In the space of five years Formula E has attracted a swathe of manufacturers and swelled its grid. But motorsport’s greenest championship isn’t in the black yet.
How long will Formula E take to turn a profit? When will its manufacturer and independent teams start to see a share of the sport’s income – and will they remain committed in the meantime? @DieterRencken spoke to the key players.
That changed with the formalisation of the European Union – which resulted in the tearing down of borders between its countries – and a 2000 ruling which affirmed the FIA as motorsport’s administrator/regulator, not its promoter. This obliged governing body to recognise all forms of motorsport, whether in competition with each other or not, provided they comply with prescribed safety standards and adhere to administrative procedures.
Concurrently the EU ordered that Bernie Ecclestone, who had been awarded the rights to all the FIA’s championships under a deal brokered by his friend of 30 years, then-FIA president Max Mosley, should relinquish the rights to all bar a single championship to prevent motorsport from becoming a monopoly controlled by a single individual.
That done, the result was a proliferation of start-ups. These included Formula Palmer Audi, myriad one-make championships punted by brands such as BMW, Renault and Abarth, plus the likes of GP3, A1 Grand Prix, Auto GP, Superleague Formula, Formula Renault 3.5 (in various guises) – all in addition to F3 and F3000. The latter was later mysteriously acquired by Formula One Management and rebranded as GP2, while Euro 3000 sprang up to give a home to the old chassis.
History relates that most of these series have disappeared, with A1GP’s implosion being the most spectacular. Still, the bare bones of that series remain, for the latest is that the cars – based on 2004 Ferrari F1 chassis fitted with modified 2008 Ferrari road car V8s – are to form the basis of a pan-African championship. Whether that sees the light of day remains to be seen.
But there is one truly international series, which was given virtually nil chance of survival by most pundits, now in its fifth season. It has become the longest surviving of all the remaining start-ups and is going from strength to strength. So much so that caps are being put on grid numbers as car manufacturers trip over each other in their haste to enter. That series is Formula E.
Since 2014 Formula E has zipped from zero to a level that sees it regularly (but wholly unfairly) likened to F1 – a comparison it is trying to avoid. That does not imply Formula E is inferior, just as tennis / squash comparisons are inappropriate: both are racquet-and-ball games, but their rules of engagement are vastly different. Of course, fans may watch (or play) both, but there is no doubt about which sport tops its genre in every respect.
However, each gain inevitably brings an element of pain, and now that Formula E’s future seems bright there are the expected rumbles about the two crucial elements that eventually blight any successful motorsport championship. These are costs and income – which fall neatly under the combined heading of ‘money’.
As Formula E CEO/chairman Alejandro Agag outlined when he spoke to RaceFans recently, the formula’s costs are kept largely under control by regulations that oblige manufacturer teams to supply independents at prescribed costs. “If you’re going a spend a lot of money, 100 million, 200 million on a powertrain that then you have to sell for €400,000 to another team, you think twice.”
Which leaves the question of income, more succinctly the question of Formula E sharing a slice of its revenues with the teams. A glance at its income statements vividly illustrates its rapid growth: for the year ending July 2017 the series generated £105m, well up on £81m for the previous year. Its 2018 financials are due to be filed by the end of May, but during our interview with Agag he pointed to expectations of around £185m.
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Intriguingly, this figure is around 10 percent of F1’s turnover, a proportion which applies to several other key metrics: Where F1 team budgets average around $200m annually, Formula E teams spend around $20m; live and television audiences are also roughly in line with the 10 percent factor. Thus, in many ways, Formula E is as cost-effective for teams and sponsors as F1, with the advantage of a different, younger demographic.
However, despite these impressive numbers, in its previous financial year Formula E recorded losses of £18m (down from £32m in 2016) and accrued liabilities of £115m (up from £90m), so the numbers have encouraging trajectories. It is, though, on the basis of these recorded losses that Formula E won’t (can’t) pay teams for their participation, which costs anything between £15m and £30m, funded purely by a combination of parent companies or sponsors.
“We have invested a big amount of, of course, effort, but cash funds in this venture,” explains Agag. “What makes sense is that first we recover our investment, then that we make some profit from our investment, and then that we start the conversation with the teams on how we’re going to do the distribution.
“We will share our revenue with the teams, but we are not there yet.”
The Formula E model is essentially that of a process company: It buys in goods and services from suppliers (teams), processes and packages the product (races), which it sells to wholesalers (promoters/broadcasters), who retail it to customers (TV/live audiences). Now imagine a start-up factory not paying suppliers simply because it is not (yet) in the black.
Agag’s responds when I put this to him was: “[My] initial equation is wrong. I am the supplier for the teams, not the teams for me. I supply teams with a platform. They pay to be part of my platform. I give them from the charging infrastructure to the tracks in the cities to the broadcasting so that people can see them, to a brand, a strategy with marketing, and so on. We give them services; like that they should pay us…”
All well and good, and for now Formula E has the strength in numbers (of participating teams) on its side. But how much longer before teams start agitating for their shares? Particularly as three-quarters of the grid is owned by car makers at a time when the overall industry faces torrid times. When Formula 1 was hit by similar storms in 2008/9, manufacturers pushed for increased revenue shares, yet five many departed.
James Barclay, team director of Jaguar Racing, believes a revenue share model is inevitable once “Formula E has matured though its first phase,” adding that “it’s now absolutely proven itself about being a very, very exciting branch of the sport.
“At the moment it’s a model which fundamentally [has] the promoter still recouping the costs of investments. From our perspective, we are fundamentally coming and paying to race in the championship, and our revenues, we can pull in additional forms through outside sponsorship, but not through the promoter.
“I think as this championship is growing, the most important thing is there will be a period of time that is manageable, but actually the long-term success of the formula will be about creating a business model which ensures long-term stability of the players. I think that is really the critical point.”
Ulrich Fritz, team boss of newcomer HWA, effectively a Mercedes proxy team, largely shares Barclay’s views about revenue sharing. He, though, adds that “The truth is in between [sharing or not], and it needs to be an [sustainable] ecosystem in the end. At the moment the ecosystem runs like it is, and everybody is fine with it, otherwise they would leave.”
Fritz, who saw manufacturers come and go during his previous tenure as a DTM team boss, acknowledges that risk. “That’s what we have to take care for the future,” he says.
Indeed, Audi Motorsport Director Dieter Gass, who joined the Four Rings from a senior management position with a manufacturer F1 team that exited in 2009 (Toyota), believes that manufacturers will inevitably leave Formula E at some stage.
“We have seen I think quite a few championships where you have many manufacturers involved, and we have seen with all these championships that this was not lasting a length of time,” he says.
“We never had a period of seven, eight years with so many factories involved, so I think we’re going to see the same situation in Formula E. You have everybody in, and there will be a point where people start losing interest, for whatever reason. Whether their ROI is not good enough, whether their performance is not good enough or whatever.
“So I don’t think we can assume that from now on for the next five or 10 years we’re going to be running with the same amount of manufacturers. It will reduce.”
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As in F1, manufacturer involvement brings with it ‘freebie’ marketing and activation activities, so it is absolutely vital that Formula E maintains a strong and vibrant manufacturer contingent. Here the series can learn from F1: once the manufacturers left F1, the sport suffered a massive marketing void that Liberty has yet to plug completely. And, for start-ups, marketing is crucial.
If manufacturer numbers may fall, Formula E may feel the need for independent teams more keenly. Venturi, headed up from this year by ex-racer Susie Wolff, is a true independent despite having its roots in the eponymous small-scale specialist car manufacturer.
Wolff believes it will take time for Formula E to become profit-making. “One aspect is that Formula E is a young start-up,” she explains. “It’s a completely new way of going racing; it’s a very different audience to that of, let’s say, a normal motorsport championship.
“That is why it’s attracted the interest of so many manufacturers, because it’s in line with the way the automotive industry is developing. And for this concept, function of one-day events in city centres with huge costs of build-up, it’s clear that it’s not profit-making yet. Because in the end Saudi was the first really big deal where you could say, ‘OK, that’s shows what the value of Formula E is.’
“[Formula E] has some fantastic shareholders, but in truth it’s a loss-making entity. And it’s far away from being a profit-making entity right now. I mean, things can change very quickly in this business, but right now it’s far away from being profit-making. So for me the key aspect which they need to be very, very diligent on is what it costs us to go racing.”
That, in a nutshell is the key: Formula E’s cost-to-income equation. As long as costs can be contained, clamours for shares of revenues can be warded off; once that changes, whether for manufacturers or independents, Formula E faces two scenarios: depleted grids or diminished coffers; maybe even both.
Those are the major obstacles facing Agag in the near-to-medium-term, and arguably represent a bigger challenge than getting the series off the ground, for start-ups generally benefit from an element of sympathetic indulgence. However Wolff is confident the series is “in very good hands.”
“The people who are running the championship, I have a lot of belief in their abilities, and I think what they have managed to create in Formula E, I really say ‘well done’, because I was a cynic in season one.
“I think probably if Dieselgate hadn’t happened, this paddock would look very different right now. But Dieselgate did happen, and there was a huge race in manufacturers to showcase electric technology. But I believe that motorsport has always been relevant for manufacturers. There’s a reason why manufacturers choose to go racing, because if gives them a sporting element to their brand, it allows them to showcase their technology, and it allows them to have a huge marketing story.
“I can’t speak for the big manufacturers, but certainly there is a lot of relevance for Formula E, and I do have a lot of faith in the people running the sport.”
While there is no doubt that, as Wolff says, Dieselgate accelerated Formula E’s global acceptance, the fact remains it currently boasts full grids through its own merits, one of which is an extremely robust promoter-competitor relationship that will serve it well as the series consolidates phase two of its growth plan. Formula E looks likely to remain motorsport’s most successful start-up well into the future.
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