How Do F1 Teams Make Profit?

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How Do F1 Teams Make Profit

It is public knowledge that running a team in Formula 1 is a very expensive undertaking. You won’t see more than 10-12 teams in Formula 1 series because not everyone can sustain the pressure of keeping up with the financials cost of running an f1 team. During the 2009 season there were 10 teams on the Formula 1 grid. After the season ended the count was increased to 12. Toyota and BMW left the sports and hasn’t returned ever since. BMW’s place was taken by Sauber who were running jointly with them in 2009. Three new teams entered the sport by the name of Lotus (later renamed to Caterham), Virgin Racing (the team was then sold out by its owners and bought by a Russian company who named it Marussia) and HRT (run by a Spanish group and later funded by drivers who paid for their seat on a race by race basis). But these teams didn’t stayed on the gird for long as today you won’t see any of them on the grid. The reason all these three teams left were because mainly they didn’t earned enough profit from the sports because they finished at the bottom three on consistent basis. Also the uneven distribution of the prize money didn’t let these teams to have earned much profit and so after draining money on the sport for couple of years they decided to pull the plug on their operations and leave the sport. F1 has changed its policy ever since for screening the new entrants of the sports. Any team who will be able to pay the high entrance fee for introducing their team to F1, would also be liable to satisfy the governing body F1, that they have the financial backing to be in the sports for the long duration.

The Monopoly of the Big Three

So if running an F1 teams is so expensive then why are the current 2020 F1 teams still racing? The problem isn’t that you can’t earn a sizeable profit from the sports. If you build a strong car and have a strong lineup then chances are that you can accumulate a respectable sum for your efforts. But that is easier said than done. The current regulation of F1 prize distribution doesn’t favor every team.  Ferrari, Mercedes and RedBull are currently the top three teams on the F1 grid. Ever since the introduction of the hybrid era in the 2014 no other team has won any F1 race apart from these three. Mercedes won the bulk of the races which amount to 86. Then comes RedBull’s 17 which is way less than Mercedes. Ferrari trails RedBull by just one win with 16. The question which arises here is that why haven’t other teams been able to bridge the gap with these teams and why haven’t the sports regulatory body the FIA been able to make it more competitive for other teams as well? Well the answer to that may not be as simple as it sounds.

Formula 1’s big three which are Mercedes, Ferrari and RedBull spend the most amount of money than other teams in the development of their cars. If you look at the list published by Forbes of the 2017 F1 spending budget. Ferrari had the most spending budget than any other team which was £464m. Mercedes spent a total of £402m. RedBull also had a sizeable budget of £238m. Since these teams have the most spending capacity then they can employee many experts who can help in developing the best car they possibly can and also spending millions in R&D to make sure that they retain their competitive advantage. As a result after the season ends these teams get most in terms of prize money. The F1 prize distribution formula is divided into different parts. First is the order in which teams have finished the F1 calendar year. The team on the top of the standing gets the most amount of prize money. There is an extra bonus for team which wins the most races in the calendar year.

Mercedes has won each of the drivers and constructors standing from 2014-2019 and has won the most number of races so they are liable to earn the most money. However that is not the case and it is in fact Ferrari who accumulates the largest sum than any other team in a calendar year. If you look at the 2014 F1 revenue distribution Ferrari earned $67m in winnings after finishing fourth in the constructors that season. By contrast Mercedes, who won the constructors championship that season, got $92m. RedBull got $82m for finishing second.  Ferrari however gained $97m in bonuses from the sports. They gained $73m alone for being the longest running team in the sports and also the most successful. Mercedes in turn gained only $34m because they only joined F1 in 2010 after 50 years being away from it. RedBull accumulated $74m in bonuses. Formula 1’s current owners, The Liberty Media Group, have been trying for years to introduce the cost cap. The purpose was to make the pecking order more competitive and allow the midfield running teams to bridge the gap with the front three. Also the spectacle would create interest for the fans as they have been complaining for many years for F1 being boring as everyone would be able to guess the winner of the race, barring any serious bad luck for the three teams running in front, the best result any other driver can hope for achieving would be 7th. But as of now they haven’t been successful in implementing these changes. Bigger teams like Ferrari and Mercedes have threatened to leave the sports on multiple occasions if such a decision was to be implemented. Since Ferrari also has the most extensive fan base and is also responsible for helping the sports generate most of its revenue. There is a new set of regulations set to be introduced in 2021 which will see a major overhaul in the designs of 2021 car and also a cost cap is to be introduced with it which will ensure that no team spends more than $175m in developing their cars for the season. However it is not clear that whether the big teams would allow the cost cap rule to take effect as they will be culpable of losing their competitive advantage.

The Best of the Rest

So far all the scenarios discussed highlight how the most financially powerful teams in F1 make their profits. But does that mean the lower order teams don’t earn much? And if that is the scenario than how are they sustaining in F1? It isn’t like the rest of the seven teams on the grid any slouches. McLaren, who is the second most successful team in F1 history, currently present on the F1 grid has seen its fortunes taking a hit when the team slid down in the pecking order after failing to win any race ever since the introduction of the hybrid era in 2014. The spent their 2015-2017 seasons on the back of the grid after a forgetful stint with Honda as their engine suppliers. Initially all of the blame was pointed at Honda for providing slower, unreliable engines and as a result McLaren took a great hit in terms of revenue earned from competing lower on the grid. But after Honda’s departure from the team at the start of 2018 and McLaren switched to Renault it became apparent that not all of the blame was justified on Honda and McLaren’s race car was also not up to the mark where the team claimed it to be. Honda switched to supplying engines to RedBull and they managed to win 4 races in 2018 with it and again 3 more in 2019. The team saw resurgence in 2019 after making some improvements in their car and finished the season 4th in 2019. During that time the team still managed to earn marginal profits. During the Honda tenure, McLaren got $100m from Honda itself as a part of allowing them to return to the sport. Also the team is a part of the CCB agreement (Constructors Championship Bonus) in which it gets a prize money bonus of $33m. The three other teams who get this bonus are Ferrari, Mercedes and RedBull respectively.

Haas F1 team is another example of the fact that you don’t have to spend big bucks to get something out of the sport. It had a staff of 200 employees compared to 800 the RedBull team was running. The team made its debut in 2016 season and in its first season the team reported the profit of nearly £5m. Haas was the 8th best out of the 11 teams competing in the season, which isn’t spectacular but still managed to beat three older running F1 teams. The team wasn’t eligible to be paid any bonuses for its first season but their decision to run in the F1 proved to be profitable for them in their first season.

Title Sponsors

Getting prize money and profit revenues from F1 aren’t the only ways the teams earn money. Fans of the sports are well aware of the sponsorships deals the teams have signed with various companies. A space on the teams’ car is worth millions. Ferrari’s title sponsor Mission Winnow (Project of the Phillip Morris International) pays them a whopping £107.5M for space on the car. Shell and UPS whose logos are also prominent on the scarlet red car pay £25M each. Similarly Mercedes title sponsors Petronas, whose green color dominates the space on the car’s side pods, gives them £47.3M. McLaren who had Vodafone as title sponsor till 2013 has been running the space empty ever since they pulled their sponsorship from the team. The team’s CEO Zak Brown has famously been quoted that he would not sell the space cheaply and would prefer to run it empty. The higher the team runs on the pecking order the more chances there is for its cars to be shown on the television. This in turn increases the exposures of their sponsors who then inject more money in the team for advertising their product.

The crux of the argument is that teams can earn a healthy sum of profit from F1, provided that they are able to compete for points regularly. The higher the teams spend on the front of the grid the more chances there is for them to earn sizeable amount in profit. But even if you are running at the lower tier you can still make it work for yourself and it keeps the fans entertained as well.

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