**NOTICE: Please see the comments below this article for alternatives to Dallara chassis monopoly. - Roggespierre**
Forbes estimates that John Menard possesses a personal fortune that is equal to that of Rupert Murdoch. Operating in an age that rewards financial engineering and economic rent-seeking more than fundamental value creation, Menard has built his business the old fashioned way. I respect him for it.
It is therefore ironic that the future of the Indy Racing League might depend on the home improvement magnate agreeing to become its financier. Tony George has indicated that Menard is interested in building and selling IndyCar engines. I do not claim to have inside knowledge, but I do suspect that the IRL would like to have Menard assume a different and, one could argue, more important role.
Series Sponsorship: Not a good Fit
Rumors have circulated that Menards stores might become the new title sponsor of the IndyCar Series. Curt Cavin of the Indianapolis Star reported this week that there has been nothing in the way of confirmation.
Examination of Menards' retail locations leads me to question why John Menard would have any interest in title sponsorship. Menard has nothing to gain from advertising at Long Beach, Sonoma, St. Petersburg, Texas, and Birmingham, let alone Toronto, Edmonton, Japan and Brazil. That is why I believe that the league has something altogether different in mind.
Menard as Financier
The IRL plans to introduce a new equipment package in 2012. Although some prefer to focus on technical characteristics, I believe that economics must be the primary consideration. Technical capabilities simply do not matter if the teams can not afford to operate.
Let's use chassis suppliers as our example. Firms such as Dallara, Lola and Dome are not going to begin development of a new IndyCar spec unless they receive a good chunk of cash upfront. Unfortunately, most IndyCar teams are not capable of providing the necessary capital outlay all at once. Therefore, a financial intermediary is required.
In the past, the Indianapolis Motor Speedway occupied that role. It co-signed on behalf of teams that sought loans from National City Bank so that cash payments for new equipment could be distributed over time. However, now that the IMS has exited the business of underwriting the IRL, a new intermediary must be found. I believe that the IRL would very much like to have John Menard accept that role.
Menard is one of few who has sufficient liquidity available to bear the cost of developing a new chassis. Underwriting the project would, of course, require that Menard accept the financial risk associated with non-payment. Each IndyCar team that fails to make good on its promise to pay for new equipment would cause Menard to incur a cash loss. This risk must be offset.
Therefore, Menard would also become the exclusive distributor of the new chassis. In effect, he would act as automaker and car dealer, financing the cost of development, purchasing the new cars from Dallara or whomever, and then selling them to IndyCar teams. Like any car dealer, Menard should be expected to add a retail mark-up. He is entitled to this because he accepted the risk of non-payment.
The Arbiter's Advantage
If John Menard were to accept the roles of underwriter and distributor, then he would also acquire tremendous bargaining power to influence IRL management. He who spends the money has the power; in this case, there is no new chassis unless Menard spends a lot.
John Menard happens to be a fan of IndyCar racing, a fact that warms the soul. I hope that Menard accepts the dual roles of underwriter and distributor. Equally important, I hope that he leverages his bargaining power to force IRL management to build an IndyCar Series that might succeed economically.
What are the conditions that Menard would do well to require?
- An oval-based U.S. racing series that occasionally ventures into road and street racing because:
- Ovals will attract U.S. drivers and, therefore, U.S. fans, which will allow for:
- Increased sponsor participation in IndyCar, which will ensure that:
- Teams have sufficient capital to make good on their promissory notes with Menard.
In addition, I suggest that the chassis retail for less than $200,000. Each additional dollar will only increase the risk of non-payment and delinquency. If $200k does not seem like enough, well, then that's too bad. NASCAR (sans-culottes!) Cup chassis cost less. Teams in that series have earned the right to spend more. IndyCar teams have not.
Hope for Dopes
John Menard has many tools at his disposal (sorry). He could save IndyCar racing from itself. The job will require not only lots of cash, but also ample resolve to engage in tough love. The IRL needs somebody like Menard much more than Menard needs the IRL.
Menard has earned a reputation for beating up his suppliers pretty badly at times. That is, after all, how low cost positioning is established and maintained in the retail industry. Let's hope he's ready to beat up some more.
He might be the last, best hope for IndyCar racing.
Roggespierre
With all due respect......isn't this how we got here in the first place? One engine, one chassis, one gear box? If Menard is going to undertake this project, It is simply transferring the same problem....it is called a monopoly! If you are required to have the new equipment to participate, you are only shooting one's self in the other foot!I think if this does happen,then Indy car is doomed!!! You have the same horse, just a different rider!!
ReplyDeleteOldwrench,
ReplyDeleteYou make an excellent point. I have thought about this very issue and propose two possible solutions.
1. What if the new chassis project were to include multiple manufacturers? Menard might be the only one who has the liquidity to pull this off. It probably isn't the optimal solution, but it would take us from monopoly to oligopoly.
2. If you haven't already, then please go back and read my very first post on this blog. It's entitled, "IndyCar Teams: Build Something!"
The concept is this: the only part of the new car that would be standard equipment is the tub (or driver compartment, if you prefer.) Like CART in the 80s and 90s, the IRL has made significant advances in driver safety in the 2000s. We don't want to lose that. The vast majority of those advances had to do with the driver capsule. So, the idea is to keep that standard.
The IRL would publish detailed design constraints - materials, heights, weights, geometry, and so on. Then, having taken delivery of the standard driver capsules, the teams can have at it. They would be responsible for building the rest of the car.
Penske and Ganassi would be free to make continuous improvements, just as they do now. But because there is no standard update kit, they would be incentivized to sell their old stuff to smaller teams and Indy one-offs. All teams would be free to manage their own equipment lifecycles according to their respective budgets.
An efficient supply chain might just emerge in IndyCar racing. Small teams might elect to combine their development efforts to achieve scale economies and competitive advantage. We might also witness something akin to the Japanese keiretsu evolve among "families" of teams. This is very similar to the NASCAR model, in which top teams like Hendrick and Roush are contracted to do development and manufacturing for the smaller teams.
This is key. Rather than incurring a near 100% cash outflow as they do now, IndyCar teams could recapture a significant portion of their own development and manufacturing costs. This has not been the case since Robin Herd's March 84C turned IndyCar racing into a buy-and-race model.
Menard would have bargaining power to dictate whatever terms he wants. Is there anyone else lined up to underwrite development of a new car? Penske, perhaps, but I suspect that the keiretsu model might appeal to him, as well. He could work on the go-fast parts and let Menard and Dallara handle the boring, standard stuff. And I bet that The Captain might be pretty hip to selling his old stuff again. The man knows a thing or two about lifecycle management. He has to know that the present model is a black hole.
So we have possibilities. But we must push them to the fore.
Anybody got John Menard's phone number?
Best Regards,
Roggespierre
"Penske, perhaps, but I suspect that the keiretsu model might appeal to him, as well. He could work on the go-fast parts and let Menard and Dallara handle the boring, standard stuff. And I bet that The Captain might be pretty hip to selling his old stuff again. The man knows a thing or two about lifecycle management. He has to know that the present model is a black hole."
ReplyDeleteSo what your saying is what I have been saying for the last 20 years. I spent many a term paper writing about exactly this point. The reference to the papers were one Roger Penske. Leadership is a quality that few really understand. I have learned much from him, following all articles written about Mr. Penske If it works for him, then maybe the IRL should take a hard look. He certainly made an outstanding purchase with his recent acquisition of Saturn. And at a bargain basement price from a company who is the standard in poor management...GM !
Oldwrench,
ReplyDeleteThat's right. I'll admit it, I'm a Penske fanboy, at least with regards to his management exploits.
I love him because he really is an OPERATIONS guy. What he does isn't flashy. He doesn't buy and sell things because the parts are worth more than the whole (see: Blackstone). He lever-up as a matter of course just so that he can boost his WACC and sell out to some fool at a ridiculous price.
Penske might be the last man left in America who is actually interested in running companies. That's why Wall Street doesn't quite get him - it likes him because he's made it a lot of money over the years. But there's almost nobody on Wall Street who has worked for a company that produces either products or services. In my experience, Penske is seen as something of an enigma. He's that racing guy who runs companies. Strange.
If age and health allow, then I have every confidence that he'll make Saturn work. Manufacturing is about operating efficiency and controlling costs. Needless to say that Penske knows what the hell he's doing in that regard.
Best,
Roggespierre
I'm fascinated--we seem to be headed in the right direction---but why re-invent the wheel?
ReplyDeleteThere are engines (lots of them ) being built all over this country for under $100,000 and producing 800 HP, that could be put in the back of any chassis---and since you never see the "lump" that is propelling the race car--unless it is in pieces after a crash, why spend fortunes designing a new engine when the "patient" needs an affordable piece?
The bigger problem is an affordable chassis, and here is the problem as I see it.
Ask Dan Gurney, or most any driver who competed, and they will say, "take the wings off", "take away down force", "give them more power", to mention a few points.
This would slow the lap speeds, but increase the need to drive the car. Go like the wind down the straight, but have to brake to negiotiate the corners.
An aside:
(I am totally opposed to side-by-side-by-side racing at 215 MPH involving human drivers and fans sitting behind a fence that would only screen out the biggest parts--and that isn't certain--and sooner or later a major two, three, four car crash will happen and the discussion of racing will end, as will open wheel racing).
Racing (open wheel) is about the difference between cars, not the the top speed attained.
Want to see very high speed? Go to the drags.
Want total sophisticated engines go to F1.
Want "slot racing" go to NASCAR.
Want to watch competition between drivers and hopefully different cars--go to an open wheel race.
But back to the chassis;
We have one agreement, keep the driver cockpit as it is now or improve it-- it is the one of several things TG did well. Cost $100,000.
Talking to carbon fiber people---they think a team of builders could build a chassis for about $250,000, using present technology, and done in quantity (remember the Watson chassis were built and sold to many teams) for even less.
So we'd have a car, engine and chassis for under $500,000---give it $750,000 or even a $1,000,000, and how many teams might we have???
osca
Osca: Your point is well recieved but here lies the question......Spend a million for a complete race car only to recieve 1.2 million in revenues from the IRL? If your counting on sponsorship in this market or in the IRL any time soon your just wasting space! The product is poor and the products cost needs to match its current value. Poor business decisions got us to this point already, now you want to add 1 more? It's time to go back to basics. Look at the late 70's early 80's model. Low cost, equipment longevity, multipy engines, open source equipment suppilers and no subsides. Result: Excellent car counts, good racing and fans in the stands! What more do you want? I learned that those who fail to recognize history are doomed to repeat it !!
ReplyDelete"It's time to go back to basics. Look at the late 70's early 80's model. Low cost, equipment longevity, multipy engines, open source equipment suppliers and no subsides. Result: Excellent car counts, good racing and fans in the stands!"
ReplyDeleteWell, there's a giant elephant in the room that you left out, Wrench - - grids that included the original Foyt, Andretti, Unsers, Rutherford...et al. And car owners like Agajanian. These guys had fans and put butts in seats. Then toss in the equipment and its unpredictability compared to today's "perfection." All the ingredients were there for every emotion from joy to sheer disappointment. Well, today, not so much.
There are only two "stars" with any magnitude - Helio and Danica. The series, heck, the 500 cannot create stars like it did in earlier years. IRL brought in kids with the same name and shared genetics, and it has largely flopped. The fact is that the XGen stars haven't caught any fire with the public.
I largely agree with much of what Roggespierre espouses. And I agree with your basic point, too. But until the 500 recaptures a sliver of the public's interest again, this is all circling the commode.
I asked some race fans--why they went to the 500 and any other races they could afford.
ReplyDeleteThe answers were many but with three main themes:
1) Innovation--think different chassis many built one off, engines built or modified by mechanics that could touch the engines.
Mechanics were interviewed as often as drivers, (Brawner,Travis and Coons, Herb Porter, Watson who also built chassis for sale are examples).
2) Drivers who they could identify with, some real characters.
3) Less things for fans to do (and early on, limited TV, which made things like the Indy 500 a true one of a kind event).
Open wheel racing decided to destroy itself aided by both the team owners and TG, just as stock car racing began to grow outside the south.
The events that made open wheel racing what it was--some are no longer available-- but the rest can be re-ignited.
Innovation IS NOT DEAD, just prevented from being allowed except for minor tweaks.
Simplify the rules.
Team built, owned, and maintained engines, replacing leased engines, that never fail, but simplifying the rules, allowing different engines might bring back the possibility of an engine failure, and the excitement of someone bringing something different and winning.
(Think of Penske and the Mercedes engines that dominated one 500, or the turbine that brought excitement, never won, or the Novi that I can still hear in my head that without winning had a following that today is hard to explain. If you ever heard it screaming on the back stretch at full song--you never can forget it, or......... you fill it in).
An aside.
Team owners might spend $1,000,000 of their own money if the prize was worth the risk.
When $35,000 would buy you a complete car--and the price was $350,000 the risk was acceptable.
Sponsorships were an, "add on", in the older days, not the source of all the costs.
Talking to people running advertising budgets--they say, that a YEARLY TEAM SPONSORSHIP BUDGET OF EVEN $2,000,000, is saleable. $5-8 Million is NOT except for Penske and Ganassi.
But back to point!
What is needed, as the first step, is a total review, and from that review, a business plan could be developed that would give the series a fighting chance--as it is now--we are standing by a dying patient waiting to go to hospice (could that be a Brazilian hospice?), and then pass quietly into history.
osca
Osca said: "Team owners might spend $1,000,000 of their own money if the prize was worth the risk."
ReplyDeleteIf history is an indication, they'll risk more than that. Those Novis, Blue Crowns and others cost $50,000 for a $125k Sweepstakes purse - and they went into the garage until next year.
And whatever series forms around the 500, someone get sense and reclaim its National Championship heritage, not this milquetoast "series champion" rubbish. How about racing for a a historic title worth having? Oh, it would offend the foreign fans and highlight the too-many non-USA events.
Personally, I think "WE" have this thing surrounded gentlemen. Now the question is....can those in the IRL take the blinders and see that it just isn't working!! We know as fans, concerned citizens and potential entrants that it better change and change fast or Indy car racing is going to look like a piece of burnt toast very fast!!!
ReplyDeleteOldwrench,
ReplyDeleteI would like to believe that the current IRL leadership might right the ship. But I am not optimistic.
Barnhart listens to the powerful and browbeats everybody else. Angstadt is inclined to sell whatever he can right in hopes of hanging on until he retires. Cotman... who knows? He seems like a plant for top teams. That said, I do not know the man, so I could be way off.
We're all talking about fundamental, structural change. That is what's needed. But I don't know that anybody at IRL management has incentive to take the steps that must be taken.
Best Regards,
Roggespierre
As Oldwrench says: "I think "WE" have the solution surrounded." One of the things I would like to see is having Versus or IndyCar Productions produce a set of shows highlighting either a driver or a team, including the mechanics, strategists, technicians giving some of the background and history of the their involvement. Right now the casual fan does not know any of the drivers in the IRL, with the exception of Danica and Helio, from Adam. These drivers even the bad ones have to be seen as people, not just names on a list. We have to get the public to the point when they see Ed Carpenter's name in print they say: "Oh he's that IndyCar driver. I wonder how well he's doing."
ReplyDeleteAnd yes, we need fundamental, structural change as Roggespierre nicely put it. Someone in the IRL management with enough stroke has got to say: "This is not working. Let's fix it and fix it properly"