Otmar Szafnauer, Alpine, Bahrain International Circuit, 2023 pre-season test

New “loophole” could undermine F1’s budget cap – Szafnauer

2023 F1 season

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Alpine Formula 1 team principal Otmar Szafnauer has warned teams could exploit a “loophole” to carry out development work outside the sport’s budget cap.

Szafnauer did not accuse any rival outfits of breaching the cap, which was introduced two years ago. However he warned teams could potentially benefit from development work done outside of the cap.

The budget cap was introduced in 2021 and teams were judged on their compliance with it for the first time last year. They are required to submit reports on their spending during 2022 by the end of this month.

Last year F1 teams took months to agree a deal to increase the cap in response to rising inflation. Alpine was one of the teams which opposed those changes, and Szafnauer believes the differences in how teams are structured has the potential to seriously undermine the intention behind the cap, which was to prevent some teams out-spending their rivals.

“All those inflation bonus things, although we vetoed them, I think those are marginally adding to the cap, not massively,” he told media including RaceFans. “But when you look at corporate structures, that is massive.

“If you only have 68, 70 people in the racing team and the rest of the 900 are outside of it and apportioning costs, that’s the kind of stuff we have to worry about.”

Some teams have dedicated technology divisions where they apply developments from their F1 programme to other industries. Szafnauer is concerned about how any transfer of knowledge back from those divisions to an F1 operation is treated within the cap.

“If you have a great F1 idea because you’re working on something else, how do you account for the stuff that you thought of when you were working on something else? That’s just an idea.

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“But if you take that even further, it could be other things. Developing tools, for example, for a boat, but that tool then applies to F1 and you’ve spent loads of investment on developing the tool and then you largely account for it in F1.

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“That’s the kind of stuff we have to start thinking about to stop. And that’s much bigger than just the inflationary stuff.”

Top technical staff from some teams have been relocated to divisions which are separate from their F1 programmes.

“It seems like more and more people or teams are looking at their well-remunerated employees that way, again for cost cap reasons,” said Szafnauer. “There comes a time where all these ancillary businesses that are now cropping up, that without a budget cap wouldn’t be there, we’ve got to look at that and make sure that the loopholes aren’t big enough to where effectively we don’t have a cap.”

Szafnauer believes F1’s budget cap has been a success for the series and is concerned it could be undermined.

“I think the cap itself has helped F1 as a whole, has driven valuations of the teams higher. I think the cap that we have now is still 10 times anything any other racing formula spends on going motor racing. And to me, that’s enough.

“We have to really be careful that we don’t have these types of loopholes appearing that we can’t shut down, and then effectively we don’t have a budget cap because I think we’re all better off having it.”

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35 comments on “New “loophole” could undermine F1’s budget cap – Szafnauer”

  1. he didn’t name any teams but is this some dig at redbull and newey? i seem to remember reading a couple of weeks ago that newey is actually working on something related to boats, because he took a step back from F1.
    is that just a coincidence? i think not :)

    1. Of course it is a dig at them, they are the only team convicted of going above the cap.

      1. @chrischrill Aston Martin also exceeded, even if only marginally.

        1. Aston had procedural errors, excluding/adjusting items that should have been included (http://www.racefans.net/2022/10/28/aston-martin-f1-budget-cap-penalty), but didn’t exceed the cap. That was Red Bull only.

        2. @terro @chrischrill @jerejj “Developing tools, for example, for a boat” is a clear shot at Mercedes and Red Bull, both of which are competing in the current America’s Cup cycle. Mercedes is designing the boat for Ben Ainslie’s INEOS Britannia team (INEOS also owns 1/3 of Mercedes F1). Newey and Red Bull Advanced Technology had been involved with Ainslie’s team a few cycles ago, but this time, Red Bull have teamed up with the Swiss syndicate Alinghi. Both Wolff and Horner were explicit last year that they were going sailboat racing to retain staff and exclude them from the F1 budget cap. There was a lot of speculation that Ferrari would jump in as well with the Italian team Luna Rossa, but that hasn’t happened.

          As a fan of both F1 and sailing, I’m thrilled to see this rivalry spill over onto the water, and I think the class of foiling monohulls that they are using for the America’s Cup now are truly spectacular. The development race is full-on at the moment for the 2024 AC in Barcelona, and the daily spy reports are fascinating. But as sailing is pretty niche, I’ve always thought it’s flown under the radar as an under-recognized advantage for Mercedes and Red Bull under the budget cap. Exactly as Szafnauer says, I would think that the CFD tools would have some crossover potential. And being able to retain a large amount of talent that could be rotated between the F1 and America’s Cup teams from time to time seems like a significant advantage, too.

          1. RandomMallard
            1st March 2023, 19:28

            @markzastrow Amazing! Another sailing/America’s Cup fan. I do find it rather interesting how closely the two sports are.

            I have to admit though, I do vividly remember an explainer video for the last AC talking about how “penalties are applied instantly – no post-race investigations going on here”, which I did find rather funny!

          2. Definatly the “Boat” reference indicates who he is pointing the finger at ! But also he developed the RB17 Hypercar which is based on ground effect on a seperate project not linked finacially to the F1 team and therefore any money put into that did not fall under the budget cap gaining additional data for development! you cannot measure the knowlege gained in the mind which can be transfered to other applications for example the F1 team.

          3. Also following America’s Cup (AC) closely and the ties with RedBull or Mercedes (through Ineos) are no surprise as it can bring mutual benefits. For non AC fans, Airbus have had ties with AC teams in the past and we are talking about figures around 150 millions $ for some campaigns, so non negligible sums that could benefit F1.

            The speeds are much lower but increasing significantly to ~100 kph which means above water earo is becoming a factor, as well as under water flows to lift up the boats thanks to foils. The main problem teams are now facing are cavitation of the foils, which I don’t see as being relevant for F1.
            In any case, there is definitely enough aero development to develop some tools that could benefit some F1 teams, and the pick of the “boat” as an example is no coincidence.

        3. @jerejj And Williams…they also were guilty of a procedural breach.

    2. All teams exploit loopholes, so I don’t think this is directed at any particular teams outside of the boat comment, Otmar’s own team is exploiting it’s fair share of loopholes too with his car manufacturer backing, let’s not kid ourselves.

      I mean, the majority part of Red Bull’s breach last year was because one of the loopholes all teams exploit (government grants and tax breaks) didn’t go through for one reason or another. Don’t think Otmar isn’t using those exact same exploits to increase his own spending.

      Loopholes exist, you can close them and then everyone will find a different loophole until you close that one as well. It’s a neverending cycle.

      1. Are these really “Loop-Holes” or is it the normal way business is conducted.?
        Pretty much every F1 Team operates under the umbrella of several different corporate entities. Go back to when Stroll bought out Force India. There must have been 3 or 4 separate companies, some building the car, some running the team and a separate one with the F1 entry. Divide and conquer.
        To complain about staff and resources being held outside the F1 Cost cap is a bit rich. Teams needed to do it to avoid redundancies and spread equipment costs over several projects. Ferrari moved staff over to Hass and Dallara to avoid the costs of staff reductions. If needed, I am sure they could or would return to the mother-ship.
        Mercedes is bound to have some specialist staff splitting time between F1 and regular commercial projects. Aston Martin just recently started an Advanced Technology Division and moved some “former” F1 staff into that area. Red Bull is no doubt doing the same and Sauber has done it as well.
        Williams Advanced Engineering has been at this game …. forever it seems. Just that they weren’t bumping up against the Cost Cap. McLaren no doubt has staff splitting time between Indy, FE, Road Car division and F1.
        Heck even Minardi was doing it at one point. You could buy an F1 designed and built Minardi bicycle. Yes, I lusted after one, but didn’t bite.
        is it a loop-hole, nope, just a normal way of managing staff and resources to reduce costs and produce the best products you can.

        1. I think it depends on several things.

          Splitting up a company these ways it’s often useful for many reasons, and had been done for decades in many industries. One company I worked with even had their IT department operating as a separate subsidiary, charging their services back to the main company.

          There are also times when a discovery is made in a different department which is relevant to the F1 team, and vice versa. These are great things to happen.

          The problem only comes when there is a budget cap. Rather than natural flows of knowledge or moving staff/research around due to internal corporate politics, there is an incentive to intentionally move research which is for the F1 team to another department/company, specifically to hide the cost from the FIA and for no other reason.

          If there is no rule against this, it’s a loophole. If there is, it’s outright cheating but nearly impossible to police.

    3. Isn’t this directed at all the big teams? Seems like the cost cap generally favors bigger manufacturer teams? I think Red Bull isn’t really included in this. I know RB cheats constantly, but I don’t think this is what he is referring to.

    4. @terro

      My thoughts exactly. He could have mentioned that manufacturers are building cars and using those technologies to improve their F1 team, but he explicitly mentioned boats, which is something Newey works on as a side project.

      I think the cost cap has far too many loopholes, and I believe the monitoring of the cap is almost impossible for the FIA. I’m sure there are plenty of teams already operating within the loopholes, without having to blatantly breach the cost cap like Red Bull did.

  2. Ive been wondering how they police knowledge transfer like this, apparently they dont really do it enough.

  3. That is how Mercedes and Ferrari and maybe also Mclaren are massively cheating the system.

    They have HUGE R&D departments that aren’t part of the budget cap, where there is no visibility or oversight by the FIA and where it would be very easily to test various ideas and solutions that also benefit their F1 team.

    So far the FIA has just validated what spending/reports the teams have submitted – no factory investigations have been done – no check that none F1 team staff is actually in the F1 team factory. That all parts and components are manufactured in the F1 team factory instead of somewhere else. Last and very important is material cost – Ferrari particularly is using carbon fiber also in their road cars so they likely can buy it much cheaper or worse the F1 team buys it from Ferrari at a very low price.

    Red Bull got partly screwed last year because the FIA considered all canteen cost to be part of F1 budget cap yet other non F1 staff also ate in that canteen. The budget cap is effectively fake without very clear accounting rules and strict reinforcement as well as standard/fair pricing to avoid (below) low cost inter company purchasing.

    1. That is a lie and disingenuous. Red Bull were caught trying to subvert costs outside of F1 to the tune of several millions and it was only through creative accounting they managed to get the actual breach down to 400,000 which is still a significant breach that no other team did. They cheated, stop trying to rewrite history. The rules are clear, every other team followed them without issue.

      1. If you look at companies house you’ll see red bull spent in excess of 371 million in 2021, with the budget cap in place. That’s without the engine department. The creative accounting goes much much further than the 5 or so million they were actually caught hiding as it does for many teams. Article is in German but gives a good overview of the situation.


    2. The fact that you mentioned Mclaren here when it comes to huge R&D departments but not Red Bull and Ferrari, shows that your biased. It’s more likely than not Red Bull, Mercedes and Ferrari that can take advantage of this loophole.

  4. How can you possibly account for any knowledge gained outside of F1, and give it a monetary value to add to the cost cap?
    How can it be a requirement to have zero experience/gains from business, engine or aero developments that comes fom outside F1? Formula 1 does not exist in a vacuum.

    How obtuse can Schnauzer possibly be? This is no doubt in preparation to throw around various excuses regarding his own team, and accusations at others, for the upcoming season.

    1. I think that while he is right there is no way to police it. The budget cap is fine and well but it cannot extend to how car manufacturers are set up as company’s. IP is always going to be retained inside of a company for its own use (see Ferrari’s deal with the FIA over its engine. That tech will find its way back to F1 at somepoint assuming its still relevant), thats part of the sport and cannot be regulated. It’s the movement of employees between teams that allows these ideas to be shared, but as we have seen people need to go on leave between joining teams to mitigate the data they take with them inside their heads.

  5. Yeah I find it weird to be able to police this properly. Ultimately teams pursue ideas… what if you do a bunch of work outside of the team working out which idea is the most valid and then you just happen to pursue that idea in the factory. How can you anyone police this?

  6. I’m assuming he’s talking about the America’s Cup tie-ins? This was always going to be a problem with an F1 cost cap. There is just no way to really prevent this and as usual it just gives another advantage to the bigger teams that can farm out their workers on outside projects that don’t really exist.

  7. Lewisham Milton
    1st March 2023, 17:09

    Nice boat, why did you decide to put pullrod suspension on it?

    1. To trailer it around. ;-)

  8. As a Financial Controller, I just can’t see how you could ever prevent this from happening. These organisations are enourmous and have many subsidiaries. First, who is going to be able to audit all these companies to find out whether they shifted costs between these companies to benefit F1? And second how are you ever going to prove costs of subsidiary P actually benefitted subsidiary A. If you would be able to prove that in theory it COULD benefit subsidiary A it wouldn’t mean that it actually did so.

  9. The only real wear to do anything about this is to introduce transfer pricing, which is notoriously difficult. They’d basically have to count it as the other division selling something to the F1 team, but how do you put a price on it? Tax authorities have been wrestling with this stuff for decades and are still no closer to a solution even when companies try to be honest about it.

    They only other way would be to force teams to make any knowledge gained outside their racing divisions available for sale to any other team at a set cost, which they could then count as being charged to the racing division…. I can’t see them going for that, though, and it would still be very difficult to police.

  10. petebaldwin (@)
    1st March 2023, 19:24

    “That’s the kind of stuff we have to start thinking about to stop.”

    Haha no….. That’s the kind of stuff you have to start thinking about before you bring in a budget cap. It’s one of the many reasons lots of us said a budget cap would never work.

    If you design a tool for a boat, you design a tool for a boat. It’s got nothing to do with F1. Of course, if you then discover that tool can be used in F1, happy days….

    Of course teams can and will exploit that and it is a massive loophole but how do you stop it? If teams do other things outside of F1, there will always be knowledge transfer and it’s impossible to police.

  11. Bending the rules is key to F1’s DNA, expecting wealthier teams to limit themselves to a lower budget and leave performance on the table was never going to happen. Keeping the budgets open and introducing ballast was my preferred option for closer racing. It works in other race series.

  12. So we have one dominant team and a couple others that may be able to compete in a few years. Just let them spend what they want. Any stricter rules whether budget or technical are always going to favor these super teams. Even if cars were spec the dominant teams of the last few decades would be even more dominant. The only time we got to see smaller teams succeed was in eras without restrictions and they could make up what the didn’t have in money with innovation. I doubt that would happen now, but this isn’t working.

  13. You can’t account for everything, but the budget cap will help reign in the most important work and will lead to a closing of the field.

    1. I really don’t think it will.

      All it will do is turn F1 into GP1 with it starting to feel more and more like a psuedo-spec series where development & innovation is no longer possible or allowed.

      The thing that used to make F1 feel special, That made it feel above other categories & why it rose to the top as the ‘pinnacle of the sport’ was because of the extremes. You take those away with spending caps aimed at equalising the field and you lose the very thing that makes F1 feel special, The very thing that makes F1 feel like F1 because it will no longer be the special extreme that stands above the rest.

      Can you really look at F1 now under the GP1 model its become and say it’s more special than something like Indycar or even something like WEC? No because it’s no longer F1, It’s no longer the pinnacle of the sport because it’s no longer special.

      The current boom will burst and GP1 will be left looking less special and less relevant as it’s audience of casual fans that won’t stick around shrinks while the longer term, more dedicated fans turn off due to hating the show over sport GP1 formula.

      1. Nikos (@exeviolthor)
        2nd March 2023, 7:11

        I agree to what you say, but I would go even further and say that that F1 as a “pinnacle of sport” is already dead.
        In the past it was not just the pinnacle of motorsport, but the pinnacle of the motor industry as a whole.
        Today the most promising area of advancement in the motor industry is the creation of autonomous vehicles. As a result F1 is becoming increasingly irrelevant as a test bed for innovation.

      2. I’d suggest that F1 has never been ‘more special’ than Indycar and WEC. Just different.
        Every series has its own unique set of rules.

        “Pinnacle of motorsport” is a marketing term – or at most, a personal, subjective sentiment – not at all an objective fact.
        Even to the FIA, it’s only one of six (equal) World Championship racing series.’

      3. It’s already shown to be doing that with the teams bringing updates far less frequently and smaller in size, which is one of the most expensive areas. Even if teams are blasting past the budget cap by $75m through creative means, it’s still a win. It means they’ll only be outspending the small teams by a factor of 1.5x instead of 5x.

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