Analysis: How F1's minnows can boost their balance sheets
For those teams struggling to break even in the fast-paced, fast-spending world of Formula 1, monetising assets outside of the sport itself can be a financial lifeline. Kate Walker explains.
In the world of academia, Formula 1 often makes for a useful case study in research relating to global business, and much has been written on the subject of asset monetisation in F1, not least by Dr Paolo Aversa of City University London’s Cass Business School.
“Business model configurations are especially important in technology-based environments where firms often ‘require distinct business models that operate in tandem’ to develop multiple revenue streams with the same technology,” Aversa et al. wrote in a paper entitled ‘Business model configurations and performance: A qualitative comparative analysis in Formula One racing, 2005–2013’, published in the journal Industrial and Corporate Change.
Developing multiple revenue streams from a single resource enables businesses to expand the possibility for profits without needing to invest heavily in new processes or technology, effectively allowing the business in question to spend once yet earn two, three, four, or more times; a form of financial efficiency.
Aversa’s research has long had an F1-specific bent, and the research undertaken by his team saw the group “investigate the business model configurations associated with high and low firm performance by conducting a qualitative comparative analysis of firms competing in Formula 1 racing.”
The researchers discovered “that configurations of two business models—one focused on selling technology to competitors, the other one on developing and trading human resources with competitors—are associated with high performance” in Formula 1.
Engine customer data
Monetising F1 assets can take multiple forms. There is using an existing customer base within Formula 1 to generate profits through power unit sales, but then there is also the financial advantage that comes from access to customer data.
For a power unit supplier, having client teams running your technology on track creates a larger data pool than simply running a pair of works cars, and at no added testing cost to the supplier or factory team.
Aversa et al. wrote: “We found that by selling relevant technological components to other F1 firms, F1 teams that operate as part suppliers gain access to a set of critical resources that go beyond financial returns: they access a large set of data and information about their own technological components derived from their clients’ cars—i.e., data on how the supplied engines perform in clients’ cars during races.
"This implies that the more F1 firms engage with F1 competitors as customers, the bigger the data they obtain: for example if a firm sells its engines to other two F1 firms (e.g., Ferrari sold its engines to Scuderia Toro Rosso and Sauber), the F1 firm will access technical data from six cars on the racetrack.
“By selling components to other F1 firms [teams], F1 firms learn how to better develop their components and parts for technology transfer to road car manufactures (i.e., internal knowledge transfer). F1 firms that sell engines to other firms have a better opportunity to test and develop their own technology.
“Accordingly, these firms can enhance their knowledge base that represents the starting point for transferring F1 innovations from small-scale prototype manufacturing to large-scale road cars productions.
"By contrast, road car companies that highly benefit from receiving F1 technology and from the opportunity to transform such technology into commercially viable innovative automotive solutions are usually willing to increase their financial support to the supplying F1 firm.”
Wind tunnel leasing
The more obvious way of monetising F1 assets is by leasing out under-used resources. Those teams in possession of their own wind tunnels - the use of which is now highly restricted in the regulations as an attempt to cut the cost of competing in Formula 1 - are able to rent out their facilities when not in use, either to rival teams or to interested parties outside of the sport.
There are also profits to be made in non-physical assets, as McLaren and Williams have both shown over the years, using their intellectual property to generate sources of income in unrelated industries.
“As with most high-tech industries, F1 combines cutting-edge technologies that are derived from multiple fields (e.g., aerospace, mechanics, materials engineering, simulation and information technologies, and telecommunications, among others),” Aversa et al. wrote.
“This, in turn, allows F1 firms to sell diverse technological applications beyond the F1 domain. Some F1 firms (e.g., McLaren, Caterham, Williams, Sauber) have seized these business opportunities and established technology consulting divisions aimed at providing tailored solutions to other companies and industries.”
McLaren have long been involved in knowledge-sharing with partners and outside clients: in recent years McLaren Applied Technologies has done work on improving efficiency at Heathrow Airport; improved medical equipment for efficient and accurate administration of doses for patients on hospital wards; and increased production efficiency for GlaxoSmithKline, to name but a few of the group’s side projects this decade.
“There are more sponsors in Formula 1 today than there were ten years ago,” JMI founder Zak Brown is quoted as saying in Performance at the Limit: Business Lessons from Formula 1 Motor Racing.
“Just in sheer numbers of companies. What’s happened is that teams have assets beyond the race car, McLaren being the best example. They have the whole factory and facility with something that sponsors commercialised so they have sponsors that you know rarely if at all go to the Formula 1 track because they’re buying other assets that have been built up out of these Formula 1 teams.”
The Williams case
For Williams, a historic outfit whose fortunes have ebbed and flowed over the decades, part of the team’s turnaround in fortune stems from the team’s decision to offload some assets unrelated to their core business of racing, Williams Group CEO Mike O’Driscoll explained in a 2014 interview.
At the time, Williams were fighting for regular podiums, and O’Driscoll summarised his road map to success as follows: "First, to return the Williams F1 organisation to the front; second to develop a strong advanced engineering business. And the third is to dispose of those operations that cost us money, or have been costing us resource and time and attention.
"For me it's important we have both a strong and dynamic and successful Formula 1 organisation, and a strong and successful and robust advanced engineering group," O’Driscoll explained. "It's not an 'or', it's an 'and'. I've never seen it as a choice between the two. But it's important that both can co-exist. They have to feed each other.
"The very best calling card our Advanced Engineering can have is a world championship-winning team; it's a strong Formula 1 organisation. And a strong advanced engineering organisation can in turn provide us with the financial stability to enable us to succeed in Formula 1."
With Force India and Sauber both recently talking about the opportunities for financial growth found within their existing assets, F1 observers are afforded with a fresh opportunity to analyse the efficacy of varying approaches to monetisation and just how effective the varying methods prove to be.
But success in the company books is no guarantee of success on the racetrack, as Aversa et al. concluded in their original study: “An interesting implication is that certain F1 firms might still be able to, literally, ‘stay in the race’ despite underperforming in [their] industry's core activities. These firms might economically survive—even though they consistently underperform relative to their rivals—because their business models target viable niches.”
The real success of asset monetisation is in each teams’ ability to stay financially afloat, to live to race another day.
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Analysis: How F1's minnows can boost their balance sheets
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