Barriers to Entry: What does it take to enter F1?

June 16, 2009

In business strategy we often refer to the concept of barriers to entry when considering the attractiveness of an industry. Typically an industry with low barriers to entry will be exposed to greater competition and thereby the existing firms are less likely to make high returns. It is often a key part of business strategy to increase the barriers to entry (e.g. through building brands, increased regulation or technical know-how) thereby reducing these competitive pressures and enabling the incumbents to make higher returns.

Formula 1 is of course a bit different, but many of the basic principles still apply. In essence the regulator (FIA) is looking to reduce the barriers to entry – making it easier for new firms to enter and thereby ensuring the longer term survival of the category. A further aspect is that if the FIA reduces barriers to entry it also potentially reduces the bargaining power of the existing firms, thereby increasing the power of the FIA relative to the teams within F1. The existing teams represented by FOTA are unsurprisingly less enthusiastic about reducing barriers to entry or at least certainly they are against the speed at which the FIA wants to do so. A particular issue they have raised is that the quality of the new entrants can have a detrimental impact on the quality of the sport. Ferrari, unquestionably the strongest brand in F1, have made a number of references to this, most recently with President Luca di Montezemolo stating that “I’m very pleased to have new teams, and when I say teams I mean Formula 1 not Formula 3.”

So what does this mean? What is the difference between a Formula 1 team and a Formula 3 team? The essence of Formula 1 is that it is not just a race between drivers, but a race between race car constructors. Each F1 team designs, manufacturers and develops a unique car to race in the Drivers’ and Constructors’ World Championships. In most other categories of motorsport (such as F3) the team will buy a car from a specialist manufacturer such as Dallara or Lola and race the car relying on these manufacturers to undertake any technical development. An F3 team therefore needs a racing/logistics operation, but not the expansive design and manufacturing operation that we see in F1, nor the sophisticated commercial operation designed to bring in the revenues to support the design and manufacturing costs. This also means that a F1 operation involves a bigger workforce with many different areas of activity and departments – it therefore needs excellent management to perform well.

A new entrant to F1 will therefore require not only international racing skills and experience, but will also need to have (or have access to) design, manufacturing and fund raising capability to be a serious contender. So how do the three confirmed entries for 2010 stack up against these criteria? Well clearly I haven’t had access to the detailed documentation which the FIA and their advisors Deloittes have had, but just looking from the outside we can make some observations on the three that were confirmed on 12th June.

Campos Grand Prix: Campos are an amalgam of a successful GP2 and F3 team run by ex-F1 driver Adrian Campos  based in Valencia, and sports marketing operation Meta Image based in Madrid. On the face of it this ticks two boxes (racing experience and fund raising capability), but leaves open the areas of car design and manufacturer. However we are also told that they will have a technical partnership with Dallara Automobili, based in Parma, Italy. Dallara are one of the most successful single seater manufacturers of recent times and while they may not have recent F1 experience they were in F1 during the late eighties and early nineties and also built the Honda prototype car that was part of Honda’s exploration into F1 in 1999. So depending on the relationship, Dallara potentially bring the design and manufacturing capability needed to be a true F1 team. A Spanish F1 team will undoubtedly build on the success of F1 in the region which before Fernando Alonso was only really interested in the two wheel variety of grand prix racing. The interesting question is also whether Alonso himself may end up racing for a Spanish team – think what that would do for viewing figures in Spain!

USF1. This US based concept team have two experienced individuals at the forefront: Ken Anderson a designer who has been involved with both F1 and Indycar and Peter Windsor, former team manager with Williams and more recently an F1 journalist. Both of these individuals are well connected and there is much talk of some significant backers to the project. They have also stated that they would like to build the cars in the US. However there is a lack of clarity in terms of design and manufacturing capability and also the commercial capability to make the operation sustainable in the longer term. There is no question that a US based team and an American driver (ideally with the surname Andretti) would be a good thing for F1 (as would a US Grand Prix!), but even the legendary Roger Penske built his F1 cars in the UK.

Manor F1 Team. This is the team that took everyone by surprise (including me). Like Campos they are a joint venture between a current F3 Team (Manor Motorsport near Sheffield) and former F1 designer Nick Wirth, whose Wirth Research company is based in Bicester. Again they tick some boxes, but leave some big question marks around manufacturing (will they tie up with an existing F1 team for this?), the commercial operation and also there is currently no explanation as to their funding sources.

So our new-entrants don’t appear, on the face of it, to have climbed over the barriers to entry to enable them to be (in Montezemolo’s words) F1 not F3 teams. But that is not to say that they won’t be able to – many of the current teams started in the lower formula before stepping up to F1, but that doesn’t mean to say it was easy – just ask Eddie Jordan or Jackie and Paul Stewart what was really needed to make the jump and they will tell you that it wasn’t a case of just adding on a few more partnerships and finding a bit more money, the whole ethos and level of capability of the organization had to be changed (see my case study on Stewart Grand Prix on the blogroll to get a feel for this). So it will be interesting to see which ones actually make the grid in 2010, and of those that do which become real F1 teams, not the F3 variety.

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