Why Mercedes is better off than Renault

At the end of 2009 the Formula 1 programmes of two major motor manufacturers headed in opposite directions. Both brands had won back-to-back championships during the past five years; both had been tarnished by '-gate' scandals - Mercedes via its shareholding and technical partnership with Spygate-hit McLaren in 2007, Renault with Crashgate the next season - and both operations wished to reinvent themselves.

Mercedes had won grands prix and titles with McLaren and, in 2009, with Brawn. That was one of the most tumultuous seasons ever, one in which the teams threatened to form a breakaway championship and collectively pushed for a more favourable Concorde Agreement*, the provisions of which shifted power to them and returned around 50 per cent of the sport's underlying revenues to the competitors.

As solely an engine supplier, Mercedes had no input into the process whatsoever - despite its then motorsport director Norbert Haug being rather vocal about the situation - and effectively rode along on the back of its scandal-hit partner in which it (then) held 40 per cent, but no executive sway due to the voting structure.

In fact, the (outrageous, headline-grabbing) $100 million fine levied on McLaren by an FIA then presided over by Max Mosley indirectly cost Mercedes $40m, despite the company having had no knowledge of the matter.

Imagine how the Stuttgart suits, sitting atop the motor industry's oldest and arguably most prestigious brand, felt about having their destiny in motorsport's premier category controlled by former mechanic Ron Dennis.

The contract awarded by Mercedes to McLaren to build its SLR sportscar was not without bumps, and gathering rumours that McLaren Automotive planned to introduce a three-model supercar range aimed at the upper end of the luxury market led to a structured parting of ways.

Mercedes had success with McLaren, but also some fraught times, like the 2007 scandal © XPB

The share transfer took two years to complete, and when McLaren failed to take up its option for Mercedes engines in 2015 - cue this week's Honda announcement - the divorce was complete, with decree nisi at the end of 2014.

In addition, Mercedes had long discovered the downside of being solely an engine supplier: money flowed one way, with no chance of recovery through commercial sponsorship, a situation compounded by the subsidised engines the manufacturers had been coerced into accepting by the Mosley regime.

Therefore Mercedes had designs on full-team ownership. The Brawn partnership offered the perfect opportunity for the Three-Pointed Star to acquire a title-winning facility, one crucially situated in Brackley in Britain's Motorsport Crescent, and close to its (acquired) High Performance Engines facility in Brixworth.

Despite winning both 2009 titles - mainly, it must be said, off a 2008 mostly devoted to what had been intended to be Honda's RA109 - the squad given to Ross Brawn and the management team on a plate by Honda as recompense for its abrupt exit was, to put it mildly, cash-strapped and open to offers.

Thus, a bargain-basement deal for the Brawn operation - which had its roots in the Tyrrell Racing Organisation before being sold to British American Tobacco as platform for BAR - was struck, with Mercedes acquiring 45.1 per cent and the Abu Dhabi government-owned Aabar wealth fund 30 per cent.

The management team's remaining 24.9 per cent was acquired in early 2011, with a buyout of Aabar's (by then) 40 per cent stake being completed in November 2012, enabling the renamed Mercedes Grand Prix Ltd to assume control.

Mercedes' first three years as a works team only yielded one win © LAT

Various entities (including Petronas, IWC watches and Blackberry) now boost the budget to an estimated $200m, being roughly made up as follows: parent company Daimler $70m, FOM performance income $65m and commercial partnerships $65m.

Although the team won but a single grand prix in three years - during which time McLaren scored 18 victories with the same engine - it managed to wangle its way into the league of Bernie Ecclestone's decision-takers.

It appointed known allies of the F1 tsar, then negotiated itself an alleged annual $12m premium (rising to $15m from 2015) over and above the standard Formula One Management performance payments after initially holding out and, one hears, alluding to EU Commission action unless its terms improved.

However, the biggest pay-off was the recent appointment of Mercedes holding company Daimler's 53-year-old finance chief Bodo Uebber to the board of Formula One Management. There, he joined such as Ecclestone, Ferrari president Luca di Montezemolo, Red Bull and McLaren nominees, and corporate heavies appointed by commercial rights lessee CVC Capital Partners, the venture fund that owns but 35.5 per cent of the Formula One Group (having substantially diluted its original 63 per cent bought in March 2006) but chucks its weight about as though it alone invented the sport.

Ironically, Uebber's appointment came amid reports that Ecclestone was to be indicted for bribery and fiduciary breach of trust, and the Frankfurter Allgemeine Zeitung reporting that FOM could be operating in breach of EU law - something this column suggested in December. None of this appears to bother Daimler unduly, despite its oft-trumpeted extremely stringent corporate compliance code...

Contrast all this with Renault, which went the other way, so to speak: after winning the 2005/6 titles, Crashgate, of which the manufacturer's executive obviously knew not a letter, hit the French company like a runaway pantechnicon when the news broke in September 2009, causing a total rethink of financially struggling Renault's F1 involvement.

Having won various championships during the past two decades - and, crucially, having signed Red Bull, so obviously on the up with rising star Sebastian Vettel - Renault's F1 cluster put it to chairman and CEO Carlos Ghosn, a trained numbers man and ruthless corporate cost-cutter, that the company should exit as team owner and concentrate on engine supply.

Venture fund Genii Capital, owned by arch-enthusiasts Gerard Lopez and Eric Lux, acquired 75 per cent, which gradually increased to full ownership as Renault wound down its team involvement, in the process signing up four teams as engine partners: aforesaid RBR, its former team now renamed Lotus, Caterham, and (from 2012) Williams.

Bound by the low-cost engine agreement, the deal was simple: Renault would cover the shortfall between income from teams (estimated at £32m) and operating costs (£100m) via its vehicle marketing budget, the logic being the resultant F1 exposure would boost vehicle sales, particularly in the sport's newer territories.

The revelation that Nelson Piquet's 2008 Singapore crash was deliberate blew Renault's F1 strategy apart © XPB

The reality was rather different, though, for seldom is engine name attached to team title by the media, resulting in Joe Public being effectively unaware that Renault powered last year's Spanish Grand Prix-winning Williams, or the Lotus that took the honours in Abu Dhabi, and Australia earlier this year.

Worse, serial champion Red Bull exploited a clear loophole in its contract by signing upmarket, upstart car brand Infiniti as primary partner. Estimates place Infiniti's contribution at £20m (and rising) for rather brash and highly visible sidepod and wing branding, with RBR's engine costs panning out at less than half that - so in effect Renault finds itself subsidising at least 50 per cent of the engine cost, while the public perceives Infiniti as being the engine supplier to a double title winning outfit for three consecutive years.

True, Infiniti forms part of the Renault-Nissan alliance engineered by Ghosn back in 1999 by dint of being the Japanese company's luxury car division, but the key lies in the word 'alliance' - it is not a partnership, but simply a ground-breaking cross-shareholding agreement, with Renault owning 44.4 per cent of Nissan, and Japan's second largest motor manufacturer having a 15 per cent stake in Renault.

Spot the imbalance? Put simply, Infiniti has used its parent's 15 per cent to leverage a full F1 engine programme effectively paid for in full by its alliance partner...

Then, as purely an engine supplier, Renault has discovered it holds zero sway in the paddock despite having a budget equal to (or even greater than) a mid-ranking team. Renault has no right to paddock passes, needing to procure these via its partners; by contrast, Mercedes (and the other team/engine supplier Ferrari) enjoys global allocations.

There is now tension between Ecclestone and Renault © XPB

Ditto guest passes: where teams receive these for commercial use, Renault needs to beg same from teams or pay an average of €3000 per weekend/head to entertain VIPs in FOM's Paddock Club.

Teams, even the 10th-placed outfit, receive a portion of F1's revenues, so Lotus, the former Renault F1 Team, gets approximately €50m for finishing third in the championship with Renault power, yet its engine supplier receives not a bean.

The 2013-20-defining Concorde Agreement is, according to Ecclestone, currently shuttling back and forth between lawyers, yet Renault has enjoyed absolutely zero input into the document.

Despite its massive commitment (and contribution) to the sport, Renault thus has no say whatsoever in its governance, enjoying input only into the Engine Working Group, which holds no executive power and merely escalates recommendations. Mercedes and Ferrari, though, have seats on FOM's board...

These factors were seemingly overlooked when Renault elected to go the engine supply route - despite Mercedes (and such as BMW) having regularly and publicly lamented about its plight while being engine suppliers only.

Come 2014 the situation will likely turn for the worse, for Renault's V6 turbo engines are expected to cost teams around £21m for all-in annual two-car supplies, and already they are pushing for massive reductions, being unable to afford the more than doubling in costs. Thus more subsidies from Renault and/or fewer teams - while Infiniti hoovers up the limelight by dint of a multi-year title partnership deal that could be described as ambush marketing...

When this column in February asked Renault Sport F1 president Jean-Michel Jalinier during the first running of Renault's 2014 power unit about his operation's lack of paddock status, he responded: "We're working with Formula One Management and the FIA on that", before wryly admitting that "very little progress" had been made.

It seems that between the Bahrain and Spanish grands prix he pushed for "progress" in a meeting with Ecclestone, during which Renault effectively requested treatment on a par with other motor manufacturers in the sport, namely Mercedes, Ferrari and McLaren (Automotive), all of whom enjoy the privileges and rights outlined above, including a slice of FOM's billion-dollar revenues and underlying profits (about which CVC regularly crows), board representation, paddock passes and input into the governance process.

It is no exaggeration to state that Jalinier received short shrift, subsequently discovering that the Renault F1 hospitality/office unit had been banished to the outer reaches of the GP2 car park and that Renault personnel paddock passes did not function as intended.

Ecclestone reportedly brushed the matter aside, stating the paddock could not accommodate all technology suppliers. (Note the implication.) Where this writer on the Thursday conducted an interview with a senior Renault engineer in the Lotus hospitality area, in the past Renault's own facility had been used.

However, according to sources, Ecclestone during said meeting argued for a reduction in Renault's 2014 engine bills. Teams are known to have pushed him for greater slices of F1's revenues due to the impact of same on their budgets, so, in effect, FOM is requesting Renault's vehicle marketing budget to subsidise CVC's exorbitant profits - while cutting the company totally out of the paddock loop!

Renault powers the champion team, but the Infiniti branding dominates © XPB

The long and short of it is that Ghosn is believed to be furious at the treatment Renault received in and during the run-up to Spain, and has demanded a meeting with Ecclestone, with the implied threat of Renault withdrawing from F1 being on the cards.

Originally scheduled for earlier this week and delayed to Thursday, they were apparently due to meet in Monaco for high-level discussions. Renault personnel have downplayed the meeting, stating they have regularly met in the past. True, but no details of structured meetings have emerged since Renault's team days...

Don't for a moment believe that Le Cost Killer Ghosn, who defied Japanese business convention by closing five Nissan plants and laying off 21,000 workers when parachuted in to save the then-ailing company in the early noughties, will not be considering pulling the plug on the programme if Renault's honour is not restored and its costs reduced.

After all, wiping out £80m in 2014 engine development costs is substantially cheaper than subsidising a seven-year programme at the same again - without receiving commensurate kudos.

Thus, Ecclestone plans to propose that Ghosn persuades Infiniti to pay its fair share in order to reduce the overhead - thereby reducing prices - while maintaining its title sponsorship of Red Bull, run, not coincidentally, by Ecclestone ally Christian Horner.

If all fails, the sport could find that "It's back to V8s", as one team principal put it in Spain - where the gravity of the matter was discussed at FOTA level - at least for 2014, as existing suppliers (Mercedes, Ferrari and Cosworth) step into the breach until Honda arrives on the scene in 2015, when it, too, will discover the downsides of being solely an engine supplier, having formerly operated its own team...

* The Concorde Agreement outlines the commercial, technical and governance obligations of the governing body (FIA), FOM and teams collectively. The 2013-2020 covenant is currently under negotiation.