Caterham’s plight shines a spotlight on Formula One’s skewed financial model

23 October 2014 | Posted in SportsPro Blog | By David Cushnan | Contact the author

Caterham’s plight shines a spotlight on Formula One’s skewed financial model

As the messy, legal ownership dispute which threatens the future of the Caterham Formula One team escalates, it is worth remembering that of the 11 teams competing in the 2014 world championship, only four – Ferrari, McLaren, Williams and Sauber – existed in their current guise prior to 2005.

Red Bull Racing joined the party that year by buying out the hapless Ford Motor Company to take over its team, one originally called Stewart Grand Prix from 1997 to 1999 and subsequently renamed Jaguar. A year later Red Bull invested again, taking over the lowly Italian Minardi team and rebranding it Toro Rosso. Force India were next, formed in 2008 when Indian entrepreneur Vijay Mallya bought the Silverstone-based team which had been Jordan GP between 1991 and 2005, then passed into Dutch and Russian hands as Spyker and Midland.

In 2010 Mercedes-Benz finally went it alone, switching from mere engine manufacturer and minority McLaren shareholder to full ownership of its own team. The Stuttgart-based manufacturer acquired championship-winning Brawn GP at the end of 2009. Between 2006 and 2008 that team had been owned by and called Honda – the Japanese manufacturer having bought out British American Tobacco (BAT), which had run the team under the name BAR between 1999 and 2005. At the end of 2008 BAT had acquired the entry held by Tyrrell, the family-run team which won world championships in the 1970s but slipped down the order in later years.

Following BMW’s withdrawal from the sport at the end of 2009, which prompted the return of Peter Sauber as the owner of his eponymous team, three all-new teams entered the sport in 2010, enticed by the prospect of greater cost control – a prospect which has never quite materialised. Two of those survived into 2014, despite changes of names.

Team Lotus, run by Malaysian entrepreneur Tony Fernandes, became Caterham and Virgin Racing switched, due to a change in ownership, to Marussia. At the same time, French manufacturer Renault scaled back its investment in Formula One, relinquishing ownership of the team which it acquired from Benetton in 2002, and concentrated on manufacturing engines. The new owners, from technology investor Genii Capital, changed the name to Lotus, a moniker used under licence – but not before a messy legal dispute over the rights to the name with Fernandes.

The ownership changes paint a stark picture of the difficulties involved in keeping a Formula One team afloat and thriving

The ownership changes paint a stark picture of the difficulties involved in keeping a Formula One team afloat and thriving. The list of teams which failed makes it all the starker. In the 20 years since Ayrton Senna was killed at Imola in 1994, an anniversary which passed in May, ten other teams have disappeared completely. Toyota, the world’s largest car manufacturer, shut its team down at the end of 2009 as the global financial crisis hit, but the names of Larrousse, Pacific, Simtek, Forti Corse, Lola, Prost GP, Arrows, Super Aguri and, most recently, the Spanish HRT team have become mere footnotes in the history of Formula One: teams that tried and, for largely financial reasons, failed. Caterham, which it was announced in July had been sold by Fernandes to a group of unnamed investors hailing from Switzerland and the Middle East, may well be next.

Air Asia boss Tony Fernandes sold the Caterham team to a group of unnamed investors in July.

And yet, despite the massive costs involved in setting up and operating teams the lure of Formula One, with its international appeal and global reach, has continued, as evidenced by the investments made by the likes of Red Bull owner Dietrich Mateschitz, Genii Capital chairman Gerard Lopez, Mallya or the board of Mercedes-Benz. The next man to accept the challenge is Gene Haas, the billionaire best known as co-owner of the successful Stewart-Haas Racing Nascar team, who intends to launch Haas F1 Team, a US-based squad backed by Ferrari technical assistance, in 2016. He is, like many who buy into the sport, enthusiastic and believes he can, in time, build a successful team, working to a budget.

Fernandes will be familiar with those feelings. In 2009, as Formula One invited new entrants during a period in which it looked likely a US$40 million budget cap would break down previously prohibitive financial barriers, he jumped at the chance to expand his business empire and get involved. A team was put together from scratch. He was enthusiastic, he was open and he was keen to make an impact in such a global sport, bringing perspective from his range of business interests in Malaysia and beyond including Air Asia. When plans for the budget cap fell apart, though, the financial goalposts were moved and any chance of Team Lotus, as it was then known, making an immediate impact was dashed. Like Virgin Racing, now Marussia, Lotus and its experienced driver line-up of race winners Jarno Trulli and Heikki Kovalainen had to get use to life at the back of the field.

Through the interminable battle over the use of the Lotus name, that was where Fernandes’ team remained. Initially, there were rash promises of progress and improvement; each time, the targets could not be met as the relentless pace of development and financial outlay elsewhere in the pit-lane proved simply too great. By the start of the 2014 season, with neither Caterham, the car company which Fernandes acquired and began to expand around the Formula One operation, nor Marussia having come anywhere near scoring a point, the Malaysian’s patience appeared to be running out. “If we’re not competing,” he said, “then we have to seriously examine ourselves and ask ‘Does this make sense?’ My message to the 250 people here is we have to go for it this year. This is it – the final chance.”

"My message to the 250 people here is we have to go for it this year. This is it - the final chance."

If it was meant as a rallying call, instead it was Marussia, a team of similar budget and facing similar challenges, which pushed on, scoring its first points thanks to Jules Bianchi’s terrific drive to 9th place at the Monaco Grand Prix. Even by then, Fernandes appeared to have lost interest in the sport, having failed to achieve any level of success with Caterham and faced with a distinct lack of progress on securing a more equitable distribution of the sport’s revenues – Formula One’s financial model remains skewed heavily in favour of the top teams, which has placed minnows like Caterham in an increasingly desperate financial position but also increased the strain on midfield teams like Sauber and Lotus. Fernandes’ Twitter account, an unscientific barometer but a barometer nonetheless, turned into an almost-exclusive stream of thoughts about Queens Park Rangers, the London soccer club he acquired in 2011.

The sale of the Formula One team was announced immediately prior to the British Grand Prix in July, although the lack of information about the new investors raised immediate questions. Former Formula One driver Christijan Albers was initially made team principal but lasted only a handful of races, while former Jordan, Spyker and Midland team principal Colin Kolles has been advising the group which, until the incendiary flurry of statements from both sides in recent days, had been assumed to be the new owners. It has become increasingly evident that the team has been operated on a shoestring at recent races. On Thursday, around 200 employees were locked out of the team’s Leafield base, with Fernandes’ insisting he hasn’t received payment and the new ‘owners’, now revealed as an entity called Engavest SA, equally adamant they have paid the purchase price for the shares, fulfilling its side of the bargain.

What happens next is unclear, but the sorry Caterham story is another salutary lesson in the peril of running a team in a sport still struggling to find an appropriate way to curb soaring costs. The issue is undeniably complex – such is the financial disparity amongst existing teams that what saves money for one team doesn’t for another – but, whatever, Formula One’s habit of attracting enthusiastic billionaires then spitting them out again looks increasingly unsustainable in these financially-straitened times.

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