Welcome to the Insights section, new for 2013 on the UBS F1® microsite. In this section we will provide content which drills down into some of the most interesting topics, particularly around the business story in Formula 1®. From manufacturers’ participation in the sport, to emerging markets, to the changing face of business sectors engaging with the sport as sponsors, we will seek to provide insightful and engaging content.
The team behind the Singapore Grand Prix were seated in a meeting room at Bernie Ecclestone’s headquarters in Princes’ Gate, London, waiting for the impresario to join them for the final stages of negotiations to secure the race.
“All of a sudden he stretched his hand in and switched off the lights,” says Colin Syn, the event organiser. “Then he opened the door, switched on the lights and said, ‘I want a night race!’ “
It took just 18 months from that point to the F1® cars running on the streets around the Marina Bay circuit for the first race and since then the event has become a blueprint for how a Grand Prix should be run.
In fact, in just five years the Singapore Grand Prix has established itself as one of the most important races on the F1 calendar. Of course the concept of a night race was pioneering in F1 terms, but there is so much about the race, which breaks new ground. Other aspiring host countries are studying the business model, based on a public/private partnership, where the Singapore government takes 60% of the financial risk in return for 60% of the returns.
And as a Grand Prix to host business leaders and provide networking opportunities, Singapore is second to none.
“For the business community, it's win-win all around,” says Chi-Won Yoon, CEO and Chairman of UBS, Asia Pacific. “The event attracts fans from all over the world, while showcasing Singapore's beautiful skyline, outstanding infrastructure and dynamic business environment."
"Formula® 1 provides a unique opportunity to organize client activities around one of the most prestigious brands in the sporting world. For clients, it offers one of the best hospitality experiences in Asia during the entire year."
This year’s event has additional significance for UBS as it marks the three year anniversary of the start of its Global Partnership with Formula 1.
According to Colin Syn, the key to the project is the role played by the Singapore government,
“Because the government is backing everything, Singapore GP is a genuine place to network and do business, not only from Europe but also from this region,” he says. “A lot of people come from Indonesia, Japan, Thailand and Malaysia so everybody is here, all the top businessmen.
“The financial community is huge here. The government has a lot of financial seminars before and after the race, they arrange for banks to come to Singapore to do business and to network. “
As well as helping to put Singapore on the map as a business hub, the Grand Prix is playing its part in making Singapore more of a destination. The country has now matured a lot and average stay times have increased significantly, thanks to the development of casinos, theme parks and other attractions,
“From a transit point of view Singapore is more of a destination now,” says Syn. “Ten years ago it was just a stopover from London to Australia, the average stay was two and a half days. Now the average stay is much longer.
“The Grand Prix plays a part in that. You can’t buy the Olympics, the World Cup. There is no other event where you can quickly brand Singapore in a very short time. The government has put in all the hardware, but you need the software, the events and the entertainments to bring people. We are now fortunate to be a destination city. One of our KPIs with the Grand Prix is to achieve 40% of the people coming to the race from overseas. Every one of the five years so far we have done that.”
Overall attendance for the Singapore GP is around 260,000, an average of just over 80,000 people each day.
The private element of this public/private initiative is Singapore GP Pte Ltd, backed by Syn’s boss Singaporean entrepreneur Ong Beng Seng, whose property, hotels and lifestyle business also extends to operating Ferrari dealerships in Singapore and Shanghai. Ong was the first to bring Haagen Dazs ice cream to Asia and is one of Singapore’s main concert promoters via his Lushington Entertainments company.
The business model of shared risk and shared reward with the government has been a great success and the contract for the Grand Prix was renewed last Autumn through to the end of 2017.
“It’s a 60-40 split, although a lot of the infrastructure was paid by the government at the outset,” says Syn. “The government takes risk but gets upside. We share the risks. The new Grand Prix venues are looking at it, the Thais, for example. It’s the best way.
“If you don’t get the government behind you it doesn’t work. The first year we had to submit plans and road closures. The government had given the green light so all our plans were fast tracked.”
For Chi-Won Yoon the success of the project is clear to the business community.
"Formula 1 has developed an impressive footprint and is growing rapidly in this strategically important market," he says.
Large companies have long seen Formula One® as a platform for technical collaboration and marketing activities. The relationship between Ferrari and Shell, for example, stretches back to the 1920s and Shell supported Ferrari when it took part in the first Formula One event in 1950.
But it was only in the late 1960s that sponsor logos began to appear prominently on the cars, with the arrival of the first tobacco company, John Player.
Since then various business sectors have come and gone and this Insight article is focussed on charting those changes, with the analysis of Loris Centola, co-head of CIO Research, UBS Wealth Management.
We will establish a number of conclusions.
Sponsorship is linked to the economic cycle and to economic success of a company and of a sector.
There are two main reasons why companies engage in sponsorships: the specific nature of the product and its relevance to the sport are fundamentally important. For this reason companies in sectors like oil, tyres and automotive will be more inclined to spend budget on an activity like F1 and the sponsorship will be more resilient to downturns in the business cycle than businesses like telecoms or utilities, which are more likely to pull a sponsorship when market conditions go against them, for example Vodafone withdrawing its title sponsorship from McLaren in 2013.
For sectors without direct relevance to the sport, engagement in sponsorship is because they want to create an emotional engagement and/or signal a close connection between their product and the values of the sport. Red Bull is a good example of this. It is not an energy drink; it is a brand representing energy, risk and speed.
In terms of sustained spend over many years, tobacco was the largest spender in F1 sponsorship; it was the lifeblood of the sport for three decades and funded its exponential growth.
With large budgets to spend, typically a tobacco brand would be a title sponsor of a team. Tobacco has proven hard to replace in this respect; today only four of the eleven F1 teams have a title sponsor.
In the 1970s, 1980s and 1990s tobacco was the dominant sector engaged in sponsoring Formula 1. John Player Special, Marlboro, Lucky Strike, Benson and Hedges and Gauloises were all brands that created memorable liveries. In the early 1990s, 18 of the 26 drivers on the grid had Marlboro affiliation.
Gradually a ban on tobacco advertising in most markets prevented continuation, 2005 being the final act with the introduction of a complete ban in the European Union. Philip Morris has been the largest contributor to F1 and continues to partner with Ferrari today, but there is no branding or messaging linked to the partnership and the name Marlboro has disappeared from the official team name. They continue to use it like a title sponsor would, using F1 as an entertainment platform for Business to Business.
British American Tobacco went as far as to set up its own team, BAR, in the late 1990s, which was later sold to Honda, then to Brawn and is now the Mercedes F1 team.
Oil and energy
For the energy sector, the link to F1 is clearly to the product rather than to the emotional appeal. And the budgets are allocated accordingly, often coming from the product and retail side as much as from marketing budgets.
“The energy sector is undergoing a period of massive change, for example with the expansion of unconventional activities like shale gas and growth in renewable energy,” says Loris Centola, “This is a trend that hasn’t been seen in other sectors. Capital expenditure continues to squeeze margins, which is negative for the industry. Also China’s slowdown is not helping. Clearly this will have some impact on marketing and sponsorship activities.”
Although oil companies will feel the heat from the squeezing of margins and the oil price, it will be more resilient because oil, fuel and lubricants are such a fundamental part of Formula 1.
The late 1990s and 2000s saw a trend for banks and financial services companies to enter the sport and some of the world’s largest banking groups have had a presence. Despite the banking crisis of recent years the involvement of those still engaged is strong.
Although F1 is perceived as a money-hungry sport, the link for banking is not to the products.
There are two reasons for banks to sponsor F1; one is the target clientele and the second is the global reach.
F1 attracts middle to high-end followers and banks are trying to attract the high end of the wealthy individuals. This is why banks sponsor F1 rather than Moto GP, which has a different demographic.
The global reach is significant; the sport has expanded into Emerging Markets like Asia, Middle East and South America. By sponsoring F1 a brand can reach out to many developing markets. The sport visits countries that are growing quickly like India, Abu Dhabi and Brazil.
UBS is a Global Partner of the sport, while Santander sponsors Ferrari, McLaren and have been title sponsor of Grand Prix events in Spain, UK, Germany and Italy. RBS was a sponsor on the Williams team from 2005 to 2010. HSBC sponsored Stewart Grand Prix from 1997 to 2000 and continued when that team was taken over by Jaguar.
Telecoms and technology
There has been a steep rise (and fall) in the number of telecoms and technology companies engaging with the sport in the last decade. The links are clear; F1 is a showcase for technology and innovation. The shared buzzwords are “high-tech”, ‘Innovation” and “speed” of communication.
The worldwide F1 audience knows that the technology on the F1 car itself is of paramount importance, probably 80% of the performance is down to the car and 20% to the driver. Technology and the rapid pace of development are an important part of the story and this allows tech companies to link their story to F1 credibly.
Reliability is also vitally important. Tata Communications entered the sport in 2012 as a technology partner to Formula One Management, providing high speed connectivity via its fibre optic ring around the world and has extended its involvement to include a partnership with AMG Mercedes Petronas F1 Team. Its slogan is “The Speed to lead”, encouraging potential customers to consider that, “If we can do it for F1, we can do it for your business.”
However these are also cyclical businesses; when the business climate turns, sponsors from these sectors will be quick to cut budgets and pull their sponsorships. Telecoms is a good example of this. Telefonica, Orange, Movistar, Telmex and Vodafone have all spent a large amount of money in F1, but now these largely European operators have pulled out. By the end of 2013, the Latin America based Telmex and Claro - part of the America Movil conglomerate - will be the only telco left.
Vodafone’s spend as title sponsor of McLaren has been in the range of $70 million annually. Telecoms is a sector with deep resources and willing to spend on a sport like F1, when the market conditions are right.
Technology companies seek to get involved in the sport to align their technology with the performance of the cars and the sport. Blackberry is working with Mercedes to improve communications between team and driver during a race, for example. LG Electronics has been a sponsor of the timing graphics on the world wide live TV coverage. Panasonic was a title sponsor of Toyota’s F1 team from 2002 – 2009. Intel partnered with BMW Sauber, Compaq supported BMW Williams F1 team, SAP has been a long term backer of McLaren, Blackberry joined Mercedes this season.
Interestingly we have not yet seen internet giants like Google, Facebook, Ebay or Amazon enter F1. These companies have not featured a great deal of sports sponsorship activity generally in their growth strategy.
“When we speak about IT, there lots of different subsections with completely different margins, completely different growth rates,” says Loris Centola, “Mobile phones, for example, are they really a technology or a utility now? They have an average selling price that continues to drop dramatically. What is inside the phone is what really matters, the intelligence inside, the semi-conductors and so on, these are becoming a commodity. We are seeing different trends developing. The IT sector is one that we really like. We see very robust demand in the US and Emerging Markets and resilient consumer spending.
“Interestingly the emerging markets are starting to not copy technology from western companies, but develop their own,“ adds Centola. “Tata Communications is a good example of this. The new Chinese government has said it wants to stop copying and start developing technology. So new companies will be created and you will see these new companies from these markets engaging in heavy sponsorship in F1 in the future. It will take three to five years.”
Other sectors active in F1
Logistics companies have a strong link with the sport, given that events happen all over the world and there is always a need for teams, organisers and broadcasters to ship items quickly and reliably. DHL has been in the sport since 2004 as a Global Partner of F1, while Fed Ex was a partner of Ferrari in the 2000s and the Italian team today has UPS.
“Margins are not as high in this sector as one might think because after the first company popped up with a fantastic idea, other companies came in and the competition meant that margins went down dramatically, “ says Centola.
“It is a very cyclical industry. The sector hasn’t been doing all that well, but there has been some recovery in the last year, due to the recovery of international trade in Asia and the US.”
Alcohol brands are a tricky fit with motor sport due to society’s clampdown over drink-driving. Nevertheless they have been a fairly constant presence in the last few decades. Some, like Diageo, actually promote a safe driving message at the core of their sponsorship activation.
Fosters was a very active sponsor for 20 years from 1986, while Diageo sponsors McLaren via its Johnnie Walker brand, using it to target the Aslan market in particular and Force India owner Dr Vijay Mallya also owns Kingfisher and White and Mackay, both of which he promotes on his car.
“This is a classic consumer staples sector which offers attractive growth especially in emerging markets,” says Centola. “We are positive about it. You see a prominent trend towards the emerging markets; companies in the sector generally have good visibility and stable earnings, strong cashflow. It’s less impacted by economic downturns. This is why you see a constant spend on sponsorship, albeit not a high spend.”
The next stage for F1 sponsorships is Fast Moving Consumer Goods (FMCG). Traditionally they have concentrated on cheap TV advertising rather than sponsorships.
However due to the increase in wealth in the emerging markets and the desire for the growing young middle class to look better, they will increasingly buy shampoos, shaving creams, skin and hair products. This demographic corresponds well with the F1 audience in these countries. Recently we have seen Unilever sponsor Lotus F1 team via its Clear and Rexona brands. Centola sees this as a growth area.
There is a strong correlation between the business cycle and sponsorship and advertising. In 2012 advertising spending grew by 3.2% on average, but looking on a regional basis, countries that are doing better spend more on sponsorship, so Asia was up only 2% because of the slowdown in China. Latin America was up 6.7%, while Middle East and Africa were up 14.6%.
Sponsorship today is far more than a brand putting its brand on a car or on a circuit sign. Many sponsors seek to be engaged in the story of the sport, to participate in the competition by providing services which make the car go faster or the team more efficient.
It is far more sophisticated than the basic sponsorships begun in the 1960s when the first tobacco brands began to appear on F1 cars.
The 2013 FORMULA 1 UBS CHINESE GRAND PRIX will be the 10th 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
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.
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.”
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