Mercedes generic logo badge

Mercedes and the Formula 1 cost-cap blues

Mercedes and the Formula 1 cost-cap blues

The Formula 1 cost cap has hit Mercedes F1 hard and it culled staff too but the team made more money for their efforts.

The F1 cost cap, and related capers, have been all over the news of late, as the ruling body, the Federation Internationale d’Automobile (FIA) stutters its audit out and dithers on how to deal with a couple of errant teams who dared break that dreaded glass ceiling. The fiasco lumbers on, and on.

That F1 cost cap is no joke, however. Mercedes-Benz Grand Prix Limited spent $291 million in 2020. Last year it spent $267M, despite the calendar growing from 17 to 22 races. The cap has had a significant impact on the Mercedes-Benz Grand Prix team headcount, which was 1063 in 2020, before the cap clipped the staff count back to 1004 souls.

“Restructuring for the cost cap has been such a painful exercise,” Mercedes F1 team boss Toto Wolff explains. “We had to restructure and change our processes. Unfortunately, setting a spending limit on the largest part of the cost centres in the team also made people redundant. It is particularly painful to hear teams discussing that.”

Biggest casualties in Engineering

Motorsports: FIA Formula One World Championship WM Weltmeisterschaft 2016, Grand Prix of Malaysia, Toto Wolff (AUT, Mercedes AMG Petronas Formula One Team), xHOCHxZWEIx<br /> Motorsports FIA Formula One World Championship World Cup World Cup 2016 Grand Prix of Malaysia Toto Wolff AUT Mercedes AMG Petronas Formula One team xHOCHxZWEIx

The biggest casualties came in design and engineering, which hemorrhaged 75 people, from 906 to 831 last year. Administration, not affected by the cap, rose in staff over the same period. Ironically, many of them were hired to deal with extra F1 cost cap monitoring duties.

“We have 30 people more in finance, eight more in legal, 50 more in marketing, communication, sponsorship,” Toto Wolff points out. “All of that, to administer the cost cap.”

Mercedes F1 was however far more profitable in 2021. The team spent $24m less to do considerably more, as it adapted to this new era of cost cutting. Profits increased from $12m in 2020 to $61m in 2021 as turnover off sponsorship and F1 prize money increased as income went from $319 to $344 million.

Cost cutting proved profitable

So profitable was the team last year, that parent Mercedes-Benz AG did not have to contribute. Mercedes however still finances its High-Performance Powerplants shop, from which the F1 team buys its power units.

“The F1 cost cap has changed our business model from lightly profitable, into one with a 25% earnings before interest and tax,” Wolff explained.

“If you’ve been successful on track, the TV money, and sponsorship basically goes directly into your margins. That has happened in the US sporting franchises. The bottom line pays for itself because we can’t spend more, so we grow costs in support areas.

“The advantage is that, like the US, we’ve set the spending limit, but we’ve excluded support areas. So, support areas still needed to grow vastly in order to support the organisation with the F1 cost cap.”

Mercedes’ F1 cost cap victims shifted to other projects

Mercedes and the Formula 1 cost-cap blues mercedes world champions-001

Like other top teams, Mercedes has shifted many former F1 people into non-F1 projects. “We have America’s Cup in our applied science department, and we have various other projects on performance engineering,” Wolff explained. “So, it’s really about records, whether that be on land, sea, air and space, that’s an area for us.”

The F1 cost cap has also dramatically altered how the team operates. “Imagine the hiring process,” Wolff explains. “An engineer in the past would interview candidates. Now they need to link back with HR, and HR needs to link back with finance, and say we need another head that’s costing us £45,000 a year, can we afford it?

“As an organisation we were spending on engineering to achieve the best performance. Suddenly, we now need a structure that analyses from the moment of purchase throughout production, the logistics and then deployment on the car, and setting priorities of what you give to the car. It is super painful and difficult,” Wolff concluded.