Engine budgets are just a scapegoat

Both Sao Paulo and Abu Dhabi are recognised for their sultry, sweltering atmospheric temperatures, but over the past fortnight hot air of a different type prevailed in the respective paddocks - to wit, controversy over Formula 1's 2014-on engines and their heat and energy recovery systems.

The first salvo was fired in Brazil by Red Bull Racing's Christian Horner - who this season has been (ungratefully) vocal about Renault's performance despite RBR's French partner powering his team to four title doubles in as many years plus three race wins this season.

The Briton suggested a return to 'old iron' 2400cc V8s as a means of addressing F1's fiscal disparity and the hybrid units' lack of aural drama.

This was followed post-haste by suggestions from F1 tsar Bernie Ecclestone that the sport could adopt "a sort of Super GP2" to bolster grid sizes, a move that would require swingeing rewrites of the rule books, for the single-makes series relies on 4.0-litre units supplied by long-time Renault partner Mecachrome.

These deliver 600bhp at 10,000rpm - about three-quarters the output of F1's V6 compound turbo units in full energy expend mode - but, crucially, consume fuel at a rate far greater than regulatory the 100 litres per race distance currently prescribed for the premier series. Plus, the Dallara-chassied GP2 cars do not contain sufficient tankage to complete F1 race distances (300+ kms), necessitating further rewrites.

These controversies continued between the two races, with Force India's Robert Fernley addressing a letter to Ecclestone in the latter's capacity as CEO of F1's commercial rights holding entity Formula One Management, with copies to all teams, the FIA and CVC Capital partners, majority owner of FOM.

In the letter, a copy of which was sent to this column by a recipient team, Fernley set out the budgetary challenges facing Force India and two surviving independents - Lotus and Sauber - in particularly alluding to the cost of the new powertrains, which (more than) doubled in the course of a year due to the sophisticated technology required to optimise their complex energy recovery systems.

Force India has been vocal in its criticism of F1's situation © XPB

Fernley emphasised that "that our teams were not in favour of the new engine regulations, [that] these were imposed on us by manufacturer teams", adding that two (Mercedes and Ferrari) of three major teams benefit from having in-house engine operations. Unsaid was that RBR, despite not having an in-house supplier, does not suffer such cost increases due to its relationship with Infiniti, a Renault-Nissan alliance partner.

While it is true that the three independents did not actually vote for the 'green' engines - framed in 2008, confirmed in their original form in '09 - it is fact that their historic entities did, for BMW (until the end of 2009 the majority owner of Sauber) and Renault (then 100 per cent owner of the team now known as Lotus) were in favour, while Force India chairman and team principal Vijay Mallya sat (and still does) on the FIA's World Motorsport Council, which ratified the original regulations.

During last Friday's FIA media conference - which traditionally features team bosses or other executives - the situation was further inflamed when Horner, in reply to a direct question about the role of F1's controversial Strategy Group and the sport's future direction, mooted yet another engine variation.

"Maybe still a V6, but maybe a more simplified V6 that controls the cost," he suggested. "Cost of development, cost of supply to a team and to the privateer teams. I think that's something we need to have a serious discussion about during the next strategy group."

Pushed further, he said that "The cost to the collective [originally three, now four with Honda] manufacturers has probably been close to a billion euros in developing these engines, and then the burden of costs has been passed on, unfortunately, to customer teams..." (But, based on what he told this writer in Russia, not to RBR...)

Then, though, came the hammer: "[We should] look to simplify things, potentially retaining the V6 philosophy, perhaps going to a twin turbo that would address the sound issues we've had this year, and maybe even a standard energy recovery system [which] would dramatically reduce costs, dramatically reduce development and therefore the supply price to the customer teams also.

"I think that's something we need to have a serious discussion about during the next strategy group," concluded Horner. Coincidentally, the Strategy Group sat in Geneva as this was written, with a subsequent F1 Commission scheduled thereafter.

Asked whether developing a twin turbo engine in place of the current single set-up would result in cost savings, a senior engine supplier representative looked bemused before asking a rhetorical question: "How can it be? I ask you, how can it be?"

Horner has added more fuel to the engine debate © XPB

And if ERS-K/ERS-H were standardised? "Again negative: We have spent all that money on development, so from here on it is a question of optimising [what we have]. People are publicly pushing ideas about things they don't understand. Our board will never allow us to chuck out the development costs with baby and the bathwater..."

Mercedes motorsport executive director Toto Wolff was quick to counter Horner's suggestion: "I fully agree we have a big responsibility for all teams and need to look at the costs, but you can't turn the time back. Formula 1 is the pinnacle [of motorsport], and the pinnacle of technology as well.

"It is important to attract engine manufacturers in the sport, and actually [the regulations] have brought Honda back into the sport.

"The current format of power units was actually being proposed by Renault back then and for us, as Mercedes, it's a hugely important showcase of technology, road-relevant technology, hybrid technology, the future." That is the official Mercedes line.

Unsaid was that the company, having totally dominated this year's championships, is reaping the rewards of its dedication in developing cutting-edge technology. Yes, it enjoys a performance advantage, one derived from doing a (substantially) better job than the rest - as Red Bull and Renault did previously. Why should the company voluntarily give up on its hard-earned advantage, particularly as the base costs are covered?

Ferrari? Last Friday the Scuderia's (now deposed) team principal Marco Mattiacci was more cautious: "Definitely we need to look at something different in 2016. In terms of power unit and in terms of regulation 2015 is clear, and we have to - at the moment - accept the status quo, but definitely we are not going to accept the status quo for 2016..." Meaning a major rewrite...

"The cost of the power unit is a problem," acknowledged the Italian, since replaced by Marlboro man Maurizio Arrivabene, whom Ferrari president (and Fiat/Chrysler alliance) president Sergio Marchionne knows through his tenure on the main board of Philip Morris, Marlboro's parent.

"[It is] a fact that we cannot enhance our power unit during the season, [which] is a cost for us for not performing. So, the difficulties that the small teams are facing is an issue on the table - and I think all these problems are connected..."

There, in a nutshell, lies F1's disconnect: On one hand a man charged by his (drinks company) principals with delivering world titles via the best chassis facilitated by the biggest (team) budget seeks to reduce engine performance technology via standard ERS units - reducing the differentiators outside his control - while on the other a manufacturer representative pushes the pinnacle of technology on behalf of his employer.

Sitting between the two stools is a small volume manufacturer as much concerned with costs as with performance, while in the shadows are three independents - whose principals, incidentally, chose to attend a meeting on F1 finances rather than appear in the press conference - facing long-term ruin unless the costs of going grand prix racing are restructured totally.

Mercedes is not willing to give up on its engine advantage © XPB

Another 'solution' proposed by various paddock folk was to 'force' engine suppliers to reduce their annual supply prices. This, though, is akin to applying sticking plaster to cancerous wounds, and will in all likelihood drive existing manufacturers from the sport and deter new brands from entering.

As it stands, both Mercedes and Renault are already subsidising their power units. The most recent financial results posted by the engine division (Mercedes High Performance Powertrains Ltd) of the former, show a 2013 turnover of £140million, yet the most the company could hope to recover from customer teams for the same period was £36million based on the maximum ceiling price of £9million per team.

The rest is subsidised by what parent Daimler, which underwrites the operation, refers to as "Research and Development" in its financial statements. At the accepted current engine price of £20million (maximum) HPP will recover around £80million for 2014 - while facing commensurate turnover increase due to the higher costs of 2014 technology.

The burning question is: how could Daimler's research be enhanced by increasing engine subsidies? The company has, after all, just dominated both world championships, so how could it benefit further by slashing its engines prices to customers? And, what about the massive development costs already incurred? Should these be written off on a Strategy Group whim?

Ferrari is notoriously schtumm about its F1 financials - which are impossible to analyse accurately on account of the Scuderia being an internal operating division of Ferrari S.p.A. - but the indications are that Ferrari is not turning a profit on F1 engines, particularly given comments previously made by Mattiacci, who regularly referred to "the cost of supporting Formula 1".

Honda's situation is unclear, but is believed to encompass supplied engines on a full partnership basis, plus financial support for McLaren. Until 2016 (at least) the company will not supply customer units.

At Renault a senior manager this year indicated that direct costs after income from customers amount to approximately €80million per year, in turn covered by the main company as "marketing cost". Renault-Nissan alliance president Carlos Ghosn is a notorious cost cutter - so how would the accountant, who expects every project to wash its own face, take to a doubling of marketing subsidies?

There would, after all, be no tangible increase in marketing kudos, while the company could be expected to write off upwards of £100million in development costs. Now consider any motor company debating future entry into F1 as engine supplier - would the main board approve a project under such circumstances?

Jordan paid £30million for its engines in 2014 © XPB

However - and customers teams will find this hard to swallow - engine costs have markedly decreased in real terms over recent years, even taking the doubling of costs after 2013 into account. A (ex) Cosworth source recently unearthed documents showing that, in 2004, Jordan Grand Prix's engine bills amounted to approximately £30million - on a total team budget estimated at £50million.

Alain Prost recently revealed the portion of his (Ferrari) engine costs back in 2001, when the units were badged 'Acer': Of his £35million season budget, engines made up almost £20million - roughly what independents now pay for bells-and-whistles hybrids. By way of comparison, engines currently make up 40 per cent of the budget of the smallest 2014 team, and approximately 30 per cent of such as Force India and Sauber.

Therein lies the rub: All and sundry are blaming engine costs for F1's continuing financial crisis, but (conveniently?) overlooked in all this is that 2014 marks the first year of F1's inequitable pay-outs, which have hit the teams at the same time as have increased engine bills.

The problem is patently not the actual invoice value of a two-car season engine supply, but that the majors enjoy subsidised (or free) engines and enjoy premium FOM pay-outs, while independents face crippling bills on reduced (comparative FOM) pay-outs.

To demand that engine suppliers further subsidise their engines to battling teams while CVC continues to milk the sport for all its worth s not only illogical, but makes no strategic sense whatsoever - and does not at all address the root cause of the dilemma, namely F1's commercial terms.

In any event, the problem with all aforementioned 'solutions' is that F1's current governance procedures do not provide for such changes to be introduced before 2015 unless all players are in total agreement, and for 2016 only if agreed by a 70 per cent majority before 1 March next year.

In fact, a case could be made that the technical impact of any or all the suggestions on teams is such that at least two years' notice would be required to adapt engines, chassis and software - whereas the grid crisis is happening now, and could be repaired by CVC immediately, but only if F1's 'owners' are prepared to sacrifice a portion of the astronomical profits already ripped out of the sport.

Put differently: Why should engine suppliers subsidise the greed of the vulture fund, all for no incremental benefit?