Is the petrol-guzzling Formula 1 a better choice for automakers than driving electrically?

• Formula 1 has revamped its rulebook, which has sparked a surge of investment in teams that have been fighting to compete for years
• People like Aston Martin could bet that success on the racetrack will reinvigorate demand for their battered sports car businesses

In 2009, over a decade before plans for a soccer Super League rocked the sports world, the Formula 1 elite planned their own runaway competition.

Eight of the top racing teams, including those owned by Ferrari (IT: RACE) and Red Bull were furious at what they saw as the autocratic leadership of Max Mosley, president of the sports association, who wanted them to agree to an annual budget limit of £ 40 million. Mosley must resign, the group threatened, otherwise they would form a league of their own.

Mosley, who passed away last week, eventually resigned under mounting pressure. But just before he died, he had to see his own plan come true. Under new leadership, F1 introduced a cap on team spending; Starting this year’s season, the rules will prevent manufacturers from spending more than $ 145 million (£ 102 million) on their cars.

Development has resulted in a flurry of investment in companies that for years have not been able to cope with the huge research and development budgets of Formula 1 leaders Ferrari, Red Bull and Daimler-owner (DE: DAIX.N) Mercedes. Of Aston Martin (AML) to McLaren is now pouring hundreds of millions of fresh money into racing teams controlled by smaller automakers.

Their owners may bet that success on the track will reinvigorate demand for their consumer vehicles, which was battered during the Covid-19 crisis and faces further challenges in light of calls for a fuel cut from the automotive industry. But is a fuel-guzzling F1 a better choice for your business than driving electric?

Leveling the raceg-field

Mosley, son of British Nazi Oswald Mosley, said he was drawn to motorsport because no one “damned” his background. But while politics isn’t an obstacle to getting into the sport, it’s money.

Lewis Hamilton, currently world champion, is an unusual example of a driver without a wealthy background – his father once had to have up to four jobs at the same time to support his training. Hamilton has now won a joint record of seven F1 championships, mostly with Mercedes, thanks in no small part to the hundreds of millions the team has put into the series each year.

But the enormous budgets of Mercedes and its closest competitors have severely limited the competitiveness of the sport and, for many, its entertainment value. The Mercedes team reported costs of £ 333 million in 2019, around 54 percent more than McLaren’s £ 217 million spend, according to the company’s accounts. The former has won every championship in the past seven years.

The budget cap of $ 145 million excludes costs that are not related to vehicle performance, but should still help improve the playing field. A number of investors are taking advantage of the opportunity.

The new Aston Martin team came into being this season after a 60-year hiatus after billionaire Lawrence Stroll led a $ 500 million acquisition of the sports car maker and renamed his own Racing Point F1 constructor under his name. In December, investment firm MSP Sports Capital acquired a 15 percent stake in McLaren’s racing team, which, along with a cash injection of £ 185 million, will eventually increase to 33 percent. A few months earlier, Dorilton Capital signed a £ 137 million deal to acquire Williams, the legendary designer who has lagged its competitors in recent years.

The wave of investment that is being directed into Formula 1 seems to go against the trend of the broader automotive industry, which for the most part has constantly bowed to pressure to clean up its files and focus its future on electric vehicles; many automakers are now seeing Elon Musk and Tesla (US: TSLA), not Hamilton and Mercedes, as their main competitors. In October, Japanese business Honda (JP: 7267), which supplies engines to the Red Bull team, said it will pull out of Formula 1 to focus on building zero-emission technology.

But while Aston Martin’s rivals battle for pole position in the electric car race, the legendary automaker appears to see F1 as the best opportunity to revive its troubled business. Under Stroll’s leadership, further investments in electric vehicles were immediately stopped in the hope that success on the track would instead stimulate demand for the ailing sports car business.

“Our job is [the brand] younger, more dynamic, more interesting … culturally relevant to a lot of people, ”Jefferson Slack, commercial director of Aston Martin F1, recently told the Financial Times.

Winning the F1 championship itself also comes with significant financial incentives. Including prize money and sponsorship deals, the Mercedes team achieved sales of £ 355 million last year – around a quarter of the Daimler Group’s total income.

But winning the race often depends on factors beyond the control of management. Aston Martin’s takeover of champion driver Sebastian Vettel should improve his chances – although the decision to hire Stroll’s son Lance as his teammate raised eyebrows. With five races completed by the ten teams this year, the couple is currently in fifth place.

Meanwhile, the McLaren team, whose parent company plans to go public, had steadily higher polls each year before the budget cap was introduced, climbing from ninth place in 2017 to third place last year. Under the partial ownership of MSP, it is currently well on the way to winning the bronze medal again in 2021.

“The cost cap is now … a compelling investment,” said Jeff Moorad, CEO of MSP, during a phone call on the way to see McLaren compete in the Indy 500, a separate racing tournament in the United States. However, success is not measured by how the team performs year over year, he said, since the buyout firm is “looking at a long-term view” of the business.

BonkersF1 end?

Despite the controversy, the European Football Super League would likely have been a smart move by the sport’s greatest teams that would have helped them reach an even larger audience in the US and Asia. In the end, the plans are of course thwarted by the indignation of local fans on the continent.

With the aim of making F1 a more global event, it shouldn’t have the same problem – the series already takes place on five different continents. US group Freedom media (FWONA), which F1 acquired in 2016, has prioritized expanding the tournament by expanding it beyond its strongholds in Europe and Asia, with plans to add a Miami Grand Prix next year.

While the coronavirus pandemic devastated F1’s finances last year, it also accelerated a digital revolution in racing, leading to the start of a virtual tournament where professional drivers competed against each other in the F1 video game. The series is likely to try to continue capitalizing on esports’ rapid growth in the years to come as it aims to attract the next generation of fans.

“Formula 1 did an excellent job of attracting younger spectators,” said Moorad. “I have my own focus group with three sons aged 21-27 and they are crazy about F1. They play the video game religiously. “

Attracting young people like Moorad’s sons will likely be the key to success for Liberty Media, as well as auto companies hoping to attract new sponsors – and, as the next generation grows, customers for their cars.