Recently released documents have revealed that the Force India Formula One team had burned up a combined net loss of $371.8 million (£283.5 million) by the time that it crashed into Chapter 11 bankruptcy in July.
Its demise was driven by the financial woes of its owners, Indian businessmen Subrata Roy and Vijay Mallya who is fighting extradition from Britain to his home country on fraud and money laundering charges.
The team’s future was secured when its assets were bought by a consortium led by fashion tycoon Lawrence Stroll who has an estimated fortune of $2.7 billion according to Forbes. It is now racing under the new name of Racing Point and the post mortem has begun on its predecessor which is in the hands of administrators.
A recent report in Britain's Independent newspaper lifted the lid on the administrators’ findings and revealed how little was left in Force India’s tank.
When the team hit the wall it had just $315,000 (£240,000) in the bank and had to cover its next staff bill with a $6.6 million (£5 million) loan from its sponsor, water treatment company BWT. It had already loaned the team $993,000 (£757,000) and $617,000 (€535,000) and was one of more than 450 creditors who were owed a total of $37.4 million (£28.5 million).
They are on track to be paid in full thanks to a $118 million (£90 million) payment from Stroll’s consortium. It is one of the biggest injections of cash in the history of the team which began in 1991 when it competed in its first F1 race as Jordan Grand Prix.
Remarkably, over the first ten years of the team’s life, it made a combined net profit of $19.8 million (£15.1 million) compared to a $320.6 million (£244.4 million) net loss over the decade to the end of 2016. As the table below shows, it gives the team a combined net loss of $378.9 million (£288.9 million) which narrowed by $7.1 million (£5.4 million) last year according to the administrators’ report.
Complete data for 2017 has not yet been released by the administrators and full financial results are unavailable for the team’s first two years as its status as a small company meant that it wasn’t obliged to file them. There is good reason why Jordan Grand Prix made a net profit in those days.
The eponymous team was founded and owned by Eddie Jordan who was a former banker not a billionaire with bottomless pockets. There was no precedent for F1 teams being given blockbuster loans so Jordan was more limited in how he could cover a loss. When the team finished 1998 $2 million (£1.5 million) in the red Jordan sold a stake to the private equity firm Warburg Pincus for a reported $60 million. It is understood to have bought a 40% stake giving the team a $150 million value which is more than it was worth 20 years later.
Mallya bought the team in September 2007 and since then its performance has accelerated as it finished fourth last year, six places higher than a decade earlier. However, its financial results have reversed over that time and the decline began in Mallya’s first full year of ownership. In 2008 the team was re-named Force India and its costs surged 74.4% to $91.3 million (£69.6 million) which was the biggest increase in its history.
By 2009 its costs were still revving up even though it had yet to pay off on track and it finished the year with its biggest-ever net loss of $52.9 million (£40.3 million). Mallya wasn’t the only driving force behind the boost in spending.
The graph shows that the only time the team’s costs decreased over the past decade was in 2014 after new regulations were introduced. F1 cars are designed the year before they race on track so Force India’s costs hit $119 million (£90.7 million) in 2013 when it was working on one which would meet the new regulations. It is the third-highest amount that the team had spent in a single year and a similar spike wasn’t needed in 2014 as the regulations remained the same. It shows the impact that legislative changes can have and they made the final dent in the team in 2016.
Last year F1 changed its rules yet again to increase aerodynamic and mechanical grip through the use of wider tyres and wings. It required a re-design of the cars’ bodywork and Force India felt the effect of this in 2016 when it was designing its car.
A report by the BBC quoted Force India’s 2016 financial statements which said that its “traditional method of retaining 50% of the previous season’s car and updating the remaining 50% is not possible.” It added that “over 90% of the 2017 car is completely new with very little carry-over from 2016.” This fuelled the team’s highest-ever costs of $143.1 million (£109.1 million) which was more than ten times higher than the $13.8 million (£10.5 million) it spent 23 years earlier.
The wheels came off Force India just over a year after this and it serves as a cautionary tale for F1 which is planning to introduce more new regulations in 2021. F1’s owner Liberty Media has said it wants to limit team spending by implementing a $150 million budget cap but this wouldn’t have saved Force India as it was already below the threshold as we have reported. It suggests that putting the brakes on future rule changes could actually be the key to securing F1’s future.
