Cost Cap’s Bursting in the First Year
Formula One spent quite a bit of Energy putting a cost cap into place for 2022 in May 2020.
Formula One spent quite a bit of Energy putting a cost cap into place for 2022 in May 2020. Why are teams feeling the pressure of keeping costs under the $145 million ceiling and losing confidence they can make it to the end of the season?
Do you know what it takes for a Formula 1 team to compete in each race of a season? Let's put aside the car and R&D for a moment; that's not the focus of this message. Logistics have become a real problem at a global level! Have you looked at the shelves of your local Walmart recently? Me too!
Remember, the FIA approved the cost cap in May 2020, so let's see what happened to shipping since that has team principals scratching their heads.
Here are some rough numbers to show you container costs for sea freight.
Jan 2019 - $1720
Jan 2020 - $1733
Jan 2021 - $5252
Jan 2022 - $9420
Contacts of mine in global supply chains are anticipating containers for 2023 to double again! That could put Jan 2023 container costs at $18840! That's almost an 11x increase in price since the cost cap was originally approved and put in place! Air freight costs follow similar trends.
Formula One consumes up to 300 trucks to head from race to race. Multiply that by 23 races in 2022 and 26 races in 2023. It would be over 5km in length if you lined them up, according to DHL!
Trucking costs have reportedly tripled over the past year alone! If price pressure wasn't enough, these rate increases come with looming shortages in availability, labor, and significant energy cost increases for diesel. So global economic conditions are threatening cost cap limits, now team principals could start sweating the possibility of their cars and equipment not even showing up! It's already come close to a team or two this season…
With cost caps holding firm, a team's shipping budget must be doubled annually if the trend lines continue! These 100% increases year-over-year trends with the growth of some of the world's most promising and successful businesses. Shipping pressures a team to limit investment in upgrades and repairs after an accident.
Airfare has skyrocketed—team personnel travel by plane, both commercial and private…all fueled by…fuel. Inflation pushes the cost of people up too. Airline pilots & staff need salary increases to sustain the cost of living. The increased cost of business is passed on to the customer.
Hotels have skyrocketed, especially when the local hotels know a race is in town! I went to Florida for the Indycar season opener this year, and hotels in St Petersburg were going for nearly $1,000 per night (normally under $200)! I found my wife and me an Airbnb for $75/night nearby on a whim. For the same reasons as above, hotel staff wants more money. My teenage son is making $15/hour, and they keep going up to compete for employees. I made something like $4/hr when I was his age. The front desk and cleaning staff want more. Food costs go up for that "free" continental breakfast. Service and maintenance costs are up. These increases all get passed to the customer.
Fuel & Energy costs have skyrocketed. Demand is picking up as the global economy opens back up. Supply has been suppressed by green initiatives blocking access to producer's capital. Economics 101 (supply & demand), demand grows, stores are reduced, then prices go up. It costs more to fuel the container ship, DHL planes, and transport trucks.
Teams have historically budgeted $3–400m annually to compete at their discretion. Teams are forced to spend half of that or risk being penalized. None of these were a concern when the cost cap rules were established in 2020.
$145m doesn't go very far when the cost to get cars, equipment, and personnel to each race continues to push up. On top of that, a driver puts the car into a wall. Or worse yet, another team causes your driver to crash. Do you set aside $1–2m per race/car if Latifi or Mick is your driver?
What's the solution? At the risk of making the budget cap like filing a tax return, there should be allowances in spending for fuel surcharges, increased shipping costs, or damage repair. When this option gets too complicated, a team must hire more lawyers and accountants to understand and extract the best value in the guidelines. That costs more money and is applied to the cost cap.
It wouldn't take much to add in repairing "like" parts to the damaged car and not apply it to the cost calculations. Teams cannot use the allowances to spend on developing upgraded parts. The flip side is that a team wouldn't willingly put a car in the wall for $100k to develop a new front wing.
Teams wouldn't do that, would they? Oh wait, they have!
Teams will work with the FIA to address these concerns as we advance. I don't anticipate that the FIA would be unreasonable in seeing the staggering economic conditions putting pressure on the teams.