- The standard sanction fee for an IndyCar event is in the range of $1.2 million to $1.5 million. The number is highly variable.
- The IRL incurs costs associated with racing operations in the amount of $500,000 per event.
- The IRL distributes approximately $1 million per event to teams via IndyCar TEAM.
Thus, the IRL business plan calls for an operating loss at each IndyCar event unless a supply chain can be arbitraged or a government subsidy can be secured.
Cash Flow-a-Go-Go
Of course an event sponsor can alleviate the financial burden considerably. Unfortunately, the IRL and its teams frequently sponsor their own races.
- Honda is title "sponsor" at St. Petersburg, Toronto and Mid-Ohio
- Honda's IndyCar participation is subsidized by teams that overpay for spec engines
- Teams are subsidized by the Indianapolis Motor Speedway through IndyCar TEAM
Therefore, Honda receives title sponsorship for three events without incurring a net cash outflow. Why would any firm offer cash to sponsor an IndyCar race when, for all intents and purposes, Honda gets three of them for free?
Manufactured Partnership
Perhaps the teams and the IRL don't mind sponsoring their own races. Do they care that they are funding Honda's Formula Dream "sponsorship" that allows Hideki Mutoh to participate? Does Hideki Mutoh add any reciprocal economic value to the IndyCar product?
Perhaps the teams and the IRL don't mind sponsoring their own races. Do they care that they are funding Honda's Formula Dream "sponsorship" that allows Hideki Mutoh to participate? Does Hideki Mutoh add any reciprocal economic value to the IndyCar product?Honda might be writing the checks that pay for the series to travel to Motegi next week, but that does not mean that it is paying the freight. Does Motegi add reciprocal value to the League?
But wait! Didn't Terry Angstadt just say that Honda has agreed to reduce the price of its engine lease program next year? Was that not a significant and benevolent act of partnership?
No, it wasn't. Declining marginal cost per unit due to economies of scale is the natural result of mass producing homogeneous products, such as spec engines and parts. Honda's production costs next year will be less than they were this year. Remember, too, that the lease is really a user fee. Ilmor does much of the the rebuild work. How many new engines is Honda required to add to its existing stock in 2010? None? A few?
No, it wasn't. Declining marginal cost per unit due to economies of scale is the natural result of mass producing homogeneous products, such as spec engines and parts. Honda's production costs next year will be less than they were this year. Remember, too, that the lease is really a user fee. Ilmor does much of the the rebuild work. How many new engines is Honda required to add to its existing stock in 2010? None? A few?Honda's costs will decrease in each year that further development is not necessary. Might that be why Honda Performance Development has become enthusiastic about the IRL remaining a single manufacturer series? Of course it is.
More Deep Capture: Honda Edition
The Committee of Public Safety has been told that Honda now thinks of the IRL as a customer rather than a partner. Does that mean that Honda is cash flow-positive on its all-inclusive IndyCar project? It sure sounds that way.
If that is the case, then why is Honda still credited as a league sponsor? Why is its name on every Indy car if in fact it is extracting and not contributing revenue? Why do the team owners wear Honda shirts on race day? Did the IRL and its teams pay for those, too?
Did you notice all of those Honda commercials during race telecasts this year? Neither did we. Let's hope that nobody at the IRL earned a commission for this deal.
If that is the case, then why is Honda still credited as a league sponsor? Why is its name on every Indy car if in fact it is extracting and not contributing revenue? Why do the team owners wear Honda shirts on race day? Did the IRL and its teams pay for those, too?
Did you notice all of those Honda commercials during race telecasts this year? Neither did we. Let's hope that nobody at the IRL earned a commission for this deal.
Is anyone asking these questions at the IRL? In the House of France, Lesa France Kennedy, proud owner of an economics degree from Duke University, is meticulously analyzing cash flows. Who is her counterpart at the IRL? Is it the salesman or the racing operations guys?
Happy Labor Day Weekend from the Committee of Public Safety
Roggespierre
I have been told a complete Dallara Chassis costs about $330,000. Honda leases the engine for $1.2 per year. Since there are many "stock block" engines that be purchased for $40,000 to $50,000 and produce more horsepower than the Honda lump and even figuring using 2 engines and several rebuilds per season wouldn't it be wise to change--even as we all wait for the new (whenever) chassis?
ReplyDeleteThere is one more point--which has nothing to do with costs---but would destroy open wheel racing in the US--having a major crash at 215 MPH and getting one or more of the cars into the stands.
I am for close racing but I'd much prefer to see it done with cars able to close on and pass---not running lap and lap at insane speeds three wide. More horsepower, less downforce which would allow the cars to run faster until they came to the corner, and then "whoaing" the cars down would offer a chance to catch and pass.
Talking to an old time driver who raced when death was an attendent at every race---suggests, "take the damned wings off, these aren't upside down airplanes", and he added unless speeds are contained expect to see a real mess at 1.5 or 2 mile banked track--killing as he put it "a whole bunch not just one or two fans, and then you can kiss open wheel racing good-bye".
osca
osca,
ReplyDeleteI don't know enough about the technology to write about it. I do know that the correct market value generated by a top one-car team is $1.3 million. If I'm running the league, then I tell the engineers that we need the best chassis and engine combo we can get that is capable of running 17 races, including 3 weeks at Indy, for $1.3 million.
If that means no wings and sidepod tunnels, then that's what it means. If it means stock block engines, then that's fine, too. Price the product to its market value, get some legitimate growth underway, and then you can add to the spec package after you earn the right to do so in the competitive marketplace.
You make a good point about the safety factor. I enjoyed the Chicagoland race, but you're right. We can't afford another IRL/Charlotte or CART/Michigan scenario.
It doesn't take an economics degree to figure out that the Honda engines cost way too much. The IRL didn't have a good bargaining position the last time Honda re-upped, and it shows.
It was about that time that Panasonic was removed from the sidepods on the Formula Dream car and placed on the engine cowling. The sidepods now read "Formula Dream." They should read "IMS & IndyCar Teams." That's who's paying for it.
Roggespierre
Roggespierre-
ReplyDeleteCouldn't agree more. Indy Car continues to thinks its a major league series, when in reality its a AA ball league, that is just lucky enough to race at Indy (to give it some relevence for one day a year).
Continuing the asinine engine lease prices and astronomical chassis prices, for a sport that usually only has about 150,000 people watching it each race, is beyond stupid. Its a spec league, with old cars and old engines. There ain't no reason, to have a million dollar engine lease.
Guys like Angstadt continue to jack around with promoters, asking for fees that just are not consumate with the ACTUAL worth of the league.
Get back to reality for a minute, and the sport might have a chance to survive. If things continue as is, it has ZERO chance to last much longer.
Anonymous,
ReplyDeleteVolkswagen learned a few years ago that consumers in the United States were not interested in a $70,000 Passat. Now that it has returned to a more mass market approach and allowed the Audi division to handle the upper crust, VW is increasing its market share.
I do think that there is a misconception about IndyCar demographics that goes back to the CART days. No auto racing product is going to capture much of the U.S. upper class. The real money in this country lives on the coasts, where most people still refer to the sport as "car racing."
I get out to Eastern Long Island from time to time. NOBODY there gives a damn about car racing. You would get more people to show up for a Squash tournament than you would if you revived the old Bridgehampton Raceway, where Donohue and Revson once dominated.
In fairness, I'm not sure that anyone knows how much real authority is possessed by each IRL manager. It looks like the salesman is charting the league's direction. Is this supposed to be a permanent solution? I hope not.
There is no detectable competitive strategy and no honest economic analysis. I see people making short-term decisions for short-term reasons in order to keep their jobs. If that is true, then the IRL is certainly not the first to have it happen. In many circumstances, Angstadt has very few options, and almost all of them are not good.
I started this blog because, like you, I fear that the day of reckoning for IndyCar racing is approaching faster than many believe. I can't see how they're going to get 33 cars at Indianapolis next year. They might pull it off, but qualifying will once again be a foregone conclusion. Why would anyone pay money to attend?
I could go on, but I won't.
Thank you for your comments.
Roggespierre
BTW, Roggespierre...
ReplyDeleteI was the "anonymous" poster, who chimed in on the Danica Patrick goings on, a few days ago, in that blog entry (down the page here).
If you go back and see what I wrote, with what has come out tonight about DP/Stewart, there may be a whole lot of truth to my "rumors" that I posted on the subject, a few days ago.
Anonymous,
ReplyDeleteI didn't think you were engaging in rank speculation. I've seen your writing style somewhere before, and I recall that it warrants credibility.
Roggespierre
I agree, Why would anyone purchase a product or service for a cost 5-6 times greater than its value. I disagree on the stock block engines and the use of turbochargers. As a previous owner of a engine development shop, the costs to develop and race these animals far exceeds the value of a purpose built racing engine. The long term costs of a purpose built racing engine effectively maintain a cost to benefit ratio that modified production equipment can not. As for horsepower, it is a realitive figure, It is the investment dollar that determines the production of power. More money in means more power out; regardless of cubic capacity. It would be wise to consider a simply yet effective platform, let the teams decide on the type of powerplant desired and allow supply chain economics to do the work. Ultimately a product of high quality and market driven cost will emerge. Same for the chassis and other racing parts.
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