Formula 1

When the F1 rule-makers were formulating the current hybrid engine formula, the usual negotiation and horse-trading took place between the potential (mostly then-current) engine manufacturers. Renault, perhaps worried that a spending competition would leave it with an inferior power unit, was one of the proponents of what became known as the token system. The power unit was divided into a number of sub-assemblies, and changes to each sub-assembly were given values expressed as a number of tokens. The number of tokens allowed for development would be fixed after homologation, development would not be allowed in-season, and the number of tokens for off-season development would reduce over several seasons. The idea being that massive engine component development would be curtailed, and as engine manufacturers refined their powerplants, everybody would converge on more or less the same performance.

This looked like a good idea, and all of the engine manufacturers signed up to it. Renault, Ferrari and Mercedes all built power units for the 2014 season. But…by the second day of pre-season testing, it was clear that, relative to Rernault and Ferrari, Mercedes had built a par more powerful unit. The difference was so large as to be embarrassing. Hampered by the rule against in-season development, Mercedes powered cars enjoyed a significant horsepower advantage through 2014. Ferrari and Renault were limited to reliability changes, and improvements obtained by changes to fuel and engine electronics. That helped them some, and Renault scored 3 victories, but all came when Mercedes powered cars hit problems.

At the end of 2014, two teams, Manor/Marussia, powered by Ferrari, and Caterham, powered by Renault, ceased operations. In addition, Lotus moved from being powered by Renault to being powered by Mercedes. Renault therefore lost 2 out of 4 teams running its power units, with a commensurate loss in revenue and mileage for data collection. Ferrari lost 1 of its teams.

Honda’s entry to F1 in 2015 complicated matters. When the engine manufacturers got together to discuss how many tokens should be available for development, it became clear that the rules had not been written tightly enough to preclude in-season development from 2015 onwards. So design and construction improvements to the power units were possible in the 2015 season. After yet more negotiation, the engine manufacturers determined how many tokens were available for development in 2015, and Honda was awarded the average of the other 3 engine suppliers’ token number, since their engine, homologated in March 2015, would otherwise have been frozen.

In 2015, it has become clear that while Ferrari is a lot more competitive with its power unit, Renault is less competitive and less reliable. The more restrictive rules on power unit life have already led to Renault-powered cars accumulating grid penalties after they ran over their allocation of power unit components due to reliability issues. The Mercedes powered-cars are enjoying almost bullet-proof reliability from a more powerful power unit. The non-Mercedes powered cars, with the exception of Ferrari, are struggling to stay on the same lap in races.

By common consent, Renault needs a completely re-designed power unit to have any hope of approaching Mercedes. The challenges are (a) lack of money to develop new components, due to loss of 2 teams (who were, if reports are correct, paying around $40m per team for engine supply in 2014), and (b) lack of enough tokens to support a complete re-design.

Renault is now hamstrung by the very system that it proposed back in 2012 when the new engine formula was being finalized. They are unlikely to be able to create a competitive power unit within the current token system, and the shift to in-season development has further moved the engine development process away from their original vision, which was focussed on out of season development based on defined limits to the number of changes. Honda is also hamstrung not only by the token system, but also by the onerous engine life rules, which are also resulting in Honda-powered McLaren cars collecting massive grid penalties.

There is a real risk that Renault will leave F1 soon, especially given the appalling relationship that they currently have with Red Bull Racing (and, by extension, Toro Rosso). When a team with which you won 4 drivers and constructors championships as recently as 2013 is publicly excoriating you weekly, it is difficult to see any positive upside to remaining in F1.

No privately-funded engine development company can afford to enter F1 under the current rules. Although it is difficult to determine how much money Mercedes has spent on its F1 program, numbers upwards of $300m seem to be a starting point. Only a large-volume manufacturer could afford that size of outlay on an engine design and build process. The high cost of the power units is also distorting the power balance in F1, with the “grandee” teams now threatening to swallow up the smaller teams. To be fair, part of that is due to the teams now controlling the rules via the Strategy Group, another crazy adventure of the “fox given keys to hen house” variety.

The token system might have worked if all of the engine builders had produced power units of relatively similar performance. Then a smaller number of tokens would have been used for incremental improvements.. That is not what happened. Mercedes produced a far superior power unit, and the rivals are now unable to easily catch up due to the engine reliability rules, token limits, and, in the case of Renault, lack of money.

If F1 wants to continue with multiple competing engine suppliers under the current formula, some way has to be found of giving Renault and Honda a better chance of catching up with their power unit designs. The easiest way would be a combination of a scrapping of the token system and a relaxation of engine reliability rules. Mercedes is bound to vote against such a move (why would they vote for it? They have the best powerplant by a large margin) and their customer teams will vote the way that they are told, so it is unlikely to pass the Strategy Group.

My short summary: with the current Strategy Group process, any engine supplier not named Mercedes Benz High Performance Engines is, to a varying level, screwed.

The four “big” teams (Ferrari, Mercedes, Red Bull and McLaren) met prior to the Canadian Grand Prix to discuss design and regulation changes for 2017. Included in discussions was the issue of how to allow for customer cars.

Most of the regulation changes being floated about (including refuelling and a move to 13 inch rims) appear to be unpopular with the teams due to a combination of cost and workload. So it seems like the only major agreements were to “turn up the wick” on the existing power units to make them more powerful, and to look at wider tyres. There was lots of talk about making the cars look “sexier”, but form follows function, and right now, with aerodynamics being the most important factor, the car looks are not going to change.

It appears that there was little discussion of what is really needed – a total binning of the current aero rules in favour of limited front and rear wings, and a return to a level of underbody downforce generation. That, plus wider tyres, would make it easier for cars to run nose to tail, and would increase the importance of mechanical grip in car set-up at slow circuits..

The two major agreements that they reached on the topic of customer cars appear to be:

1. An entire package of cars and engines will be offered to a team for EUR 50m.

2. Each major constructor can only supply one other team with a customer car package.

As this article from James Allen makes clear, the EUR 50m figure is only a starting point. It does not include spare parts for example.

(2) is essential, as without it, Mercedes would probably supply at least 4 teams with chassis and engines in 2017, and the other major constructors would not have any customers since their power units are currently uncompetitive.

Right now, the big teams are seemingly in the driving seat. However, that unity is tenuous. Red Bull keeps making noises about leaving. Renault is not a lock to continue (yes, they are supposed to be buying a team but they still have an unreliable and poorly developed power unit, and they seem to be trying to do F1 on a budget, which is not how Mercedes approached it).

Bernie Ecclestone keeps reminding people of his alternative plan to provide smaller teams with 2013 Red Bull chassis equipped with Renault V8 engines serviced by Mecachrome, which might only cost teams around $30m a season for chassis and engines. That plan, however, would never pass a Strategy Group vote, which explains why it does not have any traction in 2017 discussions at present.

The unknown in all of this is whether F1 will find itself the subject of a complaint to the EU over the governance of the sport. If a complaint is lodged, it is unlikely that the current structure of F1 can continue. The sport’s current broken governance system will almost certainly be declared in violation of EU competition rules.

I remain skeptical that the franchise car system will ever be implemented. Right now, F1 is in such a mess strategically that anything could happen in the next 18 months, and I am sure that what everybody is publicly saying is likely to happen is nothing like what will actually happen.

There are rumors and speculation that the underlying motive behind the attempts by Giedo van der Garde and his lawyers to claim his seat in the Sauber team at the Australian Grand Prix is that it is part of an attempt to force the Sauber F1 team, either into bankruptcy, or to a point where the team has no choice but to accept an offer for it to be bought, or it will go bankrupt.

The theory behind this is that van der Garde’s father in law is the Dutch businessman Marcel Boekhoorn. He is estimated to be worth $1.5bn. If those estimates are anywhere close to true, he could probably buy the entire Sauber team out of pocket change.

One thing I have learned over the years, from reading biographies and news articles, is that highly successful wealthy business people seldom frivolously invest their own money in projects with a low chance of success. Wherever possible, they try to invest other peoples’ money, and limit their own personal exposure. They know the value of money and what it can do, and they are experts at making it work for them.

It is therefore far from obvious to me why Marcel Boekhoorn (or anybody else for that matter) would want to buy the Sauber F1 team. Based on what has been happening to the team over the last 3 years, it appears that the team is struggling to survive. It’s sponsorship revenues have declined as external sponsors depart. The most recent departure was NEC, which sponsored the team last year. NEC left Sauber at the end of 2014, and is now a sponsor for Force India. The only current visually significant sponsor on the car not brought to the team by drivers is Oerlikon, whose name adorns the top of the dorsum next to the engine air intakes.

Rumors in the F1 journalist community have Felipe Nasr’s sponsors providing around $25m this season, and Marcus Ericsson’s sponsors providing another $15m. Let’s add $10m for Oerlikon, and $10m for other smaller deals. That gives a total sponsorship revenue stream of $60m. Now we have to add revenues from FOM. In 2014 this estimate was published about the revenue distribution in 2013. This showed that Sauber may have been paid over $70m in 2013. However, that number will have reduced significantly this year since the team failed to score a point in 2014. Let’s say it is $40m.

This gives total team income in 2015 as $100m. That sounds a lot, but in reality, according to recent stories, to run a properly functioning team takes at least $125-150m a year. That does not include further investment in people and facilities to move the team up the grid over time.

There is also the matter of what debts Sauber has accumulated over the years. If the team owes money to banks or other financial institutions, it will have to fund interest and principal payments on the debt, which will eat into its free cash flow. The fact that Sauber spent a lot of time and effort  in 2013 and 2014 trying to find investors from Russia, prior to finding it’s current drivers, suggests that they were trying to find external investors to stay solvent. It is almost impossible to know what debts the team currently has.

So if Marcel Boekhoorn was to dip into his pocket and buy the team, his committments would be the money to buy the team itself (believed to be owned 66% by Peter Sauber and 33% by Monisha Kaltenborn), and money to pay off the debts. Then there is the ongoing funding of the team. The economic model of F1 currently requires buyers to stump up seriously big money every month just to keep back of the grid teams afloat, since those smaller teams all get low payouts from FOM. The payouts are skewed heavily towards the historically successful teams.

There is also a severe lack of new sponsors in F1. The sponsor changes in 2015 seem to mainly comprise sponsors changing teams (two examples visible are Rexona moving from Lotus to Williams, and NEC moving from Sauber to Force India). There are no new big-money sponsors visible on most cars, and many of the visible sponsors are either brought by drivers, or are companies owned by the team owners.

If Marcel Boekhoorn is serious about buying any F1 team, he had better have a very good business development plan…

Having read the published judgment, there are no more stunning revelations. Because the arguments in the court were confined to the matter of applicability of the arbitration award in Australia, there are no juicy revelations about driver contracts, finances etc.  The rulings are brief, as explained by the judge, due to lack of time.

What is interesting is that the original arbitration ruling on March 2nd was made under UK law, not Swiss law, which is what I would have expected since the Sauber team is based in Switzerland.

The court was not impressed by the argument that because Giedo van der Garde BV (the contracting entity with Sauber for the driver contract) and Giedo van der Garde are two separate entities, that the ruling does not really apply to Giedo Van Der Garde the person. Well yes. If I heard that argument in front of me in a court, I would be tempted to respond “nice try…and do you think I came down from the hillside with the last rainstorm?”

The ruling pretty comprehensively demolishes all of the other arguments from Sauber. It will be interesting to see what new arguments they come up with in the afternoon appeal hearing.

Leaving primitive schadenfreude aside, it it always awkward to see one party to a legal action getting its posterior kicked in a court room.

We just witnessed that event in the Victoria Court Of Appeals, when the judge read out a short summary ruling. Giedo Van Der Garde prevailed in his attempt to have the Swiss arbitration verdict upheld in Australia. The court dismissed all of the Sauber team’s arguments, swiftly and comprehensively.

The lawyers for Sauber looked half-shocked, half-demoralized. Beyond asking for a copy of the full detail judgment, they said little. The lawyers for Van Der Garde asked for a signed copy to take to Sauber, and then craftily took the opportunity to remind the court that their client was ready and willing to drive, and would be looking forward to traveling to the circuit. They also pointed out that they had emailed Sauber at 7.45pm on Tuesday evening expressing their willingness to work with the team, but had not yet received a reply (HINT TO COURT – We’re not the ones being unco-operative, your honour).

The judge felt it necessary to point out that the court officers were available 24×7 to resolve any issues (HINT TO DEFENDANTS – You had better be co-operative). Van Der Garde’s lawyer then said “I hope we will not be back in front of you under those circumstances, your honour (HINT TO DEFENDANTS – You heard what the judge said. Be co-operative).

Sauber is clearly simply playing for time, for it has been announced that they intend to appeal the ruling this afternoon. Quite what grounds they intend to argue on I am not sure. Their previous arguments concerning non-enforcement were waved away in today’s ruling. From comments made by Monisha Kaltenborn, it seems that they may try to argue on the issue of safety, but I think that is a long shot.

Everything about the presentation of their case convinces me that Sauber never thought that could win in court, and their tactics seem to be designed to play for time and spin out the legal process to the point where they can either avoid having to run Giedo Van Der Garde, or so that they can claim force majeure and not run at all on the Grand Prix weekend.

This is a real soap opera, but with real characters, lots of money and international finance. The only thing missing is sex.

The Day In Court is now over. The court has reserved its judgment until Wednesday morning.

Although the court reports are fragmented, and mostly concern tabloidesque claims made by the lawyer representing Sauber, it is clear that Sauber’s defence of their position did not involve arguing that they are not in breach of contract. Instead, the arguments advanced in court by the Sauber lawyer seemed to consist mostly of dire warnings and predictions, and outright falsehoods. The claim that Van Der Garde has no Superlicense is easily disproved, and Van Der Garde’s lawyer disposed of it during his time at the podium by passing his Superlicense documentation to the judge. The claims that Van Der Garde cannot fit the 2015 car, that he does not have a seat, insurance etc. are all flim-flam. As others have pointed out, at one race weekend Sauber put Pedro De La Rosa in the car at something like 15 minutes’ notice. That does tend to undermine arguments like this. Van Der Garde has a race seat from 2014 which will probably fit the new car, unless Sauber destroyed it.

Worst of all was the argument that Giedo Van Der Garde could be at physical danger if he tried to drive the car. Well, duh. Formula 1 is a sport involving drivers strapped into high-speed projectiles hurtling around racetracks. This could be dangerous? After the break – water is wet, and the Sun rises in the East.

The lawyer for Van Der Garde appeared to spend a lot of his time explaining the contractual background to the dispute, but because that is kind of complicated, most of that has yet to appear in reports. The reports so far mostly focussed on the Sauber “we are all doomed if we put Giedo in the car” arguments.

These arguments advanced by Sauber seem to be so inept and lacking in substance that one is forced to ask why they put up such a poor performance. It is almost as if they were going through the motions. I am wondering if there is a hidden agenda at work.

Also notable was the presence in court of Felipe Nasr, Marcus Ericsson, and lawyers representing them. If Sauber had a strong case, there would have been no need for them to be present. The fact that they felt it necessary to be there tells me that they have little confidence in Sauber’s defense. Their threat to sue Sauber if either Nasr or Ericsson is denied a drive is somewhat predictable, but should not be of any interest to the court. They are not parties to the current dispute. If Sauber is found to be required to run Giedo Van Der Garde, then Sauber has to sort out the issue of competing contracts.

I stand by my assertion that Sauber has to sort this mess out before they find themselves on the back foot in a game of legal Whack-A-Mole with Van Der Garde’s lawyers. Right now, F1 is in the headlines for the wrong reasons.

The news has broken that Giedo Van Der Garde is to take legal action in Australia next week over what he claims is a breach of contract by Sauber, when they replaced him for 2015 by one of Felipe Nasr or Marcus Ericsson, despite him apparently having already signed for the team for 2015.

A Swiss Court of Arbitration has apparently ruled that Van Der Garde did have a valid contract for 2015. It appears that the court action in Australia is a request for enforcement of the arbitrator’s decision in Australia. This would place Van Der Garde in a strong position to possibly enforce the arbitration decision via legal action to impound the team’s cars and other assets when they arrive in Australia for the Grand Prix.

Some thoughts on this:

1. Van Der Garde has already successfully sued another F1 team over contractual matters. He won a court case in 2010 against Force India (they were actually entered as Spyker at the time of the original contract) over F1 testing mileage, and eventually collected compensation from the team. The court judgement is worth a read, since it provides a fascinating window into the behind-the-scenes processes by which drivers get testing roles in F1, and how those arrangements can rapidly unravel.

2. It is not clear what relief is useful for Van Der Garde if the court in Australia rules in his favour. As has been pointed out by Joe Saward on his blog, forcing Sauber to run him in 2015 is not exactly logical or smart for multiple reasons; he will be paying an unwilling team for a drive in a car that he has not even sat in, let alone tested. The only reason that suing the team makes sense is if he made a down-payment for 2015 when he signed his contract, and is still in dispute with the team over the down-payment.

3. If Sauber decides to tough it out and meet Van Der Garde in court, they have to be prepared for the possibility of an adverse ruling. This would throw their entire 2015 sponsorship up in the air from a legal and commercial standpoint, since running Van Der Garde would force them to stand down one of either Felipe Nasr or Marcus Ericsson, which would in turn carry negative contractual and financial implications for the team.

4. F1 team owners and bosses tend to not look good when cross-examined in court cases. Most recently, Eddie Jordan was excoriated by a High Court judge in the UK when Jordan Grand Prix attempted to sue Vodafone over a title sponsorship deal that ended up with Ferrari. The sort of business practices that seem to be the norm in F1 tend to be viewed by many legal jurisdictions as sharp practice at best.

It really will not be good for Sauber as a team to be forced to defend their position in court. I anticipate an out of court resolution, which may cost Sauber money and leave them struggling later in the season. A number of people experienced in matters F1 have commented that Sauber had to sign their current two drivers for 2015 in order to be able to get funds to survive the winter, and they are still in a precarious financial position.

It is possible that Sauber may also face legal action from their other former driver, Adrian Sutil, according to Auto Motor Und Sport.

A discussion has started up at James Allen’s blog about why modern f1 cars are deathly dull to look at. Here is my contribution.
The dullness of modern F1 cars is a combination of several factors:

1. Too much empty space on the cars. Teams cannot get sponsors, but they refuse to lower their rate cards. As a result, blank space predominates on many cars
2. Loss of sponsorship from B2C companies. Most sponsors are big-ticket B2B corporations, with very understated logos and images. They are not snazzy and exciting – they are not trying to attract Joe Blow and his family members
3. Perpetuation of a car shape profile that is based around irrelevant aero, and 18 inch rims, which no manufacturer would use on a performance road car.

Ideas for change?
Well, a cost cap with teeth is desperately needed, but it seems that the F1 governance model is broken right now, so that may be as likely as pigs flying. In the meantime, I want to see the axe taken to aero (no front and rear wings, partial wheel fairings, opening of underbody aero rules), a modest increase in horsepower (no, not 1000bhp, who apart from the factory teams can afford to pay for it?), harder tyres on 13 inch rims, and a move to social media the hell out of F1 weekends. Absent significant change in these key areas, F1 is going to continue as a declining sport based on a broken business model.