Formula One and External Economies

Honda’s decision to pull their team out of Formula One for next season and their desperate bid to find a buyer for operation provides an example of the shut down point in operation. The costs of putting two cars on the grid are simply staggering - in the order of £150 million per season. And with the global economic downturn hitting marketing budgets for many of the main sponsors of international sport, it is hardly surprising that the first of the major teams has decided that there is no business rationale for staying within the sport. So Honda was the first - who will be next? Answer - keep an eye on Williams.

The Guardian/Observer carried a feature on this story at the weekend and included a nifty graphic which showed the location of the F1 team bases in the UK. McLaren are based in Woking but Renault, Honda, Williams and Red Bull are all clustered in the east Midlands. Partly this is an accident of history - namely the availability of disused airfields after the war. But the article is worth reading as an example of the external economies of scale that can be generated when a group of producers develop and expand in a relatively small geographical area. And as the extract below suggests, the negative multiplier effects that might occur if there is a wider retreat from F1 would be huge.

“Most of the teams currently racing are based in the UK, along with their R&D operations. A whole network of industries, such as component suppliers, engineering and design firms, have sprung up in Britain, mostly in central England, to serve the sport both here and abroad.”

“F1 also helps to support a far larger motorsport industry in the UK, for example rally car racing and all its associated industries. Estimates of the total number of jobs dependent on motorsport in the UK vary between 45,000 and 110,000. Geoff Goddard, professor in Motorsport Engineering Design at Oxford Brookes University, estimates that it accounts for 1 per cent of GDP, not insignificant when compared to car manufacturers, which represent about 5 per cent.”

The remainder of the article is here