Hondas exit spells trouble for F1

Honda’s decision to pull out of Formula One raises fresh concerns over the future of the car industry’s premier sports event.

A fear that must have been felt by the F1 bosses, as Max Mosley, president of F1’s governing body Federation Internationale de L’Automobile, recently warned that the sport will only survive for one more year unless drastic spending cuts are implemented.

That a car company of Honda’s stature has opted to completely withdraw from the annual racing tournament in order to “secure the long term as widespread uncertainties in the economies around the globe continue to mount” has sent shockwaves, particularly when much smaller, leaner teams on the grid are feeling the pinch.

The car manufacturer famously promotes itself under the slogan “The power of dreams” – but the dream now seems broken, judging by the company’s decision to pull out of F1. With the departure of a team that has been involved for three decades, industry observers say F1 bosses must act quickly to stop the tournament losing its competitive edge.

The financial troubles faced by the car industry have caught up with the Grand Prix, whose conspicuous consumption seems ill at ease with the times. Mosley has admitted that there is a serious danger other car manufacturers will follow the car maker out of the tournament, comparing the economic downturn to “an ocean liner sinking”.

Over the past few years, the racing competition has been widely criticised for changes in the rules, which has made the event hugely more expensive to run. Teams have been spending up to £300m a year to put just two cars on the track over 18 races; lavishing cash on anything from development to hospitality, including private jets and palacial paddock homes. Mosely has already told the teams of his plans to cut costs “not by 20 or 30%, but by 80% or more” from 2010.

A senior source from the F1 tour says: “The problem with F1 is it’s got to a state where competition isn’t necessarily there. McClaren and Ferrari dominate the contest, and take the lion’s share of the money. Without the windfall prize money, or corporate sponsorship, Honda fell by the wayside. Others may well do the same – unless it all becomes more affordable.”

Stuart Dyble, director of consultancy I-nfluence, says Honda’s exit will leave F1 bosses concerned: “Honda pulling out will be seen as the first shock, possibly of many. The real worry for F1 bosses now will be a potential domino effect, where others follow its lead.”

Dyble, a former Ford marketing executive, adds: “The fact is F1 is too expensive in these difficult times. The irony is Honda was just coming good, so it’s a shame it chose to withdraw completely.”

Honda invested an estimated £300m into the competition, but has only won one race since 2006. Its F1 team boss Nick Fry says the team wants to maintain its presence, but not on its own. Three potential buyers are in the frame to buy the team for £1, and Fry is “confident” there will be some sort of team racing in 2009, without the Honda branding. Yet it is by no means certain a team will be on the grid come the first race in March next year and, in all, about 1,000 jobs are expected to be lost.

The FIA insists it will offer cost-cutting savings to the smaller teams, but Honda’s statement appears to indicate this is not enough.

Bernie Ecclestone, owner of F1’s commercial rights, insists “Formula One is in no bigger crisis than any other company”, but the event has seen France pull out of its Grand Prix race and the UK opting to switch venue from Silverstone to Donnington from 2010.

Rupert Pratt, managing partner of specialist consultancy Generate Sponsorship, says that while cost-savings are necessary, Honda’s downfall primarily relates to it not having any sponsorship – a “mistake” the other teams will ensure they do not repeat.

“Honda’s unique position in the F1 as the only one without sponsorship has turned out to be completely unsustainable and was the ultimate reason for them pulling out. Of course the economic recession is having an effect, and F1 must respond, but in such times of uncertainty, it is incredibly fruitful to have sponsorship. That fruit can help you exploit this visual market for your brands and others,” he says.

Under the leadership of Simon Fuller’s 19 Entertainment, Honda has taken an “environmental” approach to its cars and not displayed sponsor logos on the car. Two years ago, Fuller told Marketing Week he aimed to get F1 “on the tip of everyone’s tongue” (MW March 2, 2006).

The Formula One Teams Association says that Fuller’s vision has been achieved. However, a Fota source says that the sporting event has a competitive edge, which should not be eroded by continuous changes.

“We are committed to ensuring substantial cost-cutting for 2009 and 2010 are achieved with additional initiatives to improve the show. It is important the event maintains its competitive nature in a fair way for all,” he says.

Honda’s exit comes as several teams, including Ferrari, expressed serious misgivings about new changes being proposed by the FIA. These include introducing standard engines and introducing medals to replace the existing extravagant trophies.

Professor Garel Rhys of the Centre of Automotive Industry Research, says Honda’s decision to quit F1, despite hiring Ross Brawn – a close friend of Michael Schumacher and who drove the renaissance of the Ferrari team – to mastermind its 2009 strategy, should ring alarm bells to the other teams. “The simple fact is car companies have to cut spend, so it’s incredibly likely that Honda won’t be the only car maker to withdraw from the competition,” he adds.

In the UK alone, Honda’s new car sales are down 20% in 2008 compared to 2007, according to the Society of Motor Manufacturers and Traders. As a result, the company says it is suspending bonuses, cutting UK production by 32,000 cars and closing for 50 days next year.

Other companies with financial concerns include Ferrari, whose parent company Fiat Group says it is preparing for an uncertain 2009, and BMW whose sales have decreased by 26% globally year on year. Toyota is also facing difficulties and is currently in the middle of a company-wide review (MW December 4). Renault’s chief executive, Carlos Ghosen, has promised to review its involvement and McClaren says it expects team revenues to fall by over a third next year.

Mike Moran, a director at the Automotive Partnership, says the economic downturn will force all F1 teams to reconsider their finances and the costs involved in running an F1 team. “There’s no doubt that the departure of Honda from F1 will have a big psychological impact on the sport,” he says.

Led by Ecclestone, the competition has achieved fantastic growth around the world, but with that has come soaring costs, which most believe are not feasible in the current economic climate. The age of austerity is set to reach even the coddled paddocks of sport’s most lavish outpost.