Ferrari is Formula One auto racing’s most famous team and as we recently revealed it has the biggest budget. However, its latest financial statements contain the stunning revelation that its research and development costs are actually reversing.
For decades Ferrari’s finances were shrouded in secrecy. This started to change in 2012 when F1 planned to float on the Singapore stock exchange and produced a prospectus which lifted the lid on the prize money paid to its teams.
As ESPN reported this revealed that Ferrari, McLaren and Red Bull Racing share a guaranteed annual prize fund of at least $100 million in addition to the performance-based payments which are open to all the other teams. This is because they are Constructors’ Championship Bonus (CCB) teams - the top three based on races won in the four seasons prior to 2012.
The prospectus states that this structure sees “the Team ranked first receiving 37% of the CCB Fund (with a minimum payment of US$37 million), the second Team receiving 33% of the CCB Fund (minimum US$33 million) and the third Team receiving 30% of the CCB Fund (minimum US$30 million).” As Ferrari is third in the ranking it races off with a guaranteed $30 million but it doesn’t stop there.
The Italian marque gets its own dedicated prize pot as well as the CCB Fund. It gives Ferrari at least $62.2 million annually in return for being F1’s longest-standing team having been racing in it since the birth of the championship in 1950.
This guarantees Ferrari at least $92.2 million annually with the performance-based payments driving its total prize money to an estimated $190 million in 2016. In contrast, Mercedes was paid a staggering $53 million less even though it won the championship. At the other end of the spectrum, the Manor F1 team only got an estimated $52 million of prize money and crashed into Chapter 11 bankruptcy in January last year.
F1’s new owner Liberty Media wants to put the brakes on this inequality as there is a close correlation between the teams’ budgets and their chances of success. In 2016 its chief executive Greg Maffei said that one of its objectives is to have “much more fairness in prize money” which benefits the minnows but could see the end of Ferrari’s bonus. Plans presented to the teams before this month’s Bahrain Grand Prix reportedly involve cutting Ferrari’s bonus by half with just $40 million due to be paid in recognition of its historic status and an additional $10 million going to each engine manufacturer.
As well as facing a fall in prize money, Ferrari’s costs are on track to rise as F1 is due to introduce a new version of its 1.6 liter V6 engine in 2021. It will be cheaper for teams to lease but will cost manufacturers like Ferrari more as they will have to design it. It is a particularly sore point for Ferrari as it has failed to win the title since the V6 was introduced in 2014.
This has fuelled threats that Ferrari will pull out of F1 in 2021 when its contract to race expires. Its chairman Sergio Marchionne said last year that quitting would be “totally beneficial to the P&L” and it is no exaggeration.
Unlike most of its rivals Ferrari doesn’t file financial statements for its F1 team as it is a division of the auto maker rather than a separate corporation. However, when Ferrari floated on the New York Stock Exchange in 2015 its filings finally gave a glimpse under the hood of its racing outfit.
Britain’s Independent newspaper revealed last year that Ferrari’s single biggest expense is found in the research and development costs which come to €509.6 million ($536.9 million at the rate on the filing date of 31 December 2016). This research and development bill is for the year ending 31 December 2016 which is when last year’s F1 cars were designed. The filings state that it “mainly include the research and development incurred for the Formula 1 racing activities.”
The filings add that “the main component of research and development costs expensed related to the research and development performed for the Formula 1 racing car.” Taking this to be 75% of the total gives $402.7 million and that excludes salaries and the running costs of the team.
As Ferrari itself is floated it releases financial information ahead of almost all of the F1 teams which are private corporations. Its 2017 annual report was recently released and includes the stunning revelation that there was “a decrease in research and development expenses for Formula 1 activities.”
Far from denting its performance, Ferrari has had a boost on track. Its lead driver Sebastian Vettel won the first two races of the season and currently leads the drivers’ championship.
Like Mercedes, Ferrari is believed to be spending around $98.4 million (€93.4 million) on staff with more than half of it going on payment of Vettel and his team-mate Kimi Räikkönen. The annual expense for running the team comes to an estimated $70 million (€66.4 million) bringing Ferrari’s total F1 costs to an eye-watering $571.1 million.
It doesn’t mean that Ferrari would bank this as a profit if it put the brakes on its F1 team. This is because the costs are partially offset by Ferrari’s $190 million of prize money and income from sponsorship and leasing its engines to other teams.
The filings state that Ferrari generated $514.1 million of revenue from “sponsorship, commercial and brand” in 2016. This “includes net revenues earned by our Formula 1 racing team, through sponsorship agreements and our share of the Formula 1 World Championship commercial revenues, and net revenues generated through the Ferrari brand, including merchandising, licensing and royalty income.”
The team’s sponsorship tally comes to an estimated $220 million with the biggest spenders including Shell and tobacco giant Philip Morris which has partnered with Ferrari for more than 40 years and continues to do so despite legislation preventing its logos from appearing on the cars.
The price of an annual engine lease comes to around $20 million and in 2016 Ferrari supplied three teams. It gives Ferrari total annual income of around $470 million from F1 leaving it with a deficit of $101.1 million which is absorbed within the manufacturer’s total costs.
If Ferrari pulled out of F1 it would not need to cover this deficit every year so it would boost its bottom line, but F1 would lose its crown jewels. Liberty has three years to turn round this situation and ensure that Ferrari stays put. The race is on.
Source: Forbes
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