Commentary economics Lifestyle

Was the long-term benefit to host F1 realised?

Everything has been down with the Malaysian F1 -- attendances, foreign fans, TV viewership, returns -- except the cost of organising it.

Everything has been down with the Malaysian F1 -- attendances, foreign fans, TV viewership, returns -- except the cost of organising it.

TheMole
Written by TheMole

April 12, 2017

By Salahuddin Hisham

SINCE 1999, Malaysia has been host to the premium Formula One motor race (F1) sports event. Then, it was the only race in South East Asia and the second in Asia after Japan. The Sepang International Circuit (SIC) had a unique circuit and its two fast straights were a favourite with drivers.

The novelty has faded. There are now six F1 venues in Asia, including another one in South East Asia. The government has decided to call it quits. This 2017 season will be the last.

Before critics argue to offer alternative item for budget cut, Singapore was reported to consider quitting earlier than Malaysia.

It could be a ploy  by Singapore to renegotiate a new contract. Nevertheless, the 100,000 three-day attendance in the first year has declined to a daily average of 73,000 in the last season. Critics need be aware too that Shanghai and other venues are on the verge of quitting too.

Salahuddin Hisham was involved in various financial markets but has since, turned political and online.

In 1999, Malaysians gloated for securing a sports event sought after by the Americans and beating Singapore to it. Again, when Singapore expressed interest in organising  F1 in 2012, Malaysians gloated.

But, the competition may have contributed to Malaysia’s declining attendance.

Back in 1999, the forecasted sale from just the grandstand seats was about RM50 million. There are one-day, two-day and also three-day passes sold to foreigners at RM500 and RM250.

For the past four years, ticket sales have been on the decline. It is a daunting task for SIC to fill up the 30,000 paddock seats and 100,000 hill-side seats.

F1 tickets are expensive and beyond the affordability of average Malaysians. Only motor sports fanatic and foreigners could afford paddock seats. After the initial few years, Malaysian corporate lost interest in buying the corporate seats and in advertising.

Although the sport is expensive, the argument was that the potential revenue is huge. The New Straits Times then used the Australian Grand Prix in Melbourne as an example of success.

Has the Sepang race been so, ever?

For the host, the main revenue were ticket sales. Tickets alone were not sufficient to foot the full cost to host the event.

Local race promoters  have to also pay race fee to the F1 owner. The actual figure is not known. Contract agreement prohibits disclosure to third party but is known be continuously on the rise.

According to a March 2017 article on Forbes magazine website, the annual racing fee range from US$49 to US$58 million. It is usually a flat fee and is continuously rising due to a built-in annual fee escalator to take into account rising prices.

According to Datuk Nazri Abdul Aziz, since 2008, the government had spent RM300 million a year to host the event. As Tourism Minister, he would have been aware of the declining number from F1-related tourism.

Furthermore, the revenue generated from track-side advertisement has to be shared with the F1 owner. TV broadcasting rights is with the FIA owner that Malaysian TV stations have to pay to broadcast the Sepang race.

The cost could not be recouped. This has yet to take into account the capex for construction of SIC, and its maintenance. More so, F1 is not the only user of the SIC race track.

After 19 years, it is looking more to be an ego trip than economics. Basically, the host is merely a facility manager and assisting the race promoter.

When organising team personnel arrives in Sepang, they take over the show.  Equipment, including helicopter for emergency use, food for racing crew, and catering equipment at the pit building are brought in together.

Local participation in organising and retail business is limited.

It is not the first time an F1 host withdrew from the circuit. Those who withdrew could return later. In the meanwhile, the track could be used for motorbike races, which had sold out attendance.

After 19 years of hosting and spending billions, did the country realised the claimed long-term benefit in promoting then to convince the public?

One of the benefits then was international recognition and promotion of the country. F1 promote the country on the global stage via its worldwide TV coverage. The event is broadcast to 130 countries and the one-and-half hour race is viewed by an estimated 390 million TV viewers worldwide in 2016.

In turn, there is brand awareness for Malaysia. It then should help the economy.

However, it is difficult to quantify. Of late, viewership has been on the decline due to losing interest from the dominance of the Mercedes AMG Petronas team. In 2014, the estimated viewer worldwide was significantly higher at 550 million.

In 1999, the then Prime Minister said, Malaysian could learn from the technology related to engine design and production.

The Petronas engineers in the Sauber F1 team acquired the knowledge and experience to develop the E01 gasoline motor engine in 1997. Proton acquired the engine rights in 2012 for more than RM45 million, some reports mentioned RM63 million.

The engine was renamed as Proton E01 engine. However, more R&D is needed before Proton could replace the current CamPro engines. The amount runs in the hundreds of millions that at one time, Proton wanted to sell the engine to a tractor manufacturer in China!

There was technology intent but the only technology venture yet to generate any return.

If engine development is insisted as a success for hosting F1, it should be distinguished between hosting F1 and participating in an F1 racing team. Since then, Petronas has stopped its venture in engine development. So EO1 was a one-off venture.

Petronas and Malaysia benefited more from the visibility of the four-year champion Mercedes AMG Petronas team than the one and half hour TV coverage of the Sepang race once a year. And, Petronas does not need to waste money to sponsor the event.

There was economic benefit derived from the use of Petronas lubricant for Mercedes road cars sold and research collaboration on lubricant development.

Engine development was inextricably linked to the national car project, Proton and the private transportation mode of the past. In the long-term, the car ownership policy is unsustainable and public transportation is urgently needed.

One concern then was the capability of Malaysia and Malaysians to benefit from too fast technology advances. The benefit from F1 could be limited. After 19 years, it is partly proven as true.

It is time for a reality check. F1 is considered a luxury past-time for the rich and famous but without the returns for the promoter. In view of the current austerity drive, it is an endeavour the government should no longer waste money on.

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