When Formula 1 teams aren’t battling on track, they’re fighting behind the scenes for the slightest advantage over the other. The latest battleground is over capital expenditure and the crucial issue at stake is how much teams can spend on developing their facilities so they can compete with their rivals.
The sport broke new ground in 2021 when its first set of Financial Regulations were introduced. The aim was to deliver a more competitive championship by levelling the playing field between teams. For the first time ever, all teams had their budgets capped, preventing the top outfits spending their way to success.The operational expenses (‘OpEx’) limit this season is set at a baseline figure of $135 million (£106.8m), though some adjustments apply. That covers anything required to operate, design, develop, build and race a car, including staff members and materials. Some items are excluded, such as the salaries of a handful of top employees.
However another limit applies to capital expenditure (‘CapEx’), which amounts to $45m (just under £36m in a conversion set down in the Financial Regulations) per year. This includes big-ticket items that facilitate the building of the car: infrastructure, tools, systems and machines.
The quality of a teams’ hardware has become all the more important in the budget cap era, because the more cost-effectively you can develop, the faster you can gain ground on your rivals.
Williams have been the tail-enders for four of the last five seasons. James Vowles joined them from Mercedes, whose run of eight consecutive constructors championships only ended last year. Speaking to RaceFans earlier this year, Vowles said it was unbelievable to expect that Williams can compete with facilities “20 years out of date” compared to those at Mercedes.
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“It’s an organisation that is incredible in what it achieved,” he said. “It has a car here, 17,000 components that it put together without any digitised system at all. I didn’t even believe that was possible in modern-day Formula 1.”
Since then Vowles has been lobbying for an increase in what teams can spend on their facilities and infrastructure. Williams was arguably unlucky with the timing of the arrival of investor Dorilton at the end of the 2020 season, just as the cost cap was arriving from 2021.
To Vowles’ frustration, two proposals to allow Williams to ramp up its facilities were rejected as teams went “round in circles” during an F1 Commission meeting.
One proposal was an across-the-board increase in the OpEx limit, which was supported by teams, but not the FIA and F1. The other suggestion was that if a team can show they have a disadvantage in certain areas and need more cash to improve it, they would receive permission to address it. That was not as favoured.
“It’s disappointing because there were there were a number of votes on increasing just globally the amount of CapEx by 50 or 70 million pounds,” Vowles explained. “The blanket increase was the one that had the most support as you would imagine, because all teams across the grid benefit from it.
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“It’s not the right solution for the sport. But even as Williams I would have preferred a blanket increase over nothing, which is where we are today.”
The case-by-case proposal also failed to win support from enough of Williams’ rivals despite repeated attempts to get it over the line. “My hand was actually aching from the amount of time I held it in the air,” Vowles said.
“My point of view is that we have a regulation, we changed many times the regulation and for me the good shape of F1 today is due to the stability.
“If you start to change the regulation each week because someone has an issue or wants to invest somewhere, it’s the end of the stability. And it’s a no-end process because today it’s Williams who wants to have a new ERP [Enterprise Resource Planning] system, tomorrow it will be another one who wants to buy new trucks.”
The ERP System is software that helps teams track all the activities of an organisation. F1 teams use to monitor their spending on the design and production of new parts.
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Allowing an exception to the cost cap would be a “no-end discussion”, warned Vasseur. “We have to be coherent that the cost cap was the biggest step forward for F1 in terms of stability, convergence of performance, profitability of the teams and so that it mean that either we go in this direction and I am fully supportive or it’s the end of the cost cap.”
Mercedes CEO and team principal Toto Wolff made a similar case. “Some teams jumped on the bandwagon and said, well, actually we would like to have a little bit more CapEx,” he explained. “That number went up from 50 million to 60 million, 70 million, 90 million, and suddenly it was like free rein.
“We need the stability of regulations on financial relations. You need to be able to have a business plan that is valid and not free reign that every two years we change the goalposts on CapEx. So that’s why this was the end of the CapEx discussion.”
However Vowles’ former boss indicated he may yet get something like the deal he is looking for. “Maybe we’ll find a solution for Williams.”
Williams have managed to haul themselves off the bottom of the pile this year, lying seventh in the championship at the halfway point. But they still have a long way to go to get back to regular point-scoring ways.
Vowles reckons it took “20 years of underinvestment” for the team to find itself at its current disadvantage. It remains to be seen whether a solution will be found to at least give Williams the leg-up they are looking for. But this is a key problem with the cost cap that needs to be fixed if it’s to have the desired effect of bringing the performance of all teams to the same level, which F1 has been so eager to realise.
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BasCB (@bascb)
15th August 2023, 14:08
This makes sense. I wholly get why Williams would want this (and Sauber possibly as well?). And I also think it is good that the FIA and F1 were not keen on loosening up. With regards to the likes of Ferrari and Mercedes (and probably RB as well) being fine with no extra investment room, since they have already everything installed that’s easy for them to say.
In the end, I guess there will be some movement, but only a slight increase with some limits.
Gary
16th August 2023, 13:31
If I was Williams, I’d just spend the money, breach the limit, and take the punishment next season. Long term, it would be worth it.
The Dolphins
17th August 2023, 21:52
Absolutely, it’s a strategic move any long-term focused team should evaluate. It’s been proven that cost cap breaches come with lenient punishment so it’s fair game.
drmouse (@drmouse)
15th August 2023, 14:52
Yeesh, this is a difficult one. Those who haven’t already made these kind of investments will be at a significant disadvantage until they do. But I’m not sure of the best way to handle it…
Possibly, this is one which should be linked to results, like wind tunnel time. Everyone is allowed the same OpEx, but make CapEx limits relative to performance, with the lower teams being given a higher allowance to invest more in their facilities.
I doubt the bigger teams would be happy with this, though, so it would struggle to get through, and I’m not certain it’s the best solution anyway….
Facts&Stats
15th August 2023, 15:31
The problem with this is that CapEx is typically an upfront investment to improve efficiency (and therefore OpEx). Even an ERP system’s business case is based on OpEx reduction (more efficiency throughout the organisation, faster and better decision making, less waste/mistakes, etc.).
They could argue though that (a big) part of the ERP system is to support accounting and marketing tasks, which fall outside the Budget Cap.
Coventry Climax
15th August 2023, 16:05
Not difficult at all.
If it’s equality you want, then first look at what people have and valuate that. Combine that with both regulated income and spendings. Summarise it and make it equal – on all fronts, which is the essence of the word equal.
Otherwise it’s as equal as you and I, assuming we both have a pair of blue trousers somewhere.
All bookkeepers know the system of valuating assets according to an annual depreciation. Not the FIA, apparently. Maybe that’s the result of the FIA, trying to play the role of bookkeeper, a job they have no knowledge of?
This system does not take into account how much was earned and spent over the many years before just the spending was regulated. That’s a job half done.
Dale
15th August 2023, 19:55
James has a mostly blank car available.
He can trade away a big portion of it to an ERP supplier for 3 years, get his $70m software ‘free’ as part of a team technical partnership, and move on with the job of running a race team.
Ciaran (@ciaran)
15th August 2023, 14:56
This is a tough decision to make. I’m very sympathetic to Vowles and Williams who are dealing with a huge structural disadvantage. But if I were one of the larger teams I’d obviously oppose any move to give them greater Capex, and the FIAs position is understandable as well.
I wonder could teams who finish lower in the championship be allowed a small Capex increase for subsequent years? Possibly in exchange for their greater wind tunnel/CFD usage.
Coventry Climax
15th August 2023, 15:49
Not sure how much you’re into literature, but this is (close to) one most people read:
All teams are equal, but some are more equal than others.
Jere (@jerejj)
15th August 2023, 15:20
I don’t think budget cap would cease altogether.
Bullfrog (@bullfrog)
15th August 2023, 15:36
Surely “CapEx” can be reduced to three letters, like everything else?
SteveP
15th August 2023, 20:39
I’m sure a TLA is perfectly possible, but getting away from the slang in use by finance bods is something that requires a significant change – get rid of the finance bods. They aren’t fast thinkers and are very resistant to change.
Coventry Climax
15th August 2023, 15:46
How can anyone in his/her right mind claim that this improves the competition?
Between drivers maybe, arguably, but not among teams.
Not just in F1: Why make the effort to improve if a regulatory force chops down your competitors anyway because they are eager to equalise the field? While you get paid for your presence anyway?
All this madness achieves is spec racing. Fine with me, but if that’s what you want, just say so.
SjaakFoo (@sjaakfoo)
15th August 2023, 15:48
There’s a solution to be found here, I believe. For instance, and this is just me spitballing, but what if the FIA had a procedure in place where upgrades to the factory were allowed under specific conditions. I.e. FIA inspectors would need to verify that indeed, the facilities due for replacement are old and outdated (say 15+ years). Then the replacement of this facility would need to happen open and transparent, maybe even through the FIA again. So if, for instance, Williams were to need an investment to replace their archaic inventory system. They would specify the parameters of what they want from a replacement system (or even have a desired company make them a proposal for the new system) and the FIA would then approve this, and actually order the system and be involved in the actual installation/implementation of the system with FIA personnel on-site at Williams throughout to make sure the workers aren’t also secretly installing new carbon printers. The FIA pays the contracted party, Williams pays the FIA. That way expenditure is controlled.
bull mello (@bullmello)
15th August 2023, 18:58
I think this is a good idea @sjaakfoo
Some teams upgraded before the cost cap, other teams lost out with cost cap. There should a way to help the other teams in the right way.
Ronald
19th August 2023, 21:17
The biggest teams can pay the best laywers. I have no doubt all of a sidden Merc* would proof beyond doubt they have facilities that are at least 15 years older than their competitor’s. No way that is going to work.
* or RB, Ferrari, AM
Andy (@andyfromsandy)
15th August 2023, 16:03
The likes of MB, Ferrari, AMR and ORBR spent their millions but now Williams are in a fix. If an item costs £37 million how can they purchase it?
The Dolphins
17th August 2023, 21:58
They don’t, a “different company” will purchase this, perhaps with investment from Williams, and the cost will be realized another way. Realistically as this point Williams ought to look at an even closer strategic partnership with Mercedes (read: junior team) and use the resources available at MB instead of investing.
Gerrit
15th August 2023, 17:27
How does a capex limit affect new entrants like Andretti? They can spend up large on capex before being excepted into the fold? If so would Williams be better off to leave and reapply as a new entrant (not a real option I guess)?
But it seems unfair that a new entrant can have unlimited capex before starting to race but an existing racing team cannot spend to update?
Dale
15th August 2023, 20:34
To be fair, Williams have had decades to build infrastructure and F1 race car building DNA within the team.
If a new entrant comes in and is immediately successful, it won’t be down to the infrastructure alone … so if it happens, it’ll be deserved.
SteveP
15th August 2023, 20:43
Cast your mind back to Haas entering F1 and all the work they did, with Ferrari assistance, before their official entry period.
If Andretti are allowed in, watch how much is done before the official entry documents are signed off.
If they can do it, they will – that applies to those wishing to enter and those already in.
Optimaximal (@optimaximal)
15th August 2023, 21:10
After the FIA saw what Haas did in the grey areas, they said that any further entries will be required to outline the work they’ve done before any entry is filed and the FIA will apply some form of balancing, whether that it financial or wind tunnel/CFD limits.
Gerrit
16th August 2023, 1:49
So basically they can have no more facilities than the lowest common denominator (ie Williams). Or can they come in with Red Bull, Mercedes, etc. facilities and resources?
Who decides what facilities and resources are allowed?
Do we actually want an even playing field?
MacLeod (@macleod)
16th August 2023, 7:55
When Mario signs the agreement then his team starts at zero but all he already owns is his todo with.
Dick Dawson
15th August 2023, 18:21
If the Cap was brought in to level the playing field then this should be a no brainer. Let the teams catch up on infrastructure and get into a situation where most peeps are equal and keep the Cap as is. All this crying from the other teams amounts to Bla Bla Bla as they are just trying to keep their place in the hierarchy. It shows they do NOT want an even playing field.
mega
15th August 2023, 18:53
Why not get a modern windtullen as FIA; & MANDATE that everyone use that one. Monitor that as FIA/F1 so you actually know if teams are doing anything funny with the available tunneltime.
The windtunnel time is already limited; so it should be possible to lease it out to teams evenly. If there is not enough ‘time’ in a year; build 2 or whatever.
Lessen the cost cap with a fair amount for all teams (no more ‘own’ windtunnels needed so that is a saving)
Advantage is that FIA/F1 knows when a team is getting ‘too good’ & then they can take action if they want based on fair data.
Coventry Climax
16th August 2023, 0:59
Sigh, here we go again. Let me guess, an ‘appropriate’ action would be penalty weights?
Fer no.65 (@fer-no65)
15th August 2023, 18:55
Hindsight of course but maybe they should’ve audited the facilities to see who was really far behind in tools, equipment and the like..
Coventry Climax
16th August 2023, 1:05
Hey, you read my answer to drmouse, above? Doesn’t matter, I agree.
There’s generally a reason why people say ‘in hindsight‘. It has a lot to do with thorough preparation and gain actual insight, before making decisions. Sure you can’t foresee everything, but this was rather predictable in my opinion.
Fer no.65 (@fer-no65)
16th August 2023, 7:36
I hadn’t, but you’re right, it’s just common sense… I actually thought they had done so, to an extent…
Suffering Williams Fan
15th August 2023, 19:34
I guess the question for me is, could the structure be adapted in such a way as to allow some spending to be brought forward? So instead of blanket $45M per year, could you instead adopt an approach where you are allowed to spend $135M in one year, but then no capital expenditure for the following two years? Obviously that’s a somewhat extreme case (and you could finesse the amounts and timing), but would that kind of approach make the difference? Keeps an actual cap in place, but gives you some flexibility on when you use it.
Dale
15th August 2023, 20:29
Maybe the ultimate solution isn’t a hard one-dimensional cost cap, but rather an ‘equalization of resources’ rule.
Open budget for marketing, hospitality & promotions
Equal budget cap for all teams on the amount spent to go racing their cars.
Sliding scale budget cap on the car development with the slowest team allowed most.
Sliding scale budget cap on infrastructure with the FIA deciding on who the benchmark is & what the infrastructure hierarchy is, & then allowing lesser teams to develop more.
Obviously if a team has access to less available budget than their specific cap would allow them, they will find it more difficult to close the gap to the top teams … but for those who do have the additional budget, at least they get to spend it to equalize the resources, vs seeing it sitting on a balance sheet doing nothing for them.
Stephen Crowsen (@drycrust)
16th August 2023, 6:34
The problem isn’t that other teams spent millions of dollars getting stuff they considered essential to racing in F1 before there was a cost cap, the problem is a previous management at Williams decided not to get that sort of stuff when they had the opportunity to do it without all the red tape that’s now in place. If they had done that then Williams would have less of a problem than the do now. This is one of the reasons Williams is valued at the amount it is. If it had all those bells and whistles machines other teams have then its value would be different, probably higher. I agree completely with James, he should be allowed to spend money and get those bells and whistles machines, but that just gives the teams at the front more reason to want to exceed the cost cap. There are historical reasons why those other teams have this expensive stuff and Williams doesn’t.
MacLeod (@macleod)
16th August 2023, 8:01
Funny part is that even the current teams who has updated stuff will be outdated in 5 years and then they can’t upgrade either or have a really skimpy car while they upgrade.
The silly rulemakers forgot to apply this when the made this rules… as a simulation machine maker i know teams replace theirs around every 5 years and believe me that is a big difference (and costs) in performance, tools to improve cars.
So i think the big teams will soon going to see things Williams do :)
Ian Tommins (@thelem)
16th August 2023, 12:26
For the sake of argument lets say both Red Bull and Williams have 5 year old sims. Red Bull already have an ERP, so can use the budget available to just replace their sim. Williams have to decide whether the budget will be better spent on a new sim or a new ERP.
They might save a bit of capex cost by making their existing sim last 6 or 7 years, but that will be at the cost of competitiveness.
DB-C90 (@dbradock)
16th August 2023, 11:42
If I were Williams and they have the financial capacity, I’d spend what they need to upgrade and take whatever penalty they’re given.
At present, there doesn’t seem to be any huge penalty – it’d be worth doing – even if it meant they suffered a limiting penalty for a season.
After all a top team pretty much got away with an overspend…..
Graham (@guitargraham)
16th August 2023, 12:15
its in the best interest in certain British based teams to keep Williams down. a resurgent Williams would be their worst nightmare, especially if their factory is just down the road
The Dolphins
17th August 2023, 22:05
Mercedes has done this during their PU dominance era, with any team (bar Red Bull for obvious reasons which Christian is still bitter about) willing to use their PU and improve their position on the grid.