When the Force India Formula One team crashed into bankruptcy at the end of July, it took the world of sport by surprise, but it shouldn’t have. New research has revealed that the team’s net losses accelerated to a combined $314.5 million (£244.3 million) over the decade leading up to its collapse.
Unlike most businesses, profit is not the yardstick of success for F1 teams. Instead, their aim is to break even and win on the track as this increases their prize money, which in turn raises the value of the team itself. This gives the owners a payout when they come to sell the team, and it increases the team’s ability to bring in more money from sponsorships since brands are prepared to pay more for association with a winner.
The more successful a team is, the more visibility it gets on F1’s television broadcasts. This can also benefit its owners as seven of them use their teams to promote products that they sell ranging from cars to engineering tools and energy drinks.
In contrast, individuals such as Sir Frank Williams, who majority owns his eponymous team, benefit by being paid an annual salary and by being able to cash out through selling shares.
These smaller teams often struggle to keep up with those that are owned by global brands because there are no restrictions on spending in F1. The table below shows the effect this has had on Force India. Over the decade to 2016, it fueled a 173.4% rise in the team’s costs to $140.5 million (£109.1 million), according to its latest financial statements. Remarkably, this high-octane spending still only comes to 23.5% of Ferrari’s budget, which is the biggest in F1, as we revealed here.
Indeed, the arms race between the teams has gotten so severe that Williams’ deputy boss Claire Williams has said that if F1 doesn’t introduce a spending cap, “then Williams will close, the whole of the company.” A $150 million limit is on the horizon, but it is too late to save Force India.
In late July the company that runs Force India went into administration, the British equivalent of Chapter 11 bankruptcy, and although it was originally thought that it would be rescued, in the end its assets were sold to a new vehicle called Racing Point. As we have reported, it is currently locked in a dispute about whether it is entitled to Force India’s prize money as the new outfit claims that it is “not a new entrant” even though it reportedly paid F1’s regulator the Fédération Internationale de l’Automobile (FIA) a “significant sum” for a new entry.
Turbocharged losses often come with turbocharged costs as teams regularly spend more money than they receive in revenue. The difference usually comes from debt or their owners so the deeper their pockets, the more money available to their teams. Force India hit the skids when its owners ended up in financial difficulty but the foundations for this were laid with the losses over the previous decade as the table below shows.
It remains to be seen whether the budget cap will be able to prevent other teams from heading into the pits without fundamentally denting their business models. The limit was originally due to be introduced in 2021 on the expiry of the teams’ current contracts to race in F1. However, according to a recent report, it will actually be phased in from next year, which gives Williams a glimmer of hope but puts F1 in a race against time to hammer out the details.