In recent weeks one of the most relevant issues for F1 teams is that of the budget cap, which is currently set at $140 MIlion (from which driver recruitment, marketing costs and those of the 3 highest paid employees are excluded.)
A possible extension of the salary cap for drivers is also being debated.
In addition to the purely technical aspect of the issue, there is also the economic and marketing aspect for those who have invested, continue to invest and will invest in the future: will cutting funds reduce spectacularity/appetizability for sponsors?

Before talking about the possible consequences, let us briefly summarize the situation.

The budget cap is a spending cap that the team must adhere to during the course of the season.
It was introduced in 2021 and takes its cue from the salary cap of other overseas sports such as the NBA and NFL. Its inception has a clear purpose: to protect the smaller teams (i.e., to allow them to have an economically sustainable season) and to increase widespread competitiveness by allowing even the “little fish” to compete on equal terms with the top teams.

It is clear how an economic powerhouse like Mercedes has markedly different revenues than its lower-ranking rival stables. It is equally clear how this has affected German dominance in the recent hybrid era.

The current seasonal team budget cap in F1 stands at $140 million, and is expected to vary depending on the number of races added or removed going forward.

The teams are rather at odds on this issue, so much so that they have to bother the FIA directly to make a final decision. In particular, the request for an increase in the budget cap comes from the top-ranked teams such as Ferrari and Mercedes that have been the protagonists of many upgrades during this season, in particular porpoising (violent car bouncing) has led the Anglo-German stable to make large investments to solve the problem.

Red Bull has the good fortune of a “born well” car and sees the need to raise the bar because of rising energy and transportation costs and subsequent inflationary surge caused by the conflict in Ukraine.

On the other hand, on the other hand, teams such as Haas, Alfa Romeo and Williams have opposite views from the above, as they do not see the need for such an intervention while the competition is ongoing, so much so that it would distort the final results according to their perspective.

Moving to the seats, driver salaries have also become a topic of discussion. The fear is that there could be a sharp rise in demand compared to the current contract offers from the leading players in the paddock. Right now, those most affected would be the likes of Lewis Hamilton and Max Verstappen, i.e., the highest paid in the circus. Already expressing his own opinion is the young Dutchman, who clearly opposes: “Right now F1 is getting more and more popular and everyone is earning more and more. Why should the drivers have a ceiling? They are the ones who put on a show and risk their lives.”

After noting that this is not an easy topic to deal with, given the multitude of facets present, we begin to evaluate the consequences of all possible scenarios.

The budget cap does not change: what happens?

The items previously listed leave no room for detail: every cost is tracked, well recognized and filed. There is a very small margin for error indeed, and this is well known by both the teams and the drivers themselves, who live with the pressure of the grid result, the need to do no damage to the car, the team’s goals, personal ego, their own safety at 350 km/h, and all at the same time.

Not increasing this “ceiling” means seeing fewer upgrades on single-seaters, thus fewer improvements that could translate into less showmanship resulting from less widespread competitiveness.
Those who produce a good car at the beginning of the year have an advantage that is difficult to close if you cannot spend freely.
The teams at the top suffer the most as the race for the title is more cutthroat than ever. Every detail, every aerodynamic appendage every devilry that the opponent has better than yours and is better performing can make all the difference. In the world of ordinary mortals like us, we almost never give weight to time as a unit of qualitative measurement. In Formula 1, a tenth of a second can cost millions. Both in development/upgrading to beat the clock, and in the event of an accident.

In just the latter scenario, starting this year there could be a serious risk of not seeing all the teams finish the world championship because of the cost of contingencies on the track. Once the repair budget runs out, there is no “third car.” Only insulating tape would remain, as with Yuki Tsunoda’s rear wing in the 2022 Azerbaijan Grand Prix.

Such a situation would be nothing short of catastrophic for the image of the teams involved, which would have to face the consequences in both sporting and legal terms. Sponsorship contracts in Formula 1 are tied partly to results, partly to the team’s presence at races. It would not be the failure to achieve a sporting goal that would create particular havoc, so much as the failure to participate in one or more GPs.

Budget cap goes up: everybody happy?

Not exactly. As explained earlier, not all teams can invest astronomical amounts of money. Raising the spending ceiling leaves no choice for the smaller teams, which are then forced to make an additional, not insignificant economic sacrifice if they want to hope to be competitive.

It is fair to specify, however, that-especially they-have an interest in attempting to finish each race in the points zone, since the organizer awards a cash compensation to the top ten finishers. Therefore, we would be talking about an investment that can theoretically be financed by sports results, which can be obtained on the track.

Moreover, today’s F1 enjoys media relevance of unprecedented scale. It would be a waste not to take advantage of it, both on the part of teams and drivers and for the federation itself. Increasing the opportunity to get hands-on with the single-seaters would have a remarkable return in terms of spectacle. It is precisely the increase in the infamous “drama” that has allowed for remarkable expansion in recent years.

Sponsors who decide to invest in it do so precisely because there is no other sport so adrenaline-fueled and extreme with such a spectrum of visibility. Limiting its possibilities would leave that “what if” aftertaste that the entire complex environment of agent figures in the industry (from F1 down to the fan) would have when the season is over.

Let’s summarize.

The FIA ‘s intent of wanting to make competition a level playing field for all is a gesture aimed at making the show more interesting for fans and sponsors.

What makes the difference remains the funds available to choose the engineers who work on the single-seaters, from concept to track. In addition to the performance of the car, a team of experts in the field promises much in terms of reliability (a topic that is now more than ever at the center of discussions, especially in Maranello).

We are all witness to the fact that strategies from the pit box can decide a world championship as much as power, set-up and reliability of the car or the skill of the driver. Being confident in one’s means despite criticism can also positively affect the environment.

Statements by Ferrari’s Team Principal, Mattia Binotto, demonstrate this: “I prefer to have a fast and competitive car rather than a reliable one. It is easier for us to work on this aspect.”

Harsh words when viewed from the purely “fan” perspective, but encouraging when framed as “we have the situation under control.”

Different discussion regarding the salary cap. If we think in terms of comparison, the salaries received by athletes in the world’s top sports leagues are slightly different than in F1.

The drivers leading this ranking, as already anticipated, are Max Verstappen and Lewis Hamilton who earn €36M and €35M per season, respectively. Next, we find Fernando Alonso at €17M. Below them, we can still find a few above €10M until we get down to Yuki Tsunoda‘s €650k.*

Now let us take as an example the salaries of basketball players in the NBA, remembering that this is a league where the salary cap is in force. Interestingly, as many as 12 athletes are paid more than the top 2 drivers in Formula 1.**

Soccer could also be mentioned, but as there is still no cap in place on either salaries or transfers, it would be misleading. However, it is only fair to at least mention the fresh contract renewal of footballer Kylian Mbappè, who is linked to Paris Saint German for the modest sums of €118M upon signing plus €54M per season until 2025.***

Comparing the rate of risk to the safety of athletes in these sports with the top class of four-wheelers, let us leave it to those in charge to do their own thinking.

What do you think? What area would you invest in for a sports sponsorship with your company? Don’t miss the opportunity to improve the communication of your business with the values of sports and contact us for more information.

 

 

 

 

 

*: “Formula 1 2022, drivers’ salaries: another Hamilton-Verstappen duel” – https://www.money.it/Formula-1-2022-stipendi-piloti-Hamilton-Ferrari

**: “NBA salaries, highest paid players in 2022” – https://www.dunkest.com/it/nba/notizie/12291/stipendi-nba-giocatori-piu-pagati

***: “Details of Kylian Mbappe’s renewal with PSG” – https://www.socialmediasoccer.com/it/articolo/i-dettagli-del-rinnovo-con-il-psg-di-kylian-mbappe.html#:~:text=Il%20PSG%20second%20quanto%20trapelato,fatto%20la%20sua%20attuale%20retribution.