IndyCar: APEX Brasil Flexes its Fuel (and Moraes)

APEX Brasil is getting pretty generous with the free tickets to the IndyCar finale at Homestead-Miami Speedway this weekend. I already alerted readers here to the ticket giveaway in exchange for sampling free Brazilian foods at South Florida supermarkets.

Now, we learn that the first 50 customers that fill-up with E85 at Midway U-Gas in Miami will each receive two free tickets to the penultimate IndyCar race of 2009.

Is it possible that the three-way shootout among Dixon, Franchitti and Briscoe has not brought a crush of race fans to the ticket windows at Homestead-Miami? Terry Angstadt and Company can't sell these guys, so they've enlisted APEX Brasil to buy tickets and then give them away.

Strange Incentives

The E85 customers will get the fuel for $0.85 per gallon, courtesy of the Brazilian Sugarcane Industry Association, no doubt a member of APEX Brasil. That's a great deal even if the lucky fuel buyers don't use the tickets.

Cheap fuel is a sure crowd pleaser at any location in the United States. IndyCar driver and team financier Mario Moraes is not. Therefore, having Moraes sign autographs for those who seek cheap fill-ups is a shrewd move. The IRL will be able to tout the hundreds, perhaps thousands, who showed up to get Moraes's autograph.

Of course, few if any of those folks will be in the stands this weekend to watch Mario drive his car. But, thanks to APEX Brasil's ticket purchases, that's not a problem. Everybody gets paid, anyway!

This is how you prop up* a product that consumers have rejected. Why are the Indianapolis Motor Speedway Board and IRL management allowing this to happen to the series that races at the Indianapolis 500?

Roggespierre

*Originally, this line read, "This is how you prop up a lie, a product that...." BC argued that my choice of words was inappropriate. Reading it again, I agree. IndyCar racing is not a lie. It is a product that has been rejected. The latter wording suffices and is not needlessly inflammatory. Thanks to BC for rightly suggesting that I rethink my original language.

Brazilliant! IndyCar and A1GP go Head-to-Head?

The IndyCar Series is scheduled to begin the 2010 season March 14 at an undisclosed Brazilian location. Reporting on the Brazil expedition has been muted in recent weeks, but some have suggested that the deal is done and that Tony Cotman is feverishly working to design a temporary street course at Location X.

Why then, is A1GP claiming that it plans to race the same day, most likely at Interlagos? The news has Brazilian property owners geeked!

Might we see competing series in Brazil on the eve of the Ides of March? Is that what Terry Angstadt and APEX Brasil had in mind? I still think it more likely that A1GP will run in support of the IndyCar Series.

Still...

Roggespierre

IndyCar 2010: Whither Brazil?

Staging the 2010 season opening IndyCar race at an undisclosed Brazilian location seemed like a harebrained idea from the get-go. Nevertheless, IRL Commercial Division President Terry Angstadt dropped more than a few hints to suggest that it would happen.

Since then, silence.

Curt Cavin of the Indianapolis Star reports that the IRL brass returned to Brazil just prior to the annual IndyCar sabbatical in Japan. Apparently, the latest trip to South America followed another Brazilian junket in early September.

Is Angstadt's season opener - and more importantly, his 2010 financier - in jeopardy? We can only speculate, but it would seem that in this case no news is bad news, at least from Angstadt's perspective.

Perhaps APEX Brasil has come to its senses, recognizing that market penetration in the United States might be better achieved without dragging around the abysmal economic failure that is the IndyCar Series. Perhaps APEX Brasil fears that IndyCar racing is no more popular in Brazil than it is in Japan and the United States.

Is finding a suitable venue the real hold-up? It could be. But the true snag might also be something as ancillary as the volume of Brazilian tea that Super Target is willing to stock. Such is the perversion of financing a market failure on wheels.

Race day at Homestead-Miami would appear to be D-Day. APEX Brasil's U.S. headquarters are nearby. If this "race" is going to happen in 2010, then the 2009 season finale would seem to be both the time and place to announce it.

Here's hoping for more silence. Perhaps, then, somebody can begin shaping an IndyCar Series that might earn an audience.

Roggespierre

Seeds of IndyCar Capture: APEX Brasil Edition

We tried to warn citizens about the emerging strategy. Now, regrettably, seedlings of APEX Brasil Deep Capture are beginning to appear. The behemoth is unintentionally undermining all hope of remaking IndyCar into something that the market will accept.

The first step toward Deep Capture is enabled by the Brazilian Trade and Promotion Agency's Business Support Center in Miami.

Sell it if you got It

IndyCar has demonstrated that it is not interested in remaking its product to please consumers. However, IndyCar is interested in distributing free tickets to the Miami race to those who sample Brazilian foods at Sedano's supermarkets in South Florida.

Attendance at the Homestead-Miami event is typically mediocre and occasionally lousy. We suggest that IndyCar fans get used to it.

APEX Brasil obviously purchased the Homestead-Miami tickets from the International Speedway Corporation. The project value lies in the sampling of food. Will the recipients of the freebies even use the tickets?

That's supposed to be the really cool thing. It doesn't matter. ISC wins, APEX Brasil wins, and the IndyCar Series collects its sanction fee and leaves behind the stench of another subpar event. Guys like Terry Angstadt revel in pulling off deals like this. They are fools.

Then, when television ratings are released, exposing the ugly and undeniable truth, IndyCar teams, secure in their self-aggrandizement, will blame Versus. Angstadt is left to defend his television partner. Perhaps those attempts to circumvent market demand weren't so smart, after all.

Recall that this is Terry Angstadt's plan for "raising the value of the IndyCar Series."

Here's a rule of thumb: if it is free, then it is worth nothing.

I will concede that shenanigans such as these are a good idea only on the day when Roger Penske determines that the best way to make money in the truck rental business is to sell barbecue sauce. Until then, I shall consider it a fool's errand.

Is it any wonder that Homestead-Miami was included in the 2010 IndyCar schedule? It will be profitable, fans or no fans. The emerging strategy is unfolding before our eyes.

How is it that this silly little plan apparently seems like a good idea to the members of the IMS Board? Would they rather the grandchildren become custodians of the Greatest Race in the World or sales reps for exotic foods?

An Important Distinction

Before we continue, I want to make something perfectly clear. Brazil has every right to aggressively market its products and services in the United States of America. The South American nation is poised for substantial growth in the global economy. This is largely the result of hard work.

Brazil has earned the opportunities that are before it because, unlike the IRL, it has addressed its fundamental economic challenges, in particular a historically skewed distribution of purchasing power that favored a tiny, well-connected class of industrialists and bureaucrats at the expense of everyone else.

Sound familiar?

If you think that correcting this problem was easy, then we suggest that you attempt to accomplish something similar in the United States. It's no picnic. The difficulties that Brazil has overcome were much greater.

And, so, congratulations to the people and leadership of Brazil. The Indy Idea welcomes your fine products and services (and impossibly gorgeous models) to the United States.

However, we do request that you not recapitalize and therefore perpetuate an IndyCar racing product that the market has rejected. The United States is already home to dozens of Zombie Banks. It does not need a Zombie Racing Series to increase yankee misery.

Tough Love

Bankruptcy - comprehensive market failure - can be a very good thing. It breaks down silos, strips bare vested interests, and allows for cancelation of contracts that are not beneficial to the insolvent firm. The IRL is not likely to go bankrupt in the legalistic sense because it is owned and subsidized by the Indianapolis Motor Speeedway Corp.

Frankly, that's too bad. If not for its corporate parent, the IRL would be in Chapter 11 as we speak. It would have to cut costs to match its market value. It would be subject to market discipline. And it would be much better off than the operationally bankrupt Zombie Racing Series that it is today. Without subsidies, this wounded animal would come to know mercy.

APEX Brasil has good and noble intentions. But its benevolence is cruel.

There is no doubt that the IRL needs APEX Brasil much more than APEX Brasil needs the IRL. We reach this conclusion because we assume that APEX Brasil has products that people actually want to buy.

Furthermore, what does IndyCar have to do with APEX Brasil's mission? Are race tickets necessary to convince grocery shoppers to sample free food? The logic seems confused.

The real value to be derived from the IRL/APEX Brasil partnership will ultimately be domiciled not in the racing, but rather in the derivative distribution contracts. And so I ask again: have we learned nothing?

We would wager that Brazilian products and services are of sufficient quality to be effectively marketed in the United States without having to endure the shackles of a Zombie Racing Series that refuses to fix its product.

So it seems that tomorrow shall be Groundhog Day in the IndyCar Series once again.

Will somebody at the Indy Racing League and the World's Greatest Race Course please stop this madness and give consumers what they want?

Roggespierre

IndyCar Arbitrage: The Emerging Strategy

Typically, if you pay $7 for something that is valued in the marketplace at $1.30, then you lose money and look pretty stupid in the process. But what if you could simultaneously sell the same product in another market for $10? Now you've made $3 risk-free and your friends think you're a genius. This is arbitrage, and it is the emerging strategy to finance the Indy Racing League and its suppliers of racing teams.


For those who are familiar with finance, we note that this is proximate, rather than pure, arbitrage. For everyone else, the technical difference does not matter.


We have established that the value generated by a championship-caliber, one-car IndyCar team over the course of a 17-race season is approximately $1.3 million. Published reports suggest that the actual price of such an effort is in the range of $7 million to $8 million. So, using these numbers we can assume that the Penske and Ganassi teams incur costs of $7 million per car each year so that they may operate racing teams that are in fact worth $1.3 million. The astute observer will argue - correctly - that Roger Penske and Chip Ganassi do not seem like men who would tolerate losing $5.7 million annually per car.


Team Penske - Abnormal Returns and Market Inefficiency

Roger Penske is not an arbitrageur with regard to his racing operation. Team Penske is financed primarily by sponsorship revenue from the Phillip Morris USA division of Altria Group, maker of Marlboro and other brands of cigarettes. Phillip Morris is subject to severe advertising restrictions enumerated in the Master Settlement Agreement between cigarette manufacturers and states attorneys general.


Unable to advertise anywhere else, Phillip Morris apparently discovered a loophole with Team Penske. The IndyCar Series therefore does not have to compete with more popular media for Phillip Morris's advertising dollars. Its relative value to Phillip Morris USA is significantly greater than it would be for any other sponsor. Penske is thus able to collect, we shall estimate here, $10 million annually per car from Phillip Morris.

Thus, the equation: Penske incurs costs of $7 million for a product that is worth $1.3 million. Then, for all intents and purposes, he sells the same product to Phillip Morris USA for $10 million. Penske can keep $3 million for himself or distribute it to loyal employees (our guess is the latter - he doesn't need the money, and there's a reason employees stay at Team Penske.)

Penske collects abnormal returns because Phillip Morris USA paid him $10 million for a product that costs him $7 million and would be worth $1.3 million to any other firm. This is not arbitrage, but rather a market inefficiency. Advertising via IndyCar racing truly is worth $10 million to Phillip Morris's Marlboro brand because its paint scheme (we don't say livery here) is iconic, and because its only other alternative is to not advertise at all.



Target Chip Ganassi Racing: Sponsorship by Arbitrage



Chip Ganassi, on the other hand, is fully engaged in arbitrage. Like Penske, he incurs costs of $7 million per car annually in order to operate a racing team that is worth $1.3 million. Chip Ganassi's sponsors do not believe that advertising via IndyCar racing is worth $7 million per car, per season. That is why the bulk of Ganassi's sponsors in fact pay for consideration that not only has nothing to do with consumer demand for IndyCar racing, but also is of far greater value than IndyCar racing in its present form could hope to be. Most of Ganassi's sponsors are, in effect, using his racing team to purchase a product in a different market altogether.


Associate sponsors such as Tom Tom, Polaroid, Vaseline and Energizer receive concessions from Target Stores in exchange for the money that finances operations at Target Chip Ganassi Racing. Retailers are prevented from receiving kick-backs in exchange for shelf space. The money that goes to Ganassi is more like a kick-aside, but we prefer to call it supply chain leverage. Having incurred costs of $7 million to produce a racing product that is worth $1.3 million, Ganassi then extracts $10 million from the supply chain leveraging activities of Target and its suppliers. Andretti Green Racing has a similar but less lucrative program in place with 7-Eleven, just as Sarah Fisher Racing does with Dollar General Stores. Newman Haas Lanigan leverages Newman's Own products to get funding from McDonald's. Except for Phillip Morris USA and Danica Patrick's backers, IndyCar teams owe virtually all of their financing to supply chain arbitrage.

Notice, however, that arbitrage is strictly a financial engineering activity. No real value has been added to the racing product. No additional fans bought tickets. Television ratings did not increase. In essence, this financial structure eliminates the need for market acceptance of the racing product. Multiply the Ganassi example many times over, and you will begin to understand why CART was unable to land a decent television package despite its armada of high-profile sponsors. That CART was exquisitely financed is undeniably true. That it was something more than a niche sport in the competitive marketplace is not. Many of CART's more lucrative "sponsorships" were generated via supply chain arbitrage. The respective companies signed on for reasons that had nothing to do with consumer demand for CART's racing product.

The Emerging Strategy

This is the path that the IRL is now following. This is the strategy. It won't make IndyCar racing competitive in the marketplace, but that is not the intent. Supply chain arbitrage is the easiest and fastest way for IRL management to generate risk-free returns that will look good to the IMS Board. Supply chain arbitrage will prevent additional heads from rolling across Gasoline Alley. Supply chain arbitrage will pacify teams that are feared by IRL management. Supply chain arbitrage will allow the participants to do the kind of racing they want to do, even if there is virtually no consumer demand for it.

Supply chain arbitrage is a scourge that could threaten the very existence of the Indianapolis 500 Mile Race.

Supply chain arbitrage robbed the Indy 500 of the Texaco Star. It felled Team Valvoline, priced Hardees' out of Indy car racing, and eliminated the Budweiser car at Indy. Supply chain arbitrage was and is faux sponsorship that enables team owners to spend beyond the value of the product they produce. The underlying assets happen to be Indy car teams and events, but they could be professional Parchesi and hot dog-eating contests, and it would not matter. It is the derivative - the leveraged supply chain - that counts.

Welcome to IndyCarbitrage**

We thought this royal scourge to be dead, but now the serpent is slithering back to the house that Carl Fisher built and Tony Hulman saved. Bonaparte's name is APEX Brasil, a behemoth that exists for one purpose: to extend Brazil's industrial supply chain in the United States. Is there any doubt that Terry Angstadt is now a double-agent, a salesman for both the IRL and APEX Brasil? His racing product has almost no value, but the teams will have his head if he doesn't give them high-tech, high-cost racing. He must construct an artifice, and the best tool in his toolkit is supply chain arbitrage, courtesy of Apex Brasil!

And, by God, it just might work. If you want an IndyCar Series that honors consumer demand, one that creates real value, then you had better hope for a severe devaluation of the dollar (likely, in time) or a flurry of hostile takeovers.

A devaluation would slay the behemoth APEX Brasil. Takeovers would handle the rest. Why? Because supply chain arbitrage has an Achilles' heel. It is laden with hidden costs! The marketing kids must be in the hospitality tent, drunk and hitting on pole-sitters, when they sign off on these stink bombs! Following hostile takeovers, the pros take charge, evaluate the contracts, and the entire artifice dissolves. Who knew that there is no such thing as a racing team that is paid for by nobody?



If allowed to reach its logical conclusion, supply chain arbitrage will turn the Indy 500 into a bad imitation of the US Grand Prix: half-filled grandstands, a minuscule television audience, drivers known to no one. But the IRL will be profitable. The teams will be sufficiently financed to do the kind of racing they like, consumers be damned.

Louis lost his head, that he be replaced by Bonaparte.

And, finally, the guillotine blade shall come down, bringing a once undeniably awesome institution to its merciful end.

Show them my head - it's worth it!

Roggespierre - (closing by Georges-Jacques Danton)

**Apologies to Dr. Jack Badofsky