"F1 Budget Cap Scandal: Teams' Creative Strategies to Evade Cost Cap Without Cheating"

F1 Teams exploit loopholes to potentially match their previous spending levels, despite the Budget Cap.

CostCap.jpeg

In an effort to promote fairness and equal opportunities in Formula 1, the introduction of a budget cap seemed like a promising solution. However, as the third year unfolds, it becomes evident that numerous loopholes exist, benefiting primarily the top teams. Let's delve into the ways these teams manipulate the development to gain an advantage. The concept of the budget cap was well-intentioned, aimed at addressing Formula 1's most significant issue. 

In an effort to promote fairness and equal opportunities in Formula 1, the introduction of a budget cap seemed like a promising solution. However, as the third year unfolds, it becomes evident that numerous loopholes exist, benefiting primarily the top teams. Let's delve into the ways these teams manipulate the development to gain an advantage. The concept of the budget cap was well-intentioned, aimed at addressing Formula 1's most significant issue. 

The new rights holders, inspired by Max Mosley's past proposal and drawing parallels to salary caps in major US professional leagues, embraced the idea to level the playing field and provide more equitable chances for all teams. Prior to the budget cap, Formula 1 teams operated under unequal circumstances. Wealthier racing teams not only had access to the best talent but could also afford a more extensive workforce. It was akin to granting Real Madrid, Manchester City, or Bayern Munich the ability to field 33 players instead of the standard eleven. 

Consequently, between 2013 and 2020, Grand Prix victories were exclusively dominated by drivers from Mercedes, Ferrari, or Red Bull. The occasional surprise victory, like Pierre Gasly's triumph at Monza after eight years, was a rare exception for the lesser-known teams such as Alpha Tauri. Despite its noble intentions, the implementation of the budget cap has proven to be challenging, allowing top teams to exploit loopholes and maintain an advantage in the highly competitive world of Formula 1.

The predictability of any sport can be detrimental in the long run. In response to the challenges posed by the Corona crisis, the FIA introduced a budget cap in 2021, initially set at $145 million, which has gradually increased to $202.3 million by the beginning of 2023. However, when factoring in allowances, teams are permitted to spend approximately $153 million to cover additional races, sprint weekends, and inflation compensation. 

Despite the financial constraints imposed, racing teams have embraced the new system as it enhances the value of their licenses. This shift has transformed Formula 1 into a more profitable business on the surface, making it an appealing venture for potential investors. For example, Alpine recently sold 24 percent of its racing team for a substantial sum of 200 million euros. In theory, if all teams adhere to the cost cap, it could lead to greater parity and equal opportunities.

 However, the 2022 season has already demonstrated that there are still loopholes within this financial discipline. Teams like Red Bull have actively sought and exploited these loopholes. Red Bull exceeded the cap by £1.8 million, resulting in a $7 million fine and a ten percent reduction in wind tunnel time. Similarly, Aston Martin faced consequences for providing inaccurate information during the cost review, resulting in a $450,000 penalty. 

While the budget cap aimed to level the playing field and reduce predictability, its effectiveness is dependent on all teams complying with the regulations. The ongoing scrutiny of these financial measures will be crucial in achieving a more competitive and exciting Formula 1 in the future.

2022 F1 Budget Cap Audit results to be released in August to September 2023

As early as September, the audit process yielded results, but the communication of these findings to the teams was delayed until October. The FIA acknowledged their apology, citing a shortage of personnel as the reason for the delay. In 2022, with only three examiners available for ten teams, some teams took advantage of this situation to conceal certain expenses. This behavior is deeply ingrained in the DNA of Formula 1, where teams strive to push boundaries and seize every opportunity to hide costs. 

To address these issues and expedite the audit process, CFO Federico Lodi's department underwent expansion, increasing the number of employees to ten. From the end of March, auditors started working with two teams each month. They meticulously reviewed financial records, conducted interviews, examined communication channels like email and WhatsApp messages, and occasionally surprised teams with unannounced visits to their factories, presenting challenging questions to verify the accuracy of the submitted annual reports. The comprehensive review is expected to conclude by the end of July. 

Those suspected of surpassing the budget cap will face further investigation by the FIA in August. Subsequently, at the beginning of September, all teams will officially receive the results of the audit. Rumors circulating within the paddock suggest that at least two teams are once again under scrutiny for potentially exceeding the allowed limits.

The Usage of several legally independent companies by F1 to do the work for F1 companies

During the course of investigations, it became evident that numerous grey areas were exploited by the top teams in Formula 1. To address some of these loopholes, CFO Federico Lodi and FIA Technical Director Tim Goss issued the Technical Directive TD045 on 19th April. The purpose of this directive was to curb the deceptive practices that had been discovered. However, the teams continuously stay ahead of the rule keepers, finding new ways to work around the regulations. 

One popular method is to divide their core business into several legally independent companies. These subsidiaries might engage in building boats, bicycles, or radical supercars for public sale. The primary motive behind this tactic is to retain talented engineers who might otherwise leave for other teams or industries offering better career prospects or higher salaries. By employing this strategy, teams assign these engineers to work only a fraction of their time, such as 10, 25, or 50 percent, for the Formula 1 team. 

As a result, the salary expenses are proportionately reduced in the Formula 1 cost center. Subsequently, teams have taken the next step by establishing new companies to outsource specific services. This allows the teams to purchase these services from their own "external" companies at a lower cost than if they were to handle them internally. This way, they effectively circumvent the budget cap restrictions and gain an advantage over other teams.

Another trick

The teams in Formula 1 have continued to find new ways to navigate the budget cap restrictions, leading to concerns about maintaining a level playing field. Some teams have established internal companies that supply components or services to the Formula 1 racing team at cost price, effectively bypassing the cap's limitations. For instance, Mercedes set up a software company that primarily serves the Mercedes Formula 1 team.

 Similarly, Aston Martin functions as a carbon manufacturer, producing carbon fiber components in-house, but operates as a separate entity within the larger organization. It supplies the Formula 1 racing team at cost, but the employees also benefit from being able to accept external orders outside peak hours, which improves their overall financial standing. Moreover, this model extends to the development department as well. The department can sell new developments to the racing team at a flat rate, saving significant costs compared to if the team were to create these developments internally. 

In this arrangement, all the expenses are accounted for in the fixed price, and any failed developments do not appear as additional costs. To counteract such practices and prevent excessive manipulation, the FIA introduced the Technical Directive TD045. However, it seems that a new tactic has emerged that is difficult to address. Currently, Red Bull and Aston Martin are the only teams that can potentially apply this new trick, which involves developing extreme sports cars for affluent customers. 

For example, Red Bull Advanced Technologies is working on the RB17, an extreme sports car that resembles a Formula 1 car with enclosed wheels. They plan to produce 50 units, each priced at five million euros, until 2025. Similarly, Aston Martin has its racetrack version of the Valkyrie, initially developed by Red Bull but now taken over by Aston Martin. This approach poses a challenge for the FIA, as it creates a scenario where certain teams could exploit external commercial projects to supplement their budget while still benefiting from the technical knowledge and resources derived from Formula 1. Unless the FIA addresses this issue proactively, it might set a precedent for other teams to follow suit, further complicating efforts to ensure fair competition within the sport.

Using supercars for development aid

Using supercars as a development aid can present certain advantages for Formula 1 teams, particularly in terms of cost and time savings. The mechanical and aerodynamic components used in these supercars could have relevance for Formula 1 vehicles as well, making it a potential avenue for shared knowledge and technology transfer. Since there are no strict rules governing the design and development of such supercars, teams could openly showcase the integration of Formula 1-related features into these vehicles. This includes openly displaying Formula 1-inspired components, like the underbody, without any restrictions. 

The absence of regulations for these types of vehicles allows teams to experiment and gather valuable data while the cars are in use. They can collect route data and potentially benefit from insights that could be applicable to their Formula 1 endeavors. However, the same approach cannot be taken with Le Mans hypercars, like the ones Ferrari and Alpine are involved in. These vehicles have separate regulations that differ from those of Formula 1, making it challenging for teams to freely transfer developments between the two. While Red Bull claims that information flow is strictly unidirectional, from Formula 1 to the hypercar division, it remains difficult to prove that communication is not reciprocal. 

Engineers in both departments are likely to know each other and share a common language due to their previous experiences working in Formula 1. Even without explicit data sharing, subtle conversations in casual settings could potentially influence development decisions. 

Indeed, it may not be necessary for engineers to leave explicit traces or share data formally. Informal discussions and hints could be enough to impact decisions made in either division. As a result, ensuring a clear separation and preventing any potential information flow is a challenge that the FIA must diligently address to maintain the integrity of competition in Formula 1.

The top teams may still end up spending as much money as they did before the Budget Cap

The situation regarding the exploitation of loopholes and grey areas in Formula 1's budget cap is indeed a challenging quagmire for the FIA to address. Some top teams, including Mercedes, Ferrari, McLaren, and Alpine, maintain trust in the FIA's testing methods and strict interpretation of the rules. 

However, if it becomes apparent that the FIA's controls are not effective in curbing these practices, alternative solutions may need to be considered, as suggested by Toto Wolff. For instance, the idea of having a similar model to the one employed by Mercedes with their AMG Project One could be explored. Such a supercar would enable the team to leverage technology and knowledge from Formula 1 without violating the budget cap rules. 

Nonetheless, the issue remains that the top teams may still end up spending as much money as they did before, but the spending is distributed across various activities and subsidiary companies, not all appearing on the Formula 1 books. This situation can give the illusion of a profitable business to the outside world, which might not be entirely accurate. 

It's essential for the FIA to ensure that the budget cap's enforcement remains stringent, and any potential loopholes are effectively addressed. This way, Formula 1 can maintain fairness and equal opportunities among teams, preventing the sport from being perceived as less competitive due to the financial strategies employed by certain teams. A continued focus on transparency and accountability will be crucial in maintaining the integrity of the sport and promoting a level playing field for all participants.

*Note from our editorial team

We apologize if any of the information above seemed or seems to imply or suggest that F1 teams are blatantly cheating. Our main purpose is to provide information based on extensive research. We completely understand that accusations of cheating without evidence are unjust and can be harmful. Indeed, F1 teams have demonstrated creativity and resourcefulness in navigating the budget cap regulations, finding innovative ways to make the most of their financial resources and investments. 

While some practices might raise questions, it's essential to remember that the FIA has set rules and guidelines to address these issues and ensure fair competition. As F1 continues to evolve, it's crucial for the governing body and teams to work together to create a level playing field and maintain the integrity of the sport. Transparency, adherence to regulations, and a commitment to fair play will be vital in promoting a healthy and competitive environment for all participants and fans.

Comments