Mercedes Ups Its Stake in Formula One

Who needs Formula One racing anymore? It burns up billions of dollars, pollutes the atmosphere, and can tarnish a company's image in these environmentally-conscious times. Teams are spying on each other, the world champion has been caught lying to the governing body, a Grand Prix race was fixed by means of a faked accident, and the career of the sport's highest official has been ruined by a sex scandal.

Given that this is one way you could summarize the last three Formula One seasons, is it any wonder that auto manufacturers are fleeing in droves? First it was Honda (HMC), then BMW (BMWG.DE) and Toyota (TM). And now even Renault (RENA.PA) is considering abandoning ship.

Formula One is passé. Or is it?

Surely Formula One racing is timeless entertainment; an attractive and spectacular show complete with heroes and villains, victims and perpetrators, and a blessing for the marketing department of any company that wants to be seen as sporty and dynamic. And now it has even become what the feeding frenzy jettisoned years ago: cheap. At least that's how Daimler (DAI) sees it.

Last Monday the company announced it had bought a large share of the Brawn GP team, which has promptly been renamed Mercedes Grand Prix. The move goes completely against the grain and is hotly-debated within the company. CEO Dieter Zetsche had barely finished presenting the deal when the Daimler works council countered with a statement questioning its management's sanity.

Gone are the Bonanza Years

Daimler will spend somewhere in the region of €50-75 million ($75-113 million) over the next five years to acquire a 45.1-percent stake in Brawn. That may be a bargain basement price for such a successful team, but in times of financial crisis and reduced working hours that's a great deal of money. In an attempt to defend his actions, Zetsche wrote to his staff. He even quoted the figures involved; a step that boards usually prefer to avoid. Participation in Formula One racing will soon cost the company "less than €60 million a year" he claims. "That's about a quarter of our budget in the early days." As recently as 2007, the Grand Prix jamboree cost Daimler about €200 million, partly in terms of the engines it donated for McLaren's cars, the rest as cash deposited in the team's bank account. It also paid half of the drivers' wages.

For a long time Formula One racing was a huge money-making enterprise for everyone from team owners, drivers, and broadcasters to F1 supremo Bernie Ecclestone. Everyone, that is, except the auto manufacturers, who forked out billions. Nevertheless, they were willing to keep bankrolling the sport as long as they too were bathed in its glory. After all, marketing doesn't come cheap.

But as costs skyrocketed, the system threatened to collapse under its own self-importance.

Cut-Price Racing

That's when Formula One discovered parsimony. Teams have become less expensive to run. Test-driving is forbidden during the season, the number of engines and gearboxes has been limited, and the teams have now even pledged themselves to restricting resources as a way to cut their expenditure yet further. By the end of next year teams may have a maximum of 350 employees each. The year after that, this will be slashed to just 280—a far cry from the 1,000 strong workforce top teams had in their heyday. The only expenses that will remain unfettered will be those not related directly to the vehicles, such as the drivers' fees and marketing costs.

The aim is that teams hoping to compete in the sport's upper echelon won't have to spend more than about €50 million a season developing and racing their cars. Up until a few years ago, the likes of Ferrari (FIA.MI), Toyota, and McLaren-Mercedes were each dolling out upwards of €300 million for the privilege.

Added to this, teams will stand to get a far greater proportion of the Formula One marketing revenues. Bernie Ecclestone has become more generous in his distribution of the income generated from selling broadcasting and advertising rights. Brawn will receive a payout worth a little over €40 million for its successful 2009 season. In the past, winning teams could only reckon on getting about 25 million.

Boosting the Brand?

Daimler's deal with Brawn isn't only relatively good value-for-money. It's also secured. The company is set to net about €180 million for the sale of its 40-percent stake in McLaren—several times what it is paying for its involvement with Brawn. But that's not all: Daimler even has a co-investor for its undertaking. The state-owned Aabar investment company from Abu Dhabi—which is already Daimler's biggest single shareholder, with a 9.1-percent stake—will buy a further 30 percent of the racing team. And if sponsors bring in so much money that it runs up a surplus by the start of the season, Daimler will be free to dip into the pot. This compares extremely favorably to its involvement with McLaren, which never brought the Stuttgart-based company any money.

First and foremost, and in sharp contrast to the belief at rival BMW, the Daimler management thinks that association with Formula One racing is still more likely to boost its image than harm it. Zetsche calls it "motor racing's most important stage." Mercedes has been involved in Formula One continuously since 1994. It hopes having a team in its own name will help stamp the brand's name on the sport. Zetsche enthuses about a "Silver Arrow works team," and wants to revive the near-mythical pre- and postwar era of motor racing.

Daimler may have had a similar-sized chunk of McLaren as it now holds in Brawn, but it wastes few words on its previous alliance. The team was always known as McLaren-Mercedes; a reflection of the relative importance of the two partners: Mercedes remained a hanger-on, while McLaren decided which drivers to hire. Although Mercedes would have loved one, the team never had a German driver.

That's about to change: 24-year-old Nico Rosberg has already been signed up. The favorite for the number-two slot is 32-year-old Nick Heidfeld. He's been driving for BMW up to now.

Translated from the German by Jan Liebelt

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