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Saturday, September 19, 2009

ARTICLE: F1 entry – good timing or big risk?

SOURCE: The Star, Saturday September 19, 2009

F1 entry – good timing or big risk?


EYEBROWS were raised when news broke that Malaysia is participating in the Formula One (F1) race next year via the Lotus F1 team.

The team is a collaboration between the Government and a group of entrepreneurs linked to AirAsia Bhd and the Naza Group, with Proton Holdings Bhd’s British subsidiary, Lotus as the constructor.

Sceptics are many, especially since big names in the auto world such as Honda and BMW have withdrawn their participation from the sport due to the global economic crisis.
BMW Sauber Formula One crew pushing Nick Heidfeld’s race car past stacks of tyres at the Sepang International Circuit during the F1 race in April.

As the United States and countries across Europe and Asia are still trying to revive their economies, why would Malaysia choose this time to join one of the world’s most expensive sports? More importantly, who is forking out the money?

Let’s talk money

F1 is well known for its huge spending. The reported 2008 team budgets ranged from US$45mil to US$445mil (RM158mil to RM1.6bil) for sponsorship, supplier deals, prize money, team owner contributions, tyre provision and supply of customer engines.

In May, the Federation Internationale de L’Automobile (FIA), the ruling body of F1, decided to cap the budget for 2010 to £40mil (about RM228mil) in a bid to prevent more teams from dropping out and to encourage the entry of new contenders.

Datuk Seri Tony Fernandes, the AirAsia Bhd boss and one of the investors in 1Malaysia F1 Team Sdn Bhd, which owns the Lotus F1 team, told CNN in a recent interview that the budget cap, coupled with the huge F1 following, made it “a good time to join F1”.

His co-investor, as well as partner in AirAsia, Datuk Kamarudin Meranun concurs, calling the venture “a commercially viable one”.

While Lotus F1’s budget remains sketchy for now, Kamarudin reveals that an initial investment of £10mil (RM57mil) has been made to start the construction of the vehicle. “We’re starting mid-way. So we need to be quick to get the approvals for the car,” he says.

While FIA’s capped budget covers team expenditure, it does not include marketing and hospitality, remuneration for test or race drivers, fines or penalties imposed by the FIA, and engine costs, which may come up to few hundred million ringgit more.

It also does not include the setting up of the new headquarters at the Sepang International Circuit (SIC), for which 8,000ha to 12,000ha of land have been allocated.

An SIC official says the two- to three-year development cost for the state-of-the-art facilities for the new HQ could reach millions, or perhaps billions, of ringgit.

The funding of F1 teams is usually supported by sponsorship. Companies form tie-ups with the teams in various capacities for brand-building purposes.

Sir Richard Branson’s Virgin Group, for example, took up a substantial sponsorship deal for Brawn GP in March this year (Virgin’s involvement, however, ends in November).

Fernandes is not new to such arrangements since his low-fare carrier has a three-year partnership with the AT&T Williams team as its official airline since 2007.

The Lotus F1 team, one suspects, will follow the same marketing trend of searching for potential corporate sponsors. Since its entry is supported by the Government as an opportunity to profile the 1Malaysia theme, government-linked companies are likely to be roped in.

F1 a nationalism symbol?

Talking about country profile, motor racing started out as a country-based competition and eventually evolved into a commercial sport involving independent teams and car manufacturers.

The existing F1 teams do not have specific country identity, with the exception of Force India, which used to be Spyker F1 team before it was sold to a private consortium comprising Indian millionaire Vijay Mallya and successful European e-businessman Michiel Mol in late 2007 for 88 million euros.

Force India’s main sponsor is Kingfisher, the flagship brand of Vijay’s beer and aviation businesses. His conglomerate, the UB Group, has annual sales of over US$4bil and a market capitalisation of US$12bil. Forbes puts Vijay’s net worth at US$1.2bil, one of the richest in India.

The team uses an Indian flag in its logo but the drivers are non-Indians – Adrian Sutil is from Germany and newly promoted driver, Vitantonio Liuzzi, is Italian. The team is solely driven by its private-entity owners and does not involve any Indian government initiative.

Similarly, India’s hosting of the F1 Grand Prix in 2011 is also an initiative driven by individuals. The project owner, JPSK Sports Private Ltd, owned by the Jaypee construction conglomerate, is funding the circuit construction costs.

The Malaysian entry, in contrast, has the Government’s backing, although the idea of Lotus F1 was mooted by both Fernandes and Kamarudin.

“There’s an opportunity to participate (due to the spot vacated by BMW Sauber) and so we went ahead to conceptualise the idea of our own team, roped in SM Nasaruddin SM Nasimuddin (executive chairman and chief executive officer of Naza Group) and Proton, and approached the Prime Minister for his blessing,” explains Kamarudin.

“The concept of 1Malaysia is not limited to people. My view is that it should be extended, to encompass the partnership of the private sector and the Government.”

Separately, Fernandes says the entry is “great for Malaysia” as it will further utilise its “hardware” at SIC while developing “the soft side – drivers, engineers, management”.

But what about risks?

As with any investment, there will be financial risks. In this case, the millions of ringgit that will be spent to set up the F1 team is at stake. Some argue that the huge investments are well worth the money because of the brand recognition gained internationally.

National oil company Petronas claims its annual cost of sponsoring F1 is less than 5% of what it would cost to gain similar exposure. Last year, its exposure via F1 was valued at about RM1bil.

But Petronas’ involvement is different as it does not run an F1 team. It supports BMW Sauber as its lubricant sponsor, and rightly so, since it’s in the oil business.

(It is uncertain if the national oil company’s sponsorship of BMW Sauber will continue since BMW has withdrawn from the team and Sauber does not have a firm entry for next year’s race.)

Aside from financials, there could also be the intangible risks. A poor performance may bring more detrimental publicity than the desired high profile.

Note that Malaysia’s first F1 driver, Alex Yoong, drove for the Australian-owned Minardi F1 team back in 2001 and 2002. Yoong only managed to finish five races out of the 11 in 2002, because of setbacks like engine, hydraulics and gear box problems.

Lotus technical director Mike Gascoyne is, nevertheless, confident of Lotus’ future performance. He told the British press recently that Lotus F1 was “a very substantial team.”

Gascoyne has over 20 years’ experience in the sport, having worked with Force India, Toyota, Renault and Jordan Formula One teams.

Still, it remains to be seen how Malaysians would feel, watching with millions of viewers worldwide, when Malaysia’s team finishes weakly, or perhaps not even completing races.

Lotus no newcomer to F1

The association of Lotus and F1 is not foreign. In fact, Lotus was a well-known participant in the glamorous sport in the 1960s. Between 1958 and 1994, the original Lotus team achieved 73 grand prix wins, 102 pole positions, six drivers’ world titles and seven constructors’ crowns from 489 starts, with illustrious names of the calibre of Jim Clark, Graham Hill, Sir Stirling Moss, Emerson Fittipaldi, Jochen Rindt, Mario Andretti, Ronnie Peterson, Nigel Mansell, Ayrton Senna, Nelson Piquet and Mika Hakkinen in its roll call of drivers.

Its success track record is mainly linked to founder Colin Chapman, who remained passionate about the sport until his death in 1982. Lotus’ last F1 race was in 1994.

The Lotus company, meanwhile, had been struggling with financial difficulties and had different shareholders trying to revive its finances. Proton has been the major shareholder since 1996, but it has long been rumoured that it wants to divest its stake.

OSK Investment Bank, however, said Proton had no urgency to sell Lotus Cars as the subsidiary had returned to profitability since 2008 with net earnings of £1.5mil.

While the Government’s involvement in the Lotus F1 team is via Proton, analysts do not expect the national car company to offer financial support. Proton’s role in the F1 venture will mainly be as the coordinator for Lotus, says an analyst in a recent report.


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