FIA analysis of its dispute with FOTA

The FIA, the governing body of Formula One that is pushing for a budget cap in 2010 has released a full statement about its position in the dispute with FOTA. Read carefully, and you might see a breakaway series coming closer and closer.

What is this dispute really all about? Is it about an attempt by some teams to take over the commercial rights to Formula One? Or to take the regulatory function away from the FIA? Or even just a clash of personalities? It has elements of all of these, but the real issue is philosophical; it goes to the fundamentals of Formula One. It is about technical freedom. It is recognition by the FIA and several teams that you can have technical freedom - the freedom to innovate - or you can have freedom to spend without limit. But you cannot sustain both.

The lesson which emerged from five years of attempts to contain engine costs was that real savings could only be achieved by the removal of technical freedom: the engine freeze. All attempts to limit expenditure by ever-tighter technical restrictions failed. This is why we currently have a frozen engine, which will soon have to be replaced. The consensus is that the replacement will have to have a budget - a limit on what can be spent on development and a limit on unit cost, just like the engines being developed for road cars. The alternative would be to go back to unlimited expenditure on racing engines by the major car companies. This was never a rational approach, but would be insane in the current climate.

If we apply these lessons to the rest of a Formula One car, we can see that attempts to rein in expenditure with detailed rules will not work. They did not work on the engine and they will not work on the chassis. Detailed rules stifle inventiveness and innovation. But, worse, they do not significantly reduce costs. As with the frozen engine, real savings could only be made with a frozen chassis, an obvious absurdity.

If we wish to see innovative technology in Formula One, the only way is to limit expenditure and allow the engineers freedom to do their best within a fixed budget. This is exactly what happens in the real world and it is the only way forward for Formula One. Without technical innovation, Formula One will wither and die. Without real cost constraints, Formula One will lose its teams. This is why the FIA is insisting on cost restraint as part of the Formula One regulations.

The final and overwhelming advantage of a cost constraint regulation is that it will provide technical freedom on a level playing field. With a limit on expenditure, the cleverest and most innovative engineering team will win. It will no longer be possible to substitute a massive budget for intellectual ability. In a technological sporting contest this must surely be the right way.

Setting the record straight

The FIA and FOM have together spent decades building the FIA Formula One World Championship into the most watched motor sport competition in history.

In light of the success of the FIA’s Championship, FOTA – made up of participants who come and go as it suits them – has set itself two clear objectives: to take over the regulation of Formula One from the FIA and to expropriate the commercial rights for itself. These are not objectives which the FIA can accept.

Background

When Honda announced their withdrawal from Formula One in December 2008, they had already entered the 2009 Championship and were contractually bound to compete. Two things were then clear to the FIA. First, any of the manufacturers could stop at any moment. The FIA would have no recourse against the main company, only against the team which would have no assets in excess of its debts. Secondly, it was quite possible that other manufacturers would stop before 2010.

Renault was dependent on the French government. It seemed doubtful that taxpayers’ money would continue to be used to contribute to this team’s high levels of spending. Toyota’s car manufacturing operations were facing their first loss in modern times and might not wish to continue to pour hundreds of millions into a race team while BMW, who were making sacrifices in their core business in order to cut costs, might not want to continue to spend heavily on their team.

Faced with the prospect of only 18 cars in Melbourne 2009 and the possibility of worse to come in 2010, the FIA had to act. There were two obvious steps. First, approach Mr. di Montezemolo to see if the car manufacturers would guarantee the presence of their teams in 2010 so that we would not have a repeat of the Honda situation. Secondly, begin talks with FOTA about reducing costs to the point where the manufacturers would be less likely to stop, the independent teams would be viable and perhaps some new teams would enter to fill the empty spaces.

Mr. di Montezemolo promised to secure the necessary guarantees from the main car manufacturing companies (not to be confused with guarantees from the teams). He continued to promise this all through the winter, most recently at a meeting he had with the FIA’s President on 23 February 2009. Not one such letter has been forthcoming – not even from Mr. di Montezemolo's own company FIAT.

At the same time FOTA and Mr. di Montezemolo rebuffed all attempts to hold meetings to discuss cost reduction. There was no need, the FIA were told. FOTA's own measures were adequate and they would make up for the shortage of cars by each running a third car. By March it was clear that FOTA had no intention of facilitating the entry of new teams, indeed were opposed.

It was also clear that if the FIA wanted new teams in 2010, it had to publish regulations, otherwise it would be too late for a new team to build a car. The FIA also had to consider what level of expenditure would work for a new team and how to ensure that a new team with relatively limited resources would not be dangerously slow.

This led to the World Motor Sport Council (WMSC) decision of 17 March which introduced a voluntary financial regulation and technical freedoms for the capped teams to enable their cars to achieve Formula One levels of performance. Ferrari voted against the financial regulation at that meeting but not against special technical freedoms for the new teams (i.e. Ferrari did not vote against the "two-tier" system).

Even after this vote, FOTA were not prepared to talk. Neither was Mr. di Montezemolo, even privately. In the absence of any negotiation or any sign that the promised guarantees of participation from the car companies would be forthcoming, it was essential to publish detailed regulations and invite entries from new teams. Otherwise there was a real risk that there would not be enough cars for Melbourne in 2010.

The detailed regulations were discussed and voted on at the WMSC meeting of 29 April. The new Ferrari representative on the WMSC was Mr. di Montezemolo, replacing Jean Todt whose Ferrari contract finished on 31 March. Mr. di Montezemolo chose not to attend but gave a proxy to Mr. Macaluso, the Italian president of Karting, who also did not attend but joined the meeting by video link. His was one of two votes against the new rules but no reasons or alternative were offered.

An exchange of letters then began with Ferrari's lawyer and a meeting was arranged between all the FOTA teams and the president of the FIA on 15 May. John Howett as vice-chairman of FOTA led their delegation in the absence of Mr. di Montezemolo. As soon as the FIA raised the question of the financial regulation, Mr. Howett tried to lead a walk-out of the teams. This did not succeed but during the meeting it became known that Ferrari had begun emergency proceedings in the French courts seeking to prevent the introduction of the 2010 rules. It was clear that FOTA had no intention of negotiating anything but simply expected the FIA to agree to all its demands.

A further meeting was held on 22 May, this time with Mr. di Montezemolo present. FOTA explained that they had three major reservations. Rule stability, governance and the 2010 regulations, in particular the "two-tier" system. It was explained that it had already been agreed to substitute technical help from established teams for the two-tier system at the Heathrow meeting, so this was no longer an issue. This was pointed out to Mr di Montezemolo at least five times during the meeting but he and FOTA are still talking about it today.

The FIA also offered to extend the 1998 Concorde Agreement, which would take care of stability and governance at least to a degree that had satisfied all the teams for 10 years up to 2008. The FIA was asked to postpone its entry date. It was explained that the Sporting Code did not provide for such a suspension and that, in any event, potential new entrants needed to know urgently if they had a place in the Championship.

On 29 May, the eight remaining FOTA teams submitted conditional entries. Among the conditions were a requirement that the FIA forthwith sign FOTA's new Concorde Agreement (which diluted the Sporting Code, made an outside body, the CAS, the ultimate appeal court, allowed any team to veto rule changes and removed the FIA's right to insist on changes if the cars became dangerously fast). FOTA also crossed out references to the International Sporting Code on their entry forms and wanted the 2010 Rules rescinded notwithstanding that a number of new teams had already submitted entries.

A further meeting was held on 11 June at which FOTA were represented by Ross Brawn (Brawn), Stefano Domenicali (Ferrari), Christian Horner (Red Bull) and John Howett (Toyota). After nearly five hours of talks, it was agreed that the FOTA and FIA cost-reduction objectives were very close if not identical and that the financial experts from both side should meet without delay to seek a common position on detail. Also, the FIA's proposal to extend the 1998 Concorde Agreement in order to avoid interminable negotiations was well received. Agreement was also reached on some minor modifications and clarifications to the 2010 rules.

No sooner had all this been agreed than FOTA put out a statement saying no progress had been made in the meeting. This blatant falsehood demonstrates once again that elements in FOTA simply do not want agreement.

On 15 June, the meeting of the financial experts took place. However, the FOTA representatives had been forbidden to discuss the FIA’s financial regulations, thus rendering it impossible to seek a common position. The meeting did examine FOTA’s ideas on cost reduction, but, as presented, these amounted only to a voluntary system which would be incapable of preventing a wealthy team from outspending its competitors and triggering another financial arms race.

Governance

FOTA says, "the sport needs better governance." The FIA and Ferrari extended the 1998 Concorde Agreement back in 2005 and the FIA is prepared to do the same with all the teams that enter. Once that is in place the FIA and the teams can look at updating it to a 2009 version. But this is not the point. Formula One needs a strong and impartial regulator because of the nature of the sport, the high stakes and the competitors - people who want to win (literally) at any cost. There are several well-known examples of this - involving at least four FOTA members - over the past few years.

Good governance does not mean that Ferrari should govern. Ferrari now claim that the procedures followed by the FIA are contrary to their agreement with the FIA, but in reality they never objected to these procedures (indeed they voted for them) until they were not happy with the decisions themselves. Ferrari has been officially (as well as unofficially) represented on the WMSC since 1981 and never objected to the process or decisions until April and May this year.

Technology

FOTA says, "The new rules dumb down the sport". Not so, the 2009 regulations introduced greater technical freedom in several areas. The 2010 Regulations will allow even greater freedom. Compare this with the FOTA proposals: almost no testing, no KERS, homologated gearbox, homologated bodywork, limitations on factory activities, enforced shutdowns and so on. Instead of finding economic ways to do innovative things (which is the spirit of Formula One and also the challenge for the automotive industry) the FOTA proposals would impose restrictions on activities and minimise the technical challenge. When Brawn and others came up with the idea of the double diffuser, the other teams attacked them in the media, challenged them in front of the stewards at two race meetings and then took them to court. The FIA will ensure that Formula One is the most technologically challenging motor sport - and it will be financial restrictions that make this possible.

Two sets of rules

FOTA says, "Two sets of rules will ruin the sport." The 2010 regulations were structured so as to allow new entrants some technical advantages in order to enable them to get to the back of the grid. The original intention was not to have the 2009 teams race under those rules. What is interesting is that for several of the existing teams, the idea of greater technical freedom with financial constraints was very attractive. Left to their own devices, at least half the existing teams would have adopted those rules. In any event, it was agreed as far back as the Heathrow meeting that there would only be one set of rules and this was re-affirmed in Monaco and again last Thursday. Now that the new entrants are in place, one set of rules can be agreed.

Intrusiveness

FOTA says, "The FIA will be able to intrude on our businesses", referring to the FIA’s proposal to regulate the amount of money spent. If there is no intention to cheat, regulation should not present a threat. The FIA already regulates every aspect of technical performance and deals with vast amounts of confidential proprietary technical information without partiality or ‘interference’. In any case, the FIA has already agreed that the financial regulations will be managed primarily by self-verification by the team's auditors and directors.

DNA of Formula One

FOTA says "A budget cap will damage the DNA of Formula One." Setting a limit on expenditure on certain aspects of competing in Formula One evens the playing field. Isn't Formula One above all about competition? It also allows new teams to come in - the only new team into Formula One in the last several years was Super Aguri which could not survive even with manufacturer backing. But when you analyse the total cost for a manufacturer it will still be uncomfortably high, even with a €50 million cost cap. Take Ferrari: with €50 million on the chassis and racing, add the same again for drivers, about €80 million for engines and another €20 million for marketing and you have a total spend of €200 million. Perhaps that is less that the €400 to €500 million their lawyer said a top team is spending now, but surely it is enough for a team to spend on entering two cars in 20 races a year?

And finally

The FIA remains committed to finding solutions for Formula One and has always been ready to accept reasonable compromise whilst retaining the overall principle that it will continue to lead and regulate the sport for the benefit of all stakeholders. Formula One will have a full grid in 2010 with a single set of regulations. It is essential that these include clear and precise financial regulations.