April 2013

The 2013 FORMULA 1 UBS CHINESE GRAND PRIX will be the 10^th running of the event.  As one of the BRIC countries, China is important for growth to the Formula 1 business and to the many global companies involved in it.

Formula 1’s brand values of quality, innovation and scarcity are attractive to the aspirational Chinese young middle class, which is expanding rapidly.

The following for F1 in China

The average Chinese F1 fan is 36 years old. The Chinese audience is the youngest for F1 with over 10% of all viewers under 16 and a quarter under 25. F1 fans in China also come from wealthier and more educated backgrounds than the general population.

However F1 still lags well behind other international sports that have become part of Chinese sports culture, such as NBA basketball.

China is F1’s seventh largest TV audience with a 3% share of the global audience. The Asia Pacific region, of which it is part, accounts for just 10.3% of the global TV audience for the sport, according to industry monitor Repucom. F1 is still heavily reliant on its following in Europe, which holds 64% of the total audience.

The cumulative TV audience in China in 2012 was 62.5m. There were only 12 races shown live; there was a decline in audience from 2011 of 34%, as only 229 hours of F1 programming was shown, compared to 322 in 2011.

The wider picture

Economic growth has slowed in China; for the last ten years the economy has experienced 10% annual growth, now that has slowed to around 7-8%.

This runs counter to the general trend in the country; China has an ageing population due to the one child per family policy. The labour force has contracted recently and as the society evolves it will not be able to rely on cheap labour. The middle class is expanding, which is good news for premium car manufacturers and other companies who want to promote themselves in China through
Formula 1.

This year many sponsors will be making their presence known around the UBS Chinese Grand Prix.

China and the automobile sector

According to Rolf Ganter, automotive analyst from UBS CIO WM Research, “China is now the world’s largest auto market and is becoming the largest premium auto market. So for Mercedes, for example, they make a lot of profit there, it’s where the growth is in terms of profit and turnover as they sell lucrative products like the S Class there. In fact around 50% of all S Class Mercedes are now sold in China.”

Chinese automobile manufacturers have been making their presence felt more on the international stage, making a statement with stands at the larger car shows, like Geneva Autosalon.

It will be interesting to see whether they follow the model of expansion seen in the past with ambitious new manufacturers; sell in your domestic market first, with smaller cars, then move to larger cars then as the technology improves expand into Europe and, for the really ambitious, break into North America.

The relevance to F1 comes at the point where they want to establish a premium brand on a global stage and to showcase how good their technology is. At that point they will want to measure themselves against brands like Mercedes and competing in Formula 1 may well become part of that strategy, although for manufacturers which stick at producing low cost cars, participation in F1 might not be so relevant.

“There are plenty of Chinese car companies around,” says Ganter. “Some of them want to become famous and make a statement. You have to have a brand and provide quality and what the European consumer wants. It will be interesting to see if a Chinese manufacturer can make that step, have the right concept for the market and take the next step in terms of innovation to compete against the other manufacturers.”

Ferrari leads the way

China is proving important to Ferrari for a number of reasons. The Scuderia Ferrari won the first Chinese Grand Prix in 2004 with Rubens Barrichello. The same year it set up an official sales company in China for the first time.

Sales of Ferrari cars have increased dramatically in the ten years since F1 has been racing there.  In 2007 the company sold 150 cars there, whereas by last year the number had risen to 784 cars, making it Ferrari’s second largest market after the USA, where 2,000 cars are sold annually.

In January this year Ferrari announced a sponsorship deal with Weichai Power, one of China’s leading manufacturers of heavy powertrain systems and vehicles. The deal is for four years, to the end of the 2016 season. Weichai is the first Ferrari sponsor to come from China.

March 2013

Formula 1’s unique position, as the only global sports series with a year round presence, was highlighted during a fascinating hour-long open discussion session at the Geneva Motor Show, just two weeks before the start of the new season.

The 2013 FIA Formula 1 World Championship™ starts in Melbourne on March 17th and features 19 rounds, all in different countries, ending in Sao Paulo, Brazil on November 24th.

By way of a scene setter for UBS’s third full season as a Global Partner of Formula 1^®, the discussion, in front of an invited audience of UBS guests, featured Rolf Ganter, senior automotive analyst from UBS CIO WM Research and Nick Fry from the Mercedes AMG Petronas Formula One Team.

This fascinating discussion touched on all aspects of the business of Formula 1; the push into emerging markets, the role of the manufacturers, the technology transfer from track to road and F1’s role in the development of Electric vehicles.

Emerging markets was one of the dominant themes; Fry noted that Bernie Ecclestone, F1’s commercial rights holder, has done an excellent job of extending the reach of F1 into emerging markets, reflecting the areas of growth for all businesses involved in the sport.

“If you map the location of GPs and sales of Daimler cars, 90% are sold in countries that host a GP,” he said, adding that research shows that the same goes for other major brands in Formula 1.

”When I look at auto stocks, I look at where the growth is coming from." said Ganter. "China is already the largest auto market globally and is expected to become the largest premium market. Daimler is selling 50% of its Mercedes S Class cars in China.”

The pair also examined the business case for manufacturers to compete in the sport, Ganter highlighted the question of whether F1 sells cars? “For me it’s always interesting to ask the companies how much of the investment they make in F1 is coming back to them in sales?” he said. “Will I buy a Ferrari because they are active? Probably yes. Does Renault sell any more cars because of F1?”

“The numbers show that people are more disposed to buying a product because of the brand image of F1,” said Fry. “It is glamorous and it is technology. Research shows that a lot of our audience is interested in the technology and they associate companies in F1 with technology and with being the best in their field. Why are Mercedes in F1? To sell cars.”

Ganter spoke about the business case for Honda to return to F1, as the rumours suggest they might, with McLaren in 2015.

“Don’t forget what is happening now with the Japanese producers. Look at the currency; how much the Japanese yen weakened – around 20% versus the dollar and the euro. And that puts these companies in a more competitive situation. This means that they can make more profit on their cars or put in more features or even sell the car cheaper.

“Honda was always famous for having high revving engines and for them it’s a good place to be back in Formula 1."

The discussion turned to the transfer of technology from circuit to road. “Do I see a transfer from F1 into the real life experience of people?” asked Ganter.

Fry gave the example of the electric Mercedes E Cell SLS, which shares energy regeneration technology from the Formula 1 engine, while the E Cell’s drivetrain is built alongside the F1 racing engines in Brixworth, England. This technology will cascade down the AMG Mercedes model range from there, he added.

He added that F1’s role in fast-forwarding technologies to benefit the automotive sector can be seen, for example, in the weight reduction of the Kinetic Energy Recovery System (KERS) which weighed in at 80 kilos in 2009, but is now less than 25kg.  That system is now on the Mercedes E Cell SLS.

Looking ahead to future technologies, Ganter pointed out that in France last year only 5,000 electric cars were sold; 0.3% of the total sales, raising the question of where F1 fits into the future of the automotive industry, not just in technology development but also in promotion.

“F1 has to be the highest level of automotive technology and we have to mirror and work alongside what the car industry does,” said Fry. “The reason we were interested to move (in 2014) from a V8 engine to a smaller engine with higher levels of recovery is that we cannot be dinosaurs. Will it attract other manufacturers into F1? I hope so. There are rumours of Honda coming back. I can imagine it, because 1.6 litre engines are what they have in Civics.”