The Absurd Economics of Formula 1
Formula 1 is one of the world’s most expensive sports, and new cost caps for the 2021 season are causing controversy in the F1 community.
Formula 1 is one of the world’s most expensive sports. The cost of entry is high, and the 10 teams fortunate enough to compete in the sport had a combined budget of $2.6 billion to operate in 2019. But not all F1 teams are created equal when it comes to money. Mercedes, the team with the largest budget in 2019, spent $484 million, while Williams Racing had an annual budget of only $132 million. The “Fédération Internationale de l’Automobile,” (FIA) which acts as the governing body of F1, noticed the stark difference in budgets and has implemented a $145 million cost cap for the 2021 season. So exactly how absurd are the economics of Formula 1 and how could a cost cap help level the playing field?
In order to understand Formula 1’s cost caps, one must first understand just how much money is spent in F1 and how unevenly it is spread amongst the teams. In the 2019 season, the budgets of the top three teams (Mercedes, Ferrari, and Red Bull) summed to more than 50% of all of the combined team budgets. Meanwhile, the bottom three budgets (Alfa Romeo, Toro Rosso, and Williams) made up just over 15%. Mercedes, Ferrari, and Red Bull respectively ranked 1st, 2nd, and 3rd in that season while Alfa Romeo, Toro Rosso, and Williams respectively ranked 8th, 6th, and 10th.
An interesting and important metric to look at in Formula 1 economics is the cost per point, or specifically, a team’s total budget divided by the number of points they win in a given season. A higher-performing and more efficient team will have a lower cost per point. In 2019, Williams racing had a cost per point of roughly $150 million while Mercedes had a cost per point of roughly $580,000. In other words, Mercedes spent almost 4 times as much money as Williams but was 259 times more cost-effective.
And in the graph below, you can clearly see that more money means more points.
The new F1 cost cap for 2021 regulates the amount of money that any F1 team can spend on certain things. This cap pertains to any cost associated with the car’s performance. This can include, but is not limited to, design and development costs, mechanics’ salaries, and the cars and parts themselves. This cost cap notably excludes, however, marketing costs, driver’s fees, and the salaries of the three highest-paid personnel on a team (likely team leaders and the most senior engineers).
The price to beat in 2021 is $145 million. Any spending over that and teams will incur a serious penalty. This number will also continue to decrease by $5 million every subsequent season ($140 million in 2022, $135 million in 2023, etc.) This means that teams had to cut back on their costs and develop their cars on what the FIA hopes is a more level playing field. In fact, only 3 teams spent less than $145 million in 2019, meaning that nearly all of the teams have had to adapt.
The majority of Formula 1 teams and their leaders are supportive of the cost caps, but some address issues that it might bring to their team’s infrastructure. McLaren chief Zak Brown is strongly in favor of the cost cap, even if it might make his job harder. He believes that the cap will ensure that McLaren “can do Formula 1 in the future in a sustainable and competitive way.” Mercedes team principal Toto Wolff, who will have to cut the most out of his team’s budget, also sees upside to the cost cap. He says: “We’ve reduced costs all together. We are one of the very few sports in the world that has been able to do so. And I believe that this is going to strengthen us going forward.”
On the other hand, Red Bull and Ferrari team leaders openly express their issues with the cost cap. Mattia Binotto of Ferrari brings up the fact that Ferrari manufactures parts purchased by other teams, meaning that Ferrari’s cost will be higher. “There are teams that are constructors…other teams are customers,” Binotto says. He believes that “the answer is not a single budget cap equal for all the teams.” The Red Bull team, led by Christian Horner, voted against the cost cap last year. Horner now says, “It’s been a challenge and will continue to be a challenge to get there.”
One issue that team leaders have recently brought up is the effect of F1’s new sprint race format on the costs that an F1 team faces. Formula 1’s new sprint races add another, shorter race to the weekend event, meaning more crashes and damage, which will induce additional expenses. Some teams have pushed for up to $1 million extra in the cost cap to cover these expenses, but others believe that $1 million is much more money than any team’s realistic damage expenses. And if teams don’t use this money for damages, they could be putting it to work elsewhere. This issue has not been settled so far and will continue to play out during this season.
The Formula 1 cost cap is something that has been and will be a point of contention in the F1 community. But, regardless of such debates, the cost cap stands and teams will have to work around it. Not only will the cost cap greatly change the future of Formula 1, but it has the ability to influence the futures of other sports as well. Only time, however, will tell whether these changes will be for the better or for the worse.
