadra Toro Rosso were on the market for nearly a year before Dietrich Mateschitz gave up trying to sell it as a bad job (at least publicly). Again, this is a customer car team, but it is indicative about how choosy the market is right now.
When you consider other factors, you can see why buyers are difficult to find. Formula 1, to a manufacturer, has eight aims, which are really five when you think about it:
1.Marketing (to attract new markets)
2.Marketing (to attract new customers in existing markets)
3.Marketing (to augment the brand's reputation among currently loyal customers)
4.Research and development (as opposed to the image thereof, which is classed as marketing)
5.Competition with other brands
6.Elaborate training opportunities to help staff members to progress through the company
7.Perks for senior staff members and companies the manufacturer wishes to impress, which feeds into
8.Staff morale
Points 1-3 have been going extremely badly. For one thing, the credit crunch means that fewer people can afford cars. Those who can are generally going for cheaper cars than they would have bought in the days when credit was easier to acquire and was easier to pay back.
Also, people are wanting smaller cars for lifestyle reasons (there are more single-person households than previously, and unused seats are easy for a buyer to remove from the equation when purchasing) and environmental/economical reasons (it always makes financial sense to use less fuel, especially when governments are encouraging more people to go green and providing incentives to do so). The manufacturers' offerings in the small, low-fuel-consuming arena are not especially diverse at the moment and tend to be in the cheaper, lower-margin end of the market. This is not a profitable situation for the manufacturers.
Beyond that, F1 has proved a less-than-ideal platform for marketeers. It has recently been pulling out of major markets such as the USA and Canada. Places where manufacturers are based, such as Britain, France and Germany, face considerable uncertainty concerning whether they can stay or re-join the calender. Japan may be under threat because the safekeeping of the Grand Prix has transferred from a track owned by Toyota to one owned by Honda because Toyota no longer want the expenditure – yet Honda no longer wants F1 expenditure either. South Korea, which was meant to be joining the calender in 2009, has quietly fallen off the radar in much the same way as Mexico did in 2006. China, one of the two big hopes for the car manufacturers to counteract stagnating sales elsewhere, is under threat. India, their other big hope, has been delayed for a year, possibly longer, which makes it useless with regard to marketing the manufacturers out of their current problems. Apart from India, all of these have been due to financial considerations.
Bernie has put CVC's own financial interests above those of F1's participants and supporters. He has forced circuits to gain all their money from ticket sales and to give all of these (and a fair amount more) to him simply to allow them to host the race. This means ticket sales are beyond the means of vast swathes of supporters, preventing them from putting a lot of income into the sport in incidental purchases and instead making them re-think their level of commitment to the sport. While there are people who will buy caps and T-shirts simply to support a team or driver, the music industry shows that these are well outnumbered by the numbers who need an occasion to wear them at in order to make the purchase worthwhile to them.
As for the participants, if there is no F1 in the markets they are trying to reach, no F1 (or F1 at serious risk) in the markets they are trying to increase customer base in, and F1 in bad repute from existing customers because it is seen as a processional* (on TV – races usually look less processional from the touchlines) cash cow for faceless organisations which bring no value to anything, what is the marketing purpose of them being there? That goes a fortiori if the market is itself shrunken by wider financial considerations.
Point 4 has been increasingly difficult. For the last 15 years, the emphasis has been on preventing advances in technology to increase the sport's purity – and
the extra restrictions have come thick and fast, especially recently. While it may have increased the purity to some extent, it has also limited the scope for research and development. The December 2008 edition of F1 Racing shows that a fair bit of R&D is going on anyway – but that much of it is of no financial benefit to manufacturers of cars. Also, the R&D that car manufacturers need most is how to make cars relevant to owners of small, pared-down, fuel-efficient cars that are never raced anyway because they spend 90% of their time in traffic jams, passing speed cameras or traversing “traffic calming” measures. No racing series will ever be truly relevant to such people. It can entertain (a power that is not to be underestimated in these times), it can offer a limited range of R&D solutions to part of their problems, but there will still be massive gaps in the solutions it provides.
Of these gaps, the key things that F1 can provide in terms of R&D is, in approximate order of relevance, fuel technology, more efficient engine technology and low-drag aero.
Fuel technology is artificially limited by the FIA to only permitting fuels with 5.85% biological origin. Fuels with a greater biological origin are forbidden, as are any non-petroleum-based sources of power apart from KERS. Note that since road cars rarely brake with anything remotely resembling the force an F1 cars, that KERS will always be of limited applicability to road cars, and also that for the foreseeable future, the influence of KERS is being artificially controlled by the FIA.
Engine technology cannot get more efficient while the only modifications permitted on the engines frozen at the start of 2007 are those that improve reliability. Engine reliability is a relatively minor problem in the eyes of purchasers, so having engines that last a little longer in high-stress conditions will not make the manufacturers more money in providing a car that people want to buy. A high-tech car that nobody wants to buy is as useless to its manufacturer as the Betamax was in the fight against the technically inferior VHS video recorder. Efficiency would help, but efficiency is not really promoted in the FIA's scheme, as a proposal to have a 1.8 turbo engine that required no refuelling was rejected by the FIA earlier this week.
Low-drag aero has been of interest for quite some time – Pat Symonds said in the August 2007 edition of F1 Racing that this was what made the Renault car company interested in F1's R&D aspect. However, the increasing standardisation of aero has made this more and more difficult. The FIA has at least enforced a reduction in drag. The trouble is that they also heavily restricted other aspects of aero at the same time, which limits the amount of additional drag that can be taken off.
In short, the FIA has managed to largely stop point 4 as it relates to what manufacturers need to be doing in its tracks.
Point 5 remains relevant. F1 has got more competitive in the last two years. A manufacturer who is simply there to compete with other manufacturers and demonstrate their capacity to do so will be very happy with F1 as it has been recently. This grows stronger the better the manufacturer is doing. So Ferrari and Mercedes will find point 5 particularly compelling, while Honda would find it considerably less so.
This is also responsible for the keeping-up-with-the-Joneses effect that pushes running costs so high in the first place. To compete, a team needs to find and use as many resources as it can. After all, opposing teams will only do the same. To do less is to be defeated.
This effect cannot be defeated, at least not while one of the competitors is Ferrari. This is because competition is the primary reason why it is in F1 in the first place. It has an entire country's population putting pressure on it to be as competitive as possible. If it declared cutbacks, then it will have to face the wrath of an entire people in addition to its customer base. Therefore, it spends as much as possible in F1 to be as competitive as possible because it has to for the sake of the company's reputation. While that is the case, everyone else has to match that resource outlay – or at least try. This is why Max Mosley providing what he calls “an option to spend less” will never work as intended. A team that is there for competitiveness will have to spend a lot of money or none at all. The “F1-lite” option does not exist for them.
Point 6 takes advantage of the competitive element and seems particularly relevant because Honda cited this as a major reason why it was involved in F1. Shuhei Nakamoto is perhaps the most high-profile example of someone benefiting from this idea. However, there are cheaper ways of developing staff talent, so F1 would have to provide an exceptional benefit to a lot of people in order to be worth £1m, let alone the pushing-£200m that Honda were spending each year on their F1 project.
Point 7 is a nice luxury, but a luxury nonetheless. If responsible companies are already under pressure to cut costs, such perks will be among the first to go, especially since most workers will never directly benefit from them.
Finally, perks are part of staff morale. Unlike perks, every employee has the potential to benefit. However, there would have to be a large morale boost for this to be sufficient reason to invest millions in a racing series.
From that point of view, the case for manufacturer participation in F1 is very poor,
a pessimistic view backed up by grandprix.com.
The Honda Company's shares rose 0.2% as a result (which is a lot of money in absolute terms given the company's size), suggesting that investors also agree with this analysis. So what is being done about it?
The FIA and FOTA have been arguing this one since FOTA was called the GPWC. Even though I would argue that the effects of a credit crunch are beyond the powers of either to significantly ameliorate, it is still the case that things could be done to help teams out at this time.
With regard to points 1-3, nothing has been proposed because the calender is outside the influence of FOTA and the FIA has only very limited powers (it can stop “traditional races” from being cancelled, but the criteria to be deemed as such are strict and do not prevent Bernie from issuing unreasonable terms to circuits). Likewise, the FIA has no power over what the manufacturers make (though it can put pressure on them through the touring section) and FOTA, consisting as it does largely of teams semi-detached from their manufacturers, is only slightly more influential over their manufacturer-owners than the FIA is.
It is unlikely that Max Mosley's letter to the teams, sent out this morning, will include any provision for expanding research truly relevant to the road car industry as it currently stands. There may be some clauses to improve fuel and engine technology though, which will be helpful to the manufacturers. Drag is unlikely to be affected until the effects of the 2009-spec aero regime are seen in action.
It's worth adding at this point that Fernando Alonso has threatened to quit if standard engines are introduced. While he is known for spur-of-the-moment comments, he is also known for spur-of-the-moment actions. Having a double world champion quit because of unsatisfactory technology levels will be more damaging to F1 than having Juan Pablo Montoya quit because F1 wasn't, in his opinion, proper racing. This is especially the case in Spain, where Alonso is the primary reason why Valencia and Barcelona can justify paying Bernie his fees. Losing two more races will do F1 no favours at all, especially when Spanish banks are major sponsors of two teams (Mutua Madrileña at Renault and Santander at McLaren).
Thankfully,
the single engine tender has metamorphosed into a discounted engine supplier for those teams wanting one. However, asking four teams to take that supply when there are currently only four teams not supplying their own engines (Force India, Red Bull, Squadra Toro Rosso, Williams), one of whom (Force India) is already contracted to Mercedes in 2010 when it's due to start and two others (Squadra Toro Rosso and Williams) in danger for different reasons means that the pricing structure may require a re-think. At least the concept is in the right direction, though, let's give Max credit for that.
FOTA will continue to provide as much competition as their board executives will allow and there is nothing the FIA can do to stop them short of driving them out of the sport entirely. Naturally, this will make a mockery of any “cost-cutting” measure proposed, as the research to circumvent a restriction is generally higher than the savings made by taking less expensive components to the track.
Staff development and perks are purely in the hands of the FOTA member's respective boards. There is nothing that the FIA and FOTA can negotiate here that will help either, though negotiating cheaper Paddock Club tickets and other perks with CVC will help keep manufacturers in F1.
Staff morale is in the hands of FOTA's staff. It is difficult to assess how the morale effect has changed from having an in-house F1 team, but it is unlikely that the FIA-FOTA discussions will make much direct change in it, since it is largely conditions within each manufacturer and each employee that determine the morale boost an F1 team can give an individual employee.
As a result, it is difficult to see who would buy Honda, but Honda has a better chance of being saved than several other teams which could be on the market in the near future. Whoever does buy Honda will do so for the competitiveness element above all else, which should be good for the team because it will get the money it needs to perform and won't become another Midland.
There will be consequences to this move. If Button and Barrichello are about to re-enter the driver market, the currently vacant seats will freeze while the team bosses consider whether to fill them with either driver – and to find out whether they will in fact be available. An investor may keep them on in the event of takeover, but there are no guarantees. This means it is likely the end of Sebastién Bourdais' sojourn in F1, because he has already said he cannot afford to wait for STR very long due to other offers being on the table. If neither Honda driver ends up at STR, expect Buemi and Sato to get the race seats, irrespective of their performance in next week's testing, with a complete newcomer to F1 doing the testing.
More likely is that if Barrichello and Button find themselves without a Honda seat, they will either spend 2009 testing with a view to claiming a race seat in the future or they will be forced out of F1 completely. Bruno Senna, who gave up the chance of an STR seat to chase the Honda dream, may well be kicking himself about now. His only chance in F1 in 2009 is if an investor buys the team.
A bizarre footnote to the driver situation is that
only Button received an individual apology for the abrupt manner of Honda's leavetaking. Call me misguided, but I thought Barrichello was as much a member of the team as he was?
The other teams will be looking nervously at their boards to see if they make drastic changes of tactics regarding F1.
Toyota's staff will be pleased to hear that their board wishes to stay in, but Toyota is Honda's main rival and could be expected to take full advantage of its biggest rival's tacit defeat.
Ferrari and Mercedes have also confirmed their participation, and while Ferrari will be in F1 for as long as it can be for reasons outlined earlier, Mercedes' confirmation will be somewhat reassuring to the jangled nerves of the sport's administrators. They won't face a mass walk-out – this time.
Beyond that,
around 800 people risk finding themselves at the Brackley branch of the JobCentre (assuming the village has one). Unsurprisingly,
the effect of the announcement on them has been enormous. Admittedly, some will probably be redeployed in other parts of the Honda empire, particularly the ones working on engines, but for some who specialise in F1, that won't be a realistic option. Their best hope is that there is a simple “
change of logo and color scheme” and they can carry on much as before with new leadership. While many have question Nick Fry's leadership of Honda, though, this wasn't how anyone wanted his tenure to end. And if terms cannot be agreed with a buyer, the prospects for the F1 specialists in the team is grim. With teams not hiring much, especially with Max Mosley claiming that this is the primary reason for F1's unsustainability (conveniently ignoring his own and Bernie's roles in the situation), they will struggle to return to F1. This means F1 risks losing a lot of talent to other industries. That F1 can damage itself to this extent is sad. The difficulties that a blameless workforce face as a result of that damage is even sadder.
I hope that the Honda staff have as merry a Christmas as is humanly possible. In practise, that will require Honda to find a buyer and sharpish.
Even if it's from the Middle East.
(I am aware that this entry doesn't fit into the whole “Thanks” theme I signed up for in the December NaBloPoMo. Thing is, it's kind of difficult to be thankful for proof of F1's peril that the powers-that-be claim to be adapting to and haven't).
* - Yes, the last two seasons have seen a vast improvement in overtaking. No, it won't have filtered through to many people that the manufacturers are targeting because the viewing figures (apart from certain climatic events) still haven't caught up with their peak in 2001, let alone surpassed them. Reputation is usually behind reality, when they relate at all.
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