Haas F1: The Fastest Start-Up You've Never Heard Of
By: Dylan Matthews & Jon Finless
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Formula 1 Racing (F1), the global pinnacle of motorsport, garners a global viewership in excess of 450 million annually. Every year, 20 drivers backed by 10 teams compete in a nine-month, 21 race-long competition around the world. At the heart of this competition is the Constructors’ Championship: the award given to the team (“constructor”) with the most cumulative points across two drivers at the end of the season. Just two teams, RedBull Racing and Mercedes AMG Motorsport, have won this trophy over the last decade.
The odds are stacked against new entrants to this sport. Four new teams have tried to enter and compete in F1 over the past decade; three have since folded. Engineering a car that can compete with incumbent teams with financial backing and experience is both very costly and technically difficult for new entrants.
Entering in 2016, Haas F1 is the sport’s first American constructor in over 30 years. Haas F1 took the racing world by storm when they scored more points in their debut race than the total points of all previous new constructors of the last decade combined. In 2018, Haas F1 finished fourth in the Constructors’ Championship in just their third season—a position dubbed “best of the rest” acknowledging the technical prowess of the sport’s three premier teams. Overnight, Haas F1 went from being a no-name constructor deemed to fail to a strong, credible midfield competitor.
With unprecedented early success, expectations for the team going into the 2019 season were high. However, 2019 proved to be Haas F1’s worst season yet. They finished second-last in the Constructors’ Championship and lost their title sponsor, calling into question the team’s future commitment and survival.
In a winner-take-all sport like F1, how can start-up teams like Haas succeed? In their pursuit of a sustainable competitive advantage, the team must treat F1 as a business rather than a sport. While they may fall short of the podium, Haas F1’s commitment to the sport will be profitable so long as they trade off the idea of winning races with a commitment to consistency to gain exposure and build their brand.
The Formula Behind Formula 1
As each team must develop a new car at the beginning of every season, F1 teams spend on average an annual budget of $312 million. When breaking down this budget, constructors sustain their race operations with both prize money and private sponsorships.Within the prize money stream, there are two main categories of revenue. On one hand, Category 1—which amounted to $35 million in 2019—is a fixed base amount disbursed evenly amongst every team. On the other hand, Category 2 is allocated based on the previous season’s results. In 2019, first place team Ferrari earned just over $56 million while last place Williams earned just $15 million.
Finally, teams also receive bonus payments based on past successes in the Constructors’ Championships. In 2019, Ferrari alone received an additional $73 million in recognition of their status as a “Long-Standing Team.” Given that a team’s future financial success is in part driven by past success, payment structures overwhelmingly favour incumbents and help maintain barriers to entry. For teams like Haas F1 with no podium finish to their name, this dynamic creates pervasive financing constraints.
In addition to prize money, teams also rely extensively on external sponsorships. Private sponsors invest heavily in F1 teams to have their brand advertised on the car. F1 is a lucrative marketing opportunity, with an estimated average return on advertising of 130 per cent. Better-performing teams will attract more sponsors due to the associated awareness from their brand. For example, Mercedes F1 which won the last six Constructors’ Championships recently added the chemical group INEOS as a commercial sponsor for $26.2 million per year.
Haas F1’s Innovative Approach
Haas F1 was created by Haas Automation Inc. (Haas CNC), the largest computer numerical control (CNC) machine tooling company in North America. The team was born out of Haas CNC’s ambitions to gain market share in international markets, as well as owner Gene Haas’s personal passion for racing. In the realm of NASCAR racing, Gene Haas also has experience running a successful team bearing his name.
In light of rule changes in the Constructors’ Championship which allow teams to recycle parts from previous seasons, Haas has shifted towards cross-sourcing parts. Capitalizing on this favourable rule change, Haas F1 was able to source nearly every part they needed—such as the engine, gearbox, and suspension—from Ferrari F1. All of this enabled Haas F1 to avoid hefty research and development costs, while still having a competitive midfield car. While the car is not yet winning races, these sourced parts have helped Haas F1 build more consistent quality control and reduce uncertainty surrounding the range of race outcomes.
The World’s Most Expensive Billboard
F1 cars also act as marketing vehicles for team owners and sponsors. Haas CNC, the title sponsor and parent company to Haas F1 Racing, has used its F1 team to help promote its brand internationally. During their F1 team’s second season, Haas CNC recorded a 30-per-cent increase in unit sales, 55 per cent of which came from international markets. In Europe alone, the 41-per-cent revenue growth achieved was attributed in large part to the team competing in F1.
Methodology for Determining Exposure
In a capital-intensive sport like F1, one of the biggest challenges of any team is trying to measure their return on investment. One common measure of return on investment, the Advertising Value Equivalent (AVE) measures the difference between the advertising value a F1 team generates for sponsors against the costs of sponsorship. For Haas F1, success means prioritizing exposure above winning races. According to the Journal of Advertising Research, a team’s AVE varies based on several factors including their participation in a season, number of points, wins and the durability of a car—measured as the number of races a car can compete in before retirement.
Results & Implications
When comparing Haas’ 2018 and 2019 AVE based on their F1 performance, the AVE Benefit dramatically declined from $26.0 million to negative $23.3 million. This negative AVE indicates that the costs of advertising significantly outweigh its benefits. As such, even for its parent company, Haas F1 has ceased to be a desirable advertising medium.
On the current trajectory, Haas CNC’s AVE Benefit for the 2020 season follows a similar pattern to 2019. With similar results, Haas CNC would lose $36.3 million in their overall AVE contribution given the lower Category 2 funds and sponsors. On average, Haas CNC would be spending $1.78 for every dollar’s worth of advertising exposure.
For Haas CNC to break even on their 2020 marketing investment, the F1 team should aim to finish with 55 points, or a sixth/seventh place finish in the Constructors’ Championship. This was calculated using a regression model assuming that Haas F1 has nine unfinished races in 2020—which is in line with historical averages—and does not win a race.
Getting Haas Back on Track
Ultimately, Haas F1 does not need to win races to be successful. In sport, success is defined as winning. However, in business, success can be measured more broadly in terms of return on investment and profitability. Haas should achieve its 55-point target by returning to a leaner operating model to ensure more consistent performance, as well as sacrifice some of its native branding in favour of bringing in both sponsors and strategic partners to help the team succeed and ultimately get more exposure.
Lean Operations & Continuous Improvement
The most critical error Haas F1 made in 2019 was their decision to increase its budget to $150 million. The additional investment was used to purchase and change more parts on the car than they had before, leading to greater variability. Even if the car was faster than before, the greater variability in car set-ups led to a car which consistently finished outside of the top 10 points-scoring positions.
Rather, Haas F1 should cap their budget at their present $150 million and focus on making only incremental changes to their cars, as they did in 2018. A 2015 Harvard Business Review article concluded that incremental changes to the car from season to season are more beneficial than drastic ones. While radical innovation may make the car faster, it also increases the variability in performance and results in more unfinished races. Furthermore, other successful constructors worked to first attract good car designers, then sourced parts to develop the car. The Haas F1 team should adopt a similar model to complement their lean operations. Since many new parts came from different sources in 2019, Haas F1 found it difficult to quickly diagnose technical problems. Haas F1 should adopt the design process from in-house manufacturers, first designing its car and then sourcing the appropriate parts, prioritizing small continuous improvements.
Sponsors and Strategic Partners
Big data drives today’s F1 cars. Every big F1 team has a data sponsor they partner with to model car performance: Renault F1 has Microsoft, Red Bull Racing has IBM, McLaren has Dell Technologies, and Mercedes F1 has SAP. As F1 regulations limit the amount of time a team can test their car on the track pre-season, established teams instead turn to data-driven simulations and wind tunnel modeling to design and tune their cars. Failing to do so puts Haas F1 at a disadvantage.
Haas F1 should consider partnering with data companies who can better use predictive analytics on car performance, aerospace companies who can apply their principles of aerodynamics on the car, and other companies who can better specialize on the technicalities of the sport. Haas F1 should orchestrate the overall strategy and design, leaving the technical developments to partners with greater resources to improve quality. For a mutually beneficial partnership, Haas F1 should provide its analytics partner advertising in exchange for data services.
The Real Race
Haas F1 started as a small but successful player, but deviation from their original business model has threatened the team’s continued participation in F1. By pursuing F1 as an advertising opportunity, Haas can minimize costs and optimize their returns instead of risking significant capital to compete against the F1 incumbents. Their strategy moving forward must return them to their core business model—consistency. For Haas F1, the real race is won in the exposure gained.