2014 technical regulations for F1® racing have affected the competitive balance between factory and customer teams

Published 01 July 2014 By: Charles Maurice

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This season’s Formula One (F1) engines divide opinion, there is no question1. A smaller power unit, coupled with hybrid and turbo technology to produce a similar amount of power compared to the previous seasons fuel intensive engines has always been an interesting proposition, especially when one considers that the technology in the sport is now directly relevant to the real-world road car trend of smaller engines, hybrid technology and supplementary forced induction.
Whether you like the sound of the cars or not, from a technological perspective (and therefore an interested IP lawyer), the effect of the developments this season on relative team performance is fascinating, particularly when one views them in the context of those teams which performed well in the V8 era.
 
Mercedes are dominant. Unless another team manages to magically find some extra pace, this is likely to continue for the rest of the season – simply, Mercedes have the best engine and the other teams do not. The proposition I would like to put forward here though is that this dominance is not actually a surprise at all given the extreme changes to the technical regulations2 governing F1 this season, particularly through Article 53 of the regulations which brings in fundamental changes to the specification of the power units used in the cars. The relative ability (or lack thereof) of the teams to reach parity in the implementation of the new technology means, in my view, that these changes make it naturally very difficult for a team that relies on its supply deal with one of the three manufacturers (“Customer Teams”) to compete with the factory/works teams of those manufacturers (“Factory Teams”). Not a new concept, but one that is in the spotlight this year given the (at least initial) shift in dynamics on the grid.
 

Traditional supply/demand economics 

Of the three engine manufacturers (Mercedes, Ferrari and Renault), the generally accepted current thinking is that the Mercedes unit produces the most power within the applicable rules, with the other engines trailing this to some extent (recent results showing that this gap may have closed slightly)4. That this translates into on-track performance is obviously not a given, but gaining a full understanding of how this power advantage can be harnessed is something that the Mercedes Factory Team have managed well and which its Customer Teams have been able to do to a lesser extent.
 
F1 has never expressed itself to be a level playing field, but this difference in performance between the Mercedes Factory Team and its Customer Teams (McLaren, Force India and Williams) has at times been striking. These teams are, after all, running the same engine and have the same power advantages over the other teams on the grid. In the case of McLaren, at least, it is not even a resource constraint (one visit to Woking confirms this). So why is this?
 
To the F1 fan, it is sometimes easy to forget that some teams are customers of an engine manufacturer (which may also have its own Factory Team) and that brings with it some interesting delineations – as in any other technology-heavy industry, where a customer purchases equipment from its supplier, unless there is specific leverage to the contrary, rarely will the customer get an insight (or input) into the underlying nuts and bolts of the key technology, or even an ability to fully understand how it works. To put this into exciting lawyer-speak, a customer may have a licence to use the intellectual property (“IP”) rights in the technology (i.e. to use the engine), but this will likely not include any rights to disassemble, reverse engineer, copy or otherwise deal (etc.) in those rights, whether these are IP rights in the traditional sense (e.g. copyright, patented technology or design rights) or more nebulous rights such as confidential information or know-how. F1 adds an added spectre of unwarranted competition into the relationship: the customers are the supplier’s competitors on the track, and so there is a necessary balance between, on the one hand, making money through sale or licence of technology and, on the other hand, maintaining a competitive advantage on the track. In a season where the technological regulations have changed in such a fundamental way, this balance comes even further under the microscope as Customer Teams rely on their engine supplier to produce a sympathetically designed power unit that is compatible with their chassis and systems. It is therefore a question of relationships to an extent, and historically there have certainly been teams that have memorably used this to their advantage.
 
Of course, the restrictions on in-season testing apply to both Factory and Customer Teams5, so there is some scope for this advantage to be balanced over time in terms of parity over the number of laps the teams have had to generate useful data. However, it is unclear whether this serves to address the fundamental Factory and Customer divide when it comes to such a fundamental change in design of such a key moving part.
 

The supply deal 

Engine supply deals are curious beasts. Having been involved in a number of these, there are certain standard provisions seen in every contract that afford the suppliers and their Factory Teams their crucial competitive advantage over their Customer Teams. Examples of this include provisions that:
  1. prevent any ability to independently access the underlying technology in the engine and related equipment, or if this is possible at all, only with the engine supplier’s technicians present;
  2. limit testing and apply additional fees, in terms of kilometres allowed per power unit and overall, as well as in relation to other testing (e.g. dyno tests); and
  3. give the engine supplier full discretion over which power units can be allocated to a certain chassis or which give the engine supplier a right of veto over the proposed use or installation by the Customer Team, 

along with the wide range of other contractual protections that one would expect to see in a long-term, high value supply deal, such as no warranty given that the power unit will comply with specifications or that it will produce any type of power or performance outcome, or indeed that it will even be compatible with a particular chassis.

It is certainly possible to have sympathy for the latter of these: for example, if a Customer Team’s design ideas are incompatible with the engine supplied, then that is (fairly) not for the account of the engine supplier. However, it seems extremely unlikely that the clauses above make their way into a supplier’s arrangements with its own Factory Teams (or, if they do, that their effect is limited in practice). By their very nature, a Factory Team will have a far greater (if not, total, depending on group structure and investment etc.) degree of freedom over how they can understand the design and specification of the power unit, as well as the ability (within the scope of applicable regulation) to dynamically mould a car with regard to all of its components, rather than having to build a car around fixed elements provided by third parties. This of course assumes that all components are designed in-house (which is to oversimplify and is not the case in practice), but the ability to view a power unit with a high degree of flexibility in terms of the way it relates to the rest of the car should not be underestimated, especially where the changes in technology mean that the power unit and the car are not simply an evolution of the previous year’s design.
 
The discretional elements mentioned above are particularly interesting and, with the right wind (and an amenable competition authority), might be capable of challenge on the basis of their effect on competition in F1 as a market (the subject of another blog). Having control over the way a Customer Team and therefore a direct competitor to a supplier’s Factory Team operates, places a large amount of importance on fair sporting principles and the ability of the Customer Team to hold the engine supplier to a particular standard of supply with regard to how it treats the other teams. As above, some contractual comfort is often present, although as this is invariably watered down to some extent, reliance needs to be placed on strength of technical relationships and the small world that is the F1 paddock (one Customer Team is likely to have a fair idea what another Customer Team with the same engine supplier is receiving) as well as the standing of the team generally. This potentially results in an uneasy stand-off (and the flux of these relationships and the evolving costs are factors in why teams change supplier), but one which does not, in any event, come close to replicating a Factory Team’s own in-house arrangements with the other divisions of its own organisation.
 
Politics also plays its part, of course, and it will be interesting to see how McLaren fare next season once they commence their long-awaited partnership with Honda. It will depend on how good the underlying technology is (this author has high hopes personally!), but it will be interesting to see whether McLaren is able to gain a greater degree of technological partnership (and hopefully performance level) through its position as the de facto Honda works team for next season. One would expect so.
 

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Author

Charles Maurice

Charles Maurice

Charlie is a senior associate at Stevens & Bolton LLP and specialises in the sports, media and entertainment sectors. Charlie advises on a wide range of sporting issues and has particular experience in the motor racing and football industries. 

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