Analysis: Why F1 is a bargain for Mercedes

While they don’t include the costs of the HPP powertrain division in Brixworth, the numbers suggest that F1 is a bargain for Mercedes in terms of the exposure the marque receives, certainly compared to the sort of figures spent by rivals Porsche and Audi in sportscar racing in recent years.

Any suggestions that Mercedes has entertained thoughts about eventually pulling out of the sport due to cost issues are wide of the mark.

The Brackley team’s 2016 accounts show that turnover rose from £213.2m the previous year to £289.4m last year. That figure includes sponsorship, income from the Commercial Rights Holder, and what the team calls “marketing revenue” - the payments that it receives from Daimler AG.

Costs increased by £27.9m in 2016, due to the extra R&D investment required as the team prepared for the huge changes to the 2017 regulations, and to currency exchange rate losses.

There was also a £15.9m tax charge, as opposed to a £13.3m tax credit in 2015, which resulted from “a reassessment of consortium tax relief claims in prior years.”

The team made an operating profit of £14.3m – compared to a loss of £33.9m in 2015. However, after that tax payment was taken into account, along with interest charges, the final figure was a loss of £3.7m – very different from the post-tax credit £22.2m overall loss of the previous year.

Although not specified in the official accounts, the most intriguing aspect is just how modest a sum Daimler AG has to put into the team, given how it has so successfully generated both prize money and sponsorship.

“I don’t want to say the precise number, but the marketing contribution from Daimler is around 10 percent of revenue,” Toto Wolff told Motorsport.com.

“Which is a fraction of the exposure they generate. It makes us profitable. The revenue growth is encouraging, and we’ve seen it in all sectors.

“We’ve had it from TV revenues, or the prize fund, we’ve had revenue growth from the sponsorship side, we’ve had revenue growth with other income such as additional events we are hosting, and driver programmes, etc. It’s an encouraging slope.”

Race winner Lewis Hamilton, Mercedes AMG F1 celebrates with Dr. Dieter Zetsche, Daimler AG CEO and the team

Photo by: XPB Images

CCB kickback

The key is the Constructors’ Championship Bonus money and the special payment made to Mercedes following the double 2014 and 2015 title successes, which kicked in as extra income during the 2016 season.

It stems from the deal that Mercedes struck with Bernie Ecclestone shortly before the start of the turbo era, at a time when the top teams were negotiating for extra income in return for making a long-term commitment to the sport.

In essence, Ecclestone told the team that if it could match the sort of level of success achieved by Red Bull Racing, who signed up early, that would trigger an extra payment – widely reported to be worth $35m.

The challenge was to win two consecutive constructors’ championships, and 25 grands prix, across two seasons. Ecclestone was pretty confident that Mercedes wouldn’t reach that target, but his bluff was called.

Within Mercedes there was total confidence in its upcoming 2014 hybrid V6 package and the chassis that went with it, and the team invested heavily to ensure that no stone was left unturned in preparing for the new era.

“What the system rewards is success on track,” Wolff explains. “When we discussed the deal we did in 2012 and 2013, we considered whether we wanted to invest the money in growing the business and building capability and resource in order to achieve a higher share of the prize fund. And it was a very conscious decision, and we were rewarded.

“You can see from the numbers, it’s not only dependent on the prize fund growth. If you calculate in the extraordinary payment [from F1], the main growth is actually coming from sponsorship and third party revenue.

“CCB is linked to the prize fund, and therefore the prize fund growing means that the CCB payments are growing. If you’re first in the CCB payments, because of your on-track record, it adds considerably.”

The point is that when Wolff goes to the Daimler AG board and shows them the numbers, they realise what a good deal F1 is for the Mercedes brand.

“It’s great value for the brand, because you consider that the marketing contribution on the chassis side is less than 10 percent for the team, and you’re a frontrunning team," Wolff adds.

"And this is actually targeted expectation. The expectation is not to win every race or every championship, as long as you’re within the top three is what we have decided with the board as the way forward.

“Considering that contribution, it’s great value that they are generating. I think what we have achieved over the last years is some credibility, that our assumptions were actually becoming reality.”

Lewis Hamilton, Mercedes-Benz F1 W08 leads at the start of the race

Photo by: Sutton Images

Project One links

As noted earlier, these numbers do not include the cost of running the HPP engine facility in Brixworth, which had a turnover of £140m in 2016.

Some of that is income from F1 customers Williams, Force India and until last season Manor, but the bulk of it represents payments from Daimler AG.

It is regarded as R&D expenditure, rather than being allocated to a marketing budget like the race team payments, and its costs represent just a small fraction of what a company like Mercedes spends on R&D overall.

And thanks to the recently-launched Project One hypercar, there is now a genuine link to production technology to help justify the F1 spending.

“You must not forget that the R&D side is starting to kick in on road car production. The Project One car that we have launched, and which is going to be produced in a limited series of 275 cars, is sold out," says Wolff.

“We could have probably sold 10 times more cars. And that is the F1 engine as it is now, and the combination of the hybrid and combustion technology becomes a real part of road car technology. It’s a profitable business case, and the promotion for Mercedes has been huge.”

Mercedes-AMG Project ONE

Photo by: Motor1

Making teams self-sufficient

So what can we conclude from all this? The successful major F1 teams are spending more each year, but they are also generating more income, so in effect their owners don’t have to invest as much as those of smaller and less successful teams.

Consider that Dietrich Mateschitz only had to put around £10m of Red Bull GmbH’s money into Red Bull Racing in 2015, although that rose to £40m last year after he literally began to pay the price of a drop off in on-track performance, and prize money fell.

Liberty wants all teams to be financially successful, and if possible, self-sufficient. That’s why there’s such a push now to reduce costs, or spending, as the rules for 2021 and beyond are being formulated.

“I’m prepared to have that discussion on the cost side,” says Wolff. “Because we need to contain further cost escalation, and longer-term probably adjust the gap of the spending situation between the largest teams and the smallest teams in a reasonable way, with a glide slope that is feasible.

"I think all of us are living in the same financial reality, and we need to have that discussion.”

The other side of the equation is, of course, income, and inevitably Liberty is equally keen to rein in what it has to pay the teams in the future.

The general philosophy is that the teams can expect to earn more as the pie gets bigger, but the percentage size of their slices will be a negotiation battleground in the months and, indeed, years to come.

What is clear is that the teams don’t want reduced costs or spending to be used as an excuse by Liberty to cut their income.

“I don’t think we should be doing the negotiations over the media,” argues Wolff. “Some have done that in the past, and I don’t think it’s the right way.

“F1’s income has been growing year-on-year. And the teams take a share. Of course every team needs to look at its own profit and loss and optimise on income, and equally we know that on the other side Liberty has all the business, and will try to optimise on their bottom line.

“I think it’s just about optimising the value that the teams have, and then find a good solution for everybody. Everybody needs to benefit, and I think you need to recognise that everybody wants to benefit in a bigger way.”