The Economics of Racing — FORTLOC

The Economics of Racing

By Ben H. February 8 2021

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Competing in motorsports is very expensive. To make matters worse, the economics can be quite challenging to understand. This article will cover the basics of how the motorsport industry works and what is needed to compete. I have broken this up to explain why the structure is the way it is, how to compete, and a rough idea of how sponsorship works.

Economics of a team

The motorsport industry largely owes its existence to the desire of manufacturers like Porsche, BMW, and Lamborghini to showcase their engineering prowess. It is also a good advertisement for selling their cars. However, manufacturers need clear justification for building these incredible machines that are restricted to race tracks. Consequently, they find ways to recover some of the costs of research and development.

One prominent cost recovery path is the use of customer teams. These are racing teams that purchase the race cars from the manufacturers and run them independently in championships. The teams must secure the funding to compete themselves. However, in some cases, usually, where a manufacturer isn't competing against a customer team, the manufacturer can help the customer team out financially.

For the most part, the customer teams need to find a way to pay for their cars, equipment, and racing. They can try and find sponsors and then hire the drivers required to race. This route is uncommon due to the difficulty in finding sponsorship. The second way is by offering seats to drivers who have the money to compete.

Each team has a distinct pay structure. Some teams will split the budget between the drivers equally, while others will have an uneven split. A situation more common in the United States is where the teams have a driver who pays the full budget for a team, and the team then hires a pro driver to partner with them. In such a situation, the professional's paycheck would come from the team.

Racing teams each operate with a unique business model depending on whether they are a factory-supported team or a customer team. The factory teams are backed by the manufacturer, both financially and with parts and personnel. These teams make money for the manufacturers indirectly by contributing to the marketing goals of the manufacturer. The goals can only be achieved by success in the racing series the team competes in, so top performance is always expected. Often, the factory teams are also distributors for the manufacturer's race cars.

An example of a manufacturer supported team is the partnership Ford built in their return to racing at Le Mans. They chose Chip Ganassi Racing and financed the entire program. Chip Ganassi still chose the drivers, engineers, and mechanics, with Ford just being a financial backer. Should Chip Ganassi not have found success, and in turn, promote Ford, the U.S. manufacturer would've looked elsewhere for a team to lead Ford's race program.

Customer teams are generally started by a wealthy business owner or a motorsport professional. The customer teams typically earn their money in two ways. Either having drivers or, more specifically, a driver's family or sponsors, pay to drive for the team or funding from sponsors the team goes out to get themselves.

Destinations

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Most will take some of the sponsorship money they receive as a profit or a salary for the team's owner. Additionally, some also have businesses on the side, be it car restoration or aftermarket parts supply. The latter is somewhat common with racing teams based in the United States.

Every person on the team must get paid from the budget for each racing season. The personnel includes team engineers, mechanics, coaches, and tire engineers. The only exception to this structure is when a manufacturer supplies an engineer to a series where their cars race.

Economics for a race driver

When people ask what it takes to go racing, the answer is usually "what is your budget?" Strangely, the way to secure a seat in most championships is simply by having funding behind you. That could be from family money or sponsors that drivers have gathered themselves. With the cost of a seat in most top championships approaching half a million dollars at the time this article was published, it's not difficult to see how getting the money can be challenging.

As if that wasn't enough of a difficult situation, the driver is often responsible for the deductible on the insurance policy in the event of accidental damage.

Many top racing teams (mostly backed by car manufacturers) have driver development programs that cover the cost of racing. These programs usually select the drivers at a young age and groom them throughout the program. However, these programs are reserved for the most talented young drivers, and the opportunities are relatively few.

All these factors contribute to the trend where drivers from very wealthy backgrounds make it to Formula One. They can afford the learning time and early career development that it takes to get to the top. That should not take away from their speed and skill, though. The availability of funding simply facilitates the development required to make it to motorsport's highest level.

Nonetheless, we have racers in Formula One who have not come from wealth. Esteban Ocon's entire family toured Europe in a caravan for years after selling their house to fund Ocon's karting career. Like Lewis Hamilton, Ocon's father was the mechanic on his kart to keep costs low. While Hamilton found his funding via McLaren, when Ocon's talent shone through, he received financial backing via a Renault-linked management company.

On the opposite end of the scale are the so-called gentleman or lady drivers. These are drivers who have a passion for motorsports but often did not race at a young age. They are typically successful businessmen and women who earned their money over long careers in an unrelated field and want to spend it racing. They are just as dedicated as the young guys. However, they are competing out of a passion for racing rather than to build a career.

There are many ways a gentlemen/ lady driver can fund a team. If they are just starting, they may cover anywhere between 60% to the entire budget of a team. Another popular option for a gentlemen/lady driver is to purchase a race car, then either set up a team of their own or take their new race car to an existing team.

Since professional and gentleman drivers contribute to the racing budget, it's fair to ask how to distinguish one from the other. The difference between a gentleman driver and a pro would be either their driver rating from experience or age. Gentlemen drivers are most often FIA bronze-rated drivers. Pros meanwhile are likely to be silver or gold, or in the case of Formula 1 drivers, platinum.

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Irrespective of which route to racing a driver takes, one other thing required is the correct racing license. Most top championships require an "International C" racing license. To get one, a driver needs to have a certain number of signatures from stewards following good driving and race finishes in lower categories.

Regardless of the racing series that a driver is planning on competing in, it takes a whole team of people to make the car "race ready". Additionally, a significant amount of effort and resources go into providing marshals and doctors that must be on standby at the circuit whenever cars are on track.

The cost of tires is one of the largest slices of the budget, along with insurance. Some F3 teams use more than three sets of new rubber each day. Considering all of these expenses, finding a sponsor who understands motorsports makes the battle a lot easier.

Sponsorship

Each driver has their own way of securing sponsorship. The personal nature is why few speak about what it takes to get financial support. With so few companies willing to spend the kind of money required, each driver plays their cards close to their chest.

In addition to the marketing exposure companies can attain, big-budget Formula One teams have products like VIP hospitality in the F1 Paddock Club or factory tours at their facility to sweeten the deal. There is no shortage of high net worth individuals at the paddock club on race day. This makes it an excellent place for networking with corporations and individuals. A good number of high profile business deals have been initiated by paddock ticket holders representing different sponsors.

However, with smaller championships, it is much harder to identify valuable opportunities to trade in return for sponsorship. There isn't enough marketing exposure in lower series motorsport to allow a team to just "put a sticker on the car" for a huge sponsorship deal. The sponsorship seeker needs to be more creative with offering value.

Every racing driver, even a professional, may always carry the burden of seeking sponsorship to compete. Regrettably, that is the reality of competing in a sport that costs so much. Regardless, the driver still has to perform on the track and work their way up into faster cars and more competitive championships. Nothing feels better than putting in a scorching lap or bringing a race together and coming out in front of all your competitors.

Regardless of their rating, a pro has to regularly put in performances where they beat established drivers in the sport. Those results are how they get people to notice them. Whether that be gentlemen drivers looking for a great silver driver to compete with them or teams and manufacturers at higher levels looking to work with an established professional. Both options could lead to becoming a paid driver down the road. I say "could" because there is no exact road to gaining a paid driver role in the sport. Each driver has their way of making it, and quite often, it is by being in the right place at the right time.

On paper, the economics of racing can be very intimidating. But it is absolutely possible to make a career in motorsports, as many have. However, understanding the realities of competing in the sport should be the first place to start.