F1 Financial Crisis

While Mercedes, Lewis Hamilton, and Nico Rosberg were enjoying one of the more dominant seasons in Formula One, the rest of the grid was suffering from a potentially crippling financial crisis. The series had just entered a new era with 1.6 litre turbocharged V6 engines, a move that was seen as controversial over its sound and its cost. As the season continued on, Marussia F1 and Caterham F1 entered administration shortly after the Russian Grand Prix, sending the entire sport into disarray. Since then, Force India have been subject to similar rumours, and the future of the sport have been put into doubt.

Background

Three new teams entered the sport in 2010: Marussia, known as Virgin Racing, Caterham, known as Lotus Racing (not to be confused with the current Lotus F1 team), and HRT F1 (also known as Hispania Racing Team). A fourth team, US F1 Team, was entered but failed to make the grid. HRT folded in 2012 amid financial troubles, and a lack of results in their three seasons. HRT quickly went into liquidation and folded without too much controversy.

Even as far back as 2013, reports came out that as much as seven F1 teams had debts up to $2 billion, and Martin Whitmarsh, leader of the Formula One Teams Association, led blame to the private equity firm CVC Capital, which, having taken more than half of the $1.5 billion income, led him to comment that the firm was "the worst thing that had happened to the sport." Whitmarsh also commented that the rising costs of the upcoming V6 engines, the contracts to Pirelli, and the lack of action from F1 "supremo" Bernie Ecclestone led Whitmarsh to say that, "I cannot see in their shoes (the seven smaller teams) how you can construct a sustainable business model."

Sauber F1 team principal Monisha Kaltenborn has also been very critical about the current state of Formula One. She commented in April 2014 that F1 was in danger of "ruining itself" over rising costs in the sport. The FIA, the sport's governing body, had proposed a salary cap in December 2013 which would have been set in place for the 2015 season. However, the F1 strategy group, consisting of Red Bull, Ferrari, Mercedes, McLaren, Williams, Lotus, and members of the commercial rights holder and the FIA, rejected the proposal. Kaltenborn said that "the time has long gone where we should have made a decision, but it's never too late. We are just going to ruin ourselves if we don't act here. And people expect us to act." Kaltenborn then said later in September 2014 that "drastic" changes were necessary, and that "Something will happen because you can't go on at this level and you don't know the next thing that is going to come up that will again mean more costs." When asked if all 11 teams would survive to 2015, she said, "I'm not so sure if that is going to be the case."

Breaking point

Shortly before the 2014 Japanese Grand Prix, work on Caterham's 2015 car "ground to a halt" when the team had difficulty buying materials to assemble the car. Baliffs had claimed that they had seized equipment from their factory in Oxfordshire. The team was also reported to have failed to pay funds to Pirelli to use their tires for the race, and that the team was at risk for collapsing before the season had ended. Marussia was also subject to similar rumours. The Japanese Grand Prix started without incident for both Caterham and Marussia, though Jules Bianchi of Marussia was seriously injured late in the race. Caterham had been raided by police in between the Japanese and Russian Grand Prixs, but the team quickly dismissed the "unfounded and unsubstantiated rumours". The team arrived and participated at the Russian Grand Prix, alongside Marussia, who withdrew one car from the entry list, though it was out of respect for Bianchi rather than another sign of financial troubles.

However, on October 24, Caterham entered administration, followed by Marussia just four days later. Graeme Lowdon, Marussia's Sporting Director, said that "the current recipe, in terms of sporting and technical regulations, has produced a sport that nobody can afford." Both teams were forced to miss the United States Grand Prix, leaving the grid with 18 entries. Marussia missed the rest of the season, and changed their name to Manor Motorsport, their original entry name. Caterham, meanwhile, entered the Abu Dhabi Grand Prix thanks to a crowdfunding campaign which helped raise over £2.35 million. This move was criticized by Ecclestone, who commented that "we don't want begging bowls," and that "if people can't afford to be in Formula One, they have to find something else to do." Caterham raced with Kamui Kobayashi and Will Stevens, filling in for Marcus Ericsson who quit the team earlier in the month. Stevens finished 17th in Abu Dhabi, while Kobayashi failed to finish the race.

Monisha Kaltenborn, in reaction to Marussia and Caterham going into administration, said that a financial overhaul was needed for the sports' survival. She said that "it's a real shame we have turnovers of billions of dollars, yet as a sport – as a community – we are not capable of making sure that 11 teams survive. You try to explain that to somebody." Bernie Ecclestone, meanwhile, said that the bigger F1 teams needed to make sacrifices in order for F1 to survive, admitting that the financial structure he put in place were "wrong."

Much of the criticism has been placed on the uneven division of the prize fund. While Red Bull and Ferrari each have approximately $150 million from the prize fund, Marussia was given only $10 million from the same prize fund. The new engines in F1 rose from $10 million per unit to $25 million per unit, putting smaller teams under more pressure. Gerard Lopez, team principal of Lotus F1, commented that "it was logical at the time to cut costs, and instead we have one of the biggest cost increases in the history of F1. It was a bit ridiculous in the economic climate." "There is enough money in the sport to guarantee it will be there, be healthy, for a long, long time," he later said. "But the current system just doesn't hold up. It's completely wrong."

Grands Prix

It wasn't just the teams that were put under pressure, but also some of the races themselves. The Korean Grand Prix was dropped from the calendar after the race had occurred losses of $26 million in 2012, and the race showed little signs of improvement in 2013. When the race was included on the calendar for the 2015 season, Ecclestone said that the organisers "would rather it not happen," citing that contractual obligations led the FIA to include the Korean Grand Prix on the calendar. The race was subsequently dropped.

The German Grand Prix has also been put under threat. Since the retirement of Michael Schumacher, attendance figures have dropped in the German Grand Prix, alternating between the Nurburgring and the Hockenheimring. The attendance in the 2014 race in Hockenheimring was at only 52,000 spectators. The Nurburgring was set to host the race in 2015, but financial issues with the track meant that no contract was in place for the event. This led Ecclestone to comment that the German Grand Prix was in doubt, saying "We've got one. It's called Austria."

Aftermath

In the wake of the financial crisis of Formula One, at least one team is more than likely defunct from the series. Caterham is due to enter their remaining assets into auction in March 2015. Over 200 of their staff have been made redundant on the team, and the team has not been sold to another investor to keep the team afloat. The 2014 chassis is one of the items being put up for sale, and given that work on the 2015 chassis has not yet resumed, the auction has been set as a due date for Caterham to recover in time for the 2015 season.

Marussia is facing a similar situation, as in early January 2015, co-founder John Booth said that the team had two weeks for the team to be sold off to another investor. Their efforts have been made harder since a proposal to allow Marussia to race their 2014 chassis in the 2015 was rejected by Force India. Deputy team principal Bob Fernley said that, "Given the lack of information, uncertain guarantees, and the speculative nature of the application, the decision was taken that it is better to focus on ensuring the continued participation of the remaining independent teams." Technical changes for the 2015 season means that modifying the 2014 car to fit to the new regulations is "impossible." Former F1 team owner Gian Carlo Minardi criticized the decision, calling the move "absurd and unsportsmanlike behavior," also saying that "The opposing small teams hope to split up the remaining prize money that was due to Marussia, but perhaps they did not count to ten. Get rid of the two Cinderellas – Marussia and Caterham – and the grid shrinks." However, Marussia are now planning to return to Formula One in time for the Chinese Grand Prix with a brand new chassis.

Soon, Force India were reported to have financial troubles of their own. After the team announced that they were sitting out on the first pre-season test in Jerez, reports said that Force India was facing financial collapse, and was insolvent. The source later claims that the reason for the delays in the Force India VJM08 was "because important parts suppliers have not been paid." Although the team later denied the rumours, and aimed to compete in the remaining pre-season tests and the first race in Melbourne, Fernley admitted later that the team was likely to miss all three pre-season tests.

References

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