Formula 1: (Re)entering the East
By: Judith Chen & Kevin Wang
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The Brake Down
Formula 1 (F1) is the highest level of single-seat motor racing. The sport emerged from the buoyant European racing scene of the interwar years and held its first official race in 1950. Since then, F1 has evolved into an annual, nine-month long competition in which 20 drivers representing 10 teams race around the globe to compete for the Constructors’ and Drivers’ Championships. F1 is governed by the Fédération Internationale de l’Automobile (FIA) and operated by Formula One Management (FOM), which is owned by US entertainment and sports company Liberty Media. FOM’s primary revenue streams consist of broadcasting fees, sponsorships, and race hosting fees — all of which rely heavily on F1 viewership.
F1 Decelerating
In the 2010s, F1 was in danger of being irrelevant, as it failed to attract a new generation of fans. The sport lost one-third of its global audience between 2008 and 2016 due to several reasons, including the move away from free-to-air television broadcasts, weak racing competition, and quieter engines. A recent resurgence in the sport can largely be accredited to the Netflix docuseries Drive to Survive, which has helped the sport gain a stronger foothold in North America. Raceday ticket sales for the United States Grand Prix (GP) held after the 2019 series debut rose 15 percent from 2018. Despite this, F1 still suffers stagnating global viewership. Moving forward, FOM has put a greater emphasis on expanding global viewership by tapping into non-traditional geographies such as the U.S. Its recent signing of the Miami GP reflects a five-year effort that solidifies a second race in the U.S with a 10-year deal.
Drifting Into China
China has never been a traditional bastion of motorsport, and has yet to develop a following of intergenerational F1 fans like its Western counterparts. Unlike European countries which have held F1 races since the 1950s, China became the second Asian country to host an F1 GP in 2004. After F1’s debut in Shanghai, popularity dwindled from 2004’s inaugural attendance level of 260,000 — similar to other major GPs — to just 120,000 in recent years. Aside from niche enthusiasts who purchase GP tickets and wake early to watch international races, the mass-market has yet to adopt F1 as a top sport.
Participation in motor racing has also been minimal in China. Specifically, the expensive and Eurocentric nature of racing has made the sport inaccessible for the vast majority of China’s population. With seven out of ten teams headquartered near Silverstone, UK, and 14 out of 20 drivers coming from European heritage, it is clear that the Asian market remains largely untapped. However, economic growth and an increasing openness to Western culture in recent decades have paved a path for motor racing in China.
Catching the Slipstream
Despite a lack of racing culture in China, the 2022 championship season welcomed F1’s first-ever Chinese driver, Zhou Guanyu, competing for Alfa Romeo Orlen Racing (Alfa Romeo). Zhou’s debut in F1 will usher in new fans from China, similar to the impact of Max Verstappen and Sergio Perez on F1 viewership in their home countries of the Netherlands and Mexico. In 2017, it was reported that Verstappen’s fan club boosted European race attendances to the point where roughly 10,000 Dutch fans attended the German GP to support Verstappen.
In his debut race in Bahrain, Zhou performed remarkably well, scoring his first-ever championship points and finishing just within the Top 10. This feat is made more impressive by the on-track battles he had with 7-time world champion Lewis Hamilton and overtakes on numerous experienced drivers.
NBA China: A Case Study
Yao Ming’s eight-season NBA career drastically impacted the popularity of basketball in China and set a precedent for the potential impact Zhou could leave in Chinese motorsport. After Yao Ming’s first appearance in the sport, demand for all things NBA skyrocketed as annual viewership grew tenfold from 10 million to 100 million in 2012, and has continued to grow to 500 million viewers today. Tickets to watch All-Stars like Lebron James and D’Angelo Russell play in pre-season exhibition games in Shanghai and Beijing sold out within minutes in 2018. From known partnerships alone, the Chinese market generates approximately $500 million for the league each year. Under the surface, basketball’s impact is even greater. Financial benefits include $1.5 billion in broadcasting deals with Tencent and multi-million dollar branding deals between Chinese athletic apparel brands and star players such as Klay Thompson. In addition, many basketball academies have spurred since the 2000s. As such, the value of successfully opening a sports market in China far exceeds the nominal investment. For F1, the addition of Zhou to Alfa Romeo as the first-ever Chinese racecar driver presents an unparalleled opportunity to capture a large number of exceptionally loyal fans.
Chinese Stewardship
China’s complex political landscape is significantly different from those of the Western world. As such, it has proven difficult for sport leagues to gain traction unless political and financial motives are clearly aligned with the state. To receive government support and strike partnerships with state-affiliated companies, F1 must provide China with two desired incentives: a platform for Zhou to shine and an environment for future Chinese stars to succeed.
Building Momentum with Alfa Romeo
With the buzz around Zhou’s F1 debut, F1 should work with Alfa Romeo to capitalize on his momentum. Zhou’s recent point scoring performance highlights his promising career and further builds to the fandom surrounding his first season in F1. Alfa Romeo should partner with brands that are exciting and familiar to the Chinese consumer, such as XiaoMi or Bytedance, which have an established rapport with the consumer base. Furthermore, Alfa Romeo should collaborate with apparel companies such as Uniqlo to create affordable branded merchandise for the mass market. According to Statista, Uniqlo is one of the top apparel retailers in the highly competitive Chinese market, consisting of 1.6 percent of the total market.
To access younger Chinese consumers, F1 should look to short-form video media platforms rather than legacy broadcasting channels. The shortened video lengths make highlights less time-consuming and more exciting, helping existing fans interact with F1 outside of race season, and offers new fans low-commitment engagement. On short-form video platform Douyin, which is owned by ByteDance, sports leagues like the NBA and LaLiga post game highlights and content such as Lunar New Year celebrations to engage with Chinese fans. For F1 to grasp the Guanyu Zhou opportunity, the group should work with Alfa Romeo to develop content catered towards Chinese fans on short-video platforms. Douyin should be used to communicate events, race information, race highlights, and meet-and-greets in order to appeal directly to Chinese consumers.
Hitting the Apex
F1 must capitalize on the Chinese government’s recent efforts to advance the country’s sporting competitiveness. For instance, China’s Project 119, a government initiative designed to maximize the number of medals won at the 2008 Summer Olympics, and increased emphasis on physical education in school curricula indicate a nationwide shift towards sporting dominance. According to Ma Qinghua, the first Chinese driver to participate in an F1 practice session, “just as China has historically excelled in producing Olympic athletes, the country has started doing the same for racing drivers.” Such trends are corroborated by an increase in Chinese university racing teams as well as circuit construction.
China is also becoming increasingly well-positioned economically to achieve driver success. From 2000 to 2020, disposable income per capita in China increased by 700 percent, with the nominal count of millionaires steadily increasing as well. Economic development is a significant factor, as an increase in disposable income implies a greater ability for parents to put their children in motorsport racing, which is a notoriously expensive sport. Progress from karting to the F1 grid can cost as much as $10 million considering training, equipment and travel expenses. Ultimately, China’s changing attitudes towards competitive sport and higher levels of disposable income bode well for the country’s ability to put more drivers on the grid.
For F1 to truly capture a fanbase in China, it must focus on increasing the number of Chinese drivers on the grid. In the same way Max Verstappen rallied an F1 following in the Netherlands and Sergio Perez in Mexico, successful Chinese drivers will increase F1’s fandom in China. Additionally, it is common among F1 fans to feel greater attachment to drivers than to teams, perhaps with the exception of Ferrari’s Italy-dominated fan base. National allegiance to teams rather than drivers is rare due to the fact that F1 teams are made up of sponsors, equipment, and personnel from various countries. Haas F1, for example, is an American-based team managed by an Italian team principal (Guenther Steiner), uses an Italian power unit (Ferrari), and races with German and Danish drivers (Mick Schumacher and Kevin Magnussen).
Finding the Racing Line
To develop national pride in F1, FOM must help pave a better pathway for Chinese drivers to succeed. For China to have a winning driver, the country needs to provide the necessary infrastructure and support. Karting, the principal route into Formula racing, still lacks the infrastructure and human capital in China to attract and train young drivers. In addition to marketing efforts at the F1 level, FOM should subsidize set-up costs for Chinese driving academies to level the playing field between China and Europe.
The Chinese Federation of Automobile and Motorcycle Sports hosts the Chinese F4 championship, a category for junior drivers designed to bridge the gap between karting and F1. FOM should work with regional hosts to improve the exposure of Chinese F4 races for both domestic and global audiences. In concert with their objective of increasing global interest in motorsport, F4 should be promoted locally to generate public interest in the series, while races should be featured through F1TV worldwide and given similar attention as other feeder series. This would reduce the current cultural and language barriers, in hopes of attracting additional investors and making the championship more accessible to drivers. Ultimately, increasing the visibility of Chinese drivers in the top rungs of the Formula racing ladder will generate optimism for both Chinese parents and investors, creating opportunities for the next generation of drivers.
Taking Pole Position
Despite a lack of intergenerational F1 fandom, the addition of Zhou presents an unique opportunity for F1. By amplifying Alfa Romeo’s presence in China through merchandise and media partnerships, as well as increasing racing accessibility for up and coming Chinese drivers, F1 has the opportunity to gain a foothold in the attractive Chinese market.