Ron Dennis, one of the cornerstones of Formula One, has some tough words for trade unions and auto manufacturers as the industry faces its toughest challenges yet
THE CROWD packed in to Westminster Central Hall, within the shadow of Big Ben and the Houses of Parliament. It was made up of senior managers from corporate Britain. They were there at great expense, in search of nuggets, something to take back to the office to present as "the way forward". Over the two days of the "Leaders in London" conference, they sat in a reverential hush as a succession of top business people came to the platform to offer a mix of sympathy and advice.
There were a few thirtysomething over-achievers, like Richard Reed, co-founder of Innocent drinks, and many crusty war veterans - former mayor of New York Rudy Giuliani spoke on crisis management and ex-General Electric chief Jack Welch was beamed down on a big screen from the US.
However, the problem for those charged with leading the rest of us out of this mess is that there is a suspicion that William Goldman, the Hollywood screenwriter, had it right all those years ago when he said "nobody knows anything".
Among the self-appointed seers there was general agreement that these were "unprecedented times", that we were in "uncharted territory" and most worryingly, that we all appear to be standing "on the edge of a cliff".
During one presentation, the immaculately-dressed young man sitting to my right opened his Moleskine notebook with some urgency and wrote down the word "communication!" before quickly closing it again. Not much to take back to the brick factory.
Ron Dennis, chairman, chief executive, 15 per cent owner of the McLaren Group and team principal of the McLaren Formula One team, was there to talk about the business of Formula One, which would at first seem an unlikely source of down-to-earth business insight.
Global demand in freefall, an environmental crisis, a banking black hole: such issues have been of little interest to Formula One - motorsport's super-rich jet set, which for over the past decade or so has come to represent the most opulent brand of capitalism this side of the Russian hedge fund industry.
However, things change, and there are signs that the economic chill has penetrated the paddock club. Japanese car giant Honda recently announced its withdrawal from the grid, citing "the quickly deteriorating operating environment facing the global auto industry". Max Mosley, president of Formula One's governing body, the FIA, said the decision had confirmed his "long-standing concern that the cost of competing in the world championship is unsustainable".
According to Formula Money, the 10 teams spent a combined total of more than $3 billion (€2.2 billion) last season. The individual team budgets reportedly range from Toyota's $445.6 million (€330 million), the biggest, to Force India's $121.85 million (€90 million), the smallest.
The banking crisis has hit sponsorship from the financial sector, a white knight since the ban on tobacco advertising hit Formula One. Currently, Allianz, Banco Santander, Credit Suisse, ING, Mutua Madrilena and Royal Bank of Scotland support Formula One teams, a position that is becoming hard to justify given many are now part-nationalised.
The sheer scale and expense of Formula One contrasts starkly with Ron Dennis' early career in the sport: "When I started in 1966 a Grand Prix team was made up of eight people and there were eight events a year," he says, sitting in a small room, away from the conference.
"Now it's a completely different animal. If you include the supply chain that goes outside our organisation you're into the thousands. If you look at just ourselves and our partners Mercedes-Benz we have nearly 2,000 people on the programme."
He has lived through a number of economic cycles since those early days and offers this analysis of the current climate: "Formula One tends to be the last into a recession and the last out," he says.
"This is because of the nature of the contracts with sponsors. Very often these are between three and five years in length, so there is not an initial impact. Our budgets come from the advertising budgets of the companies and inevitably advertising budgets get slashed, or at least are significantly trimmed in times of economic strife. We know we have to reduce our costs to cater for the inevitable downturn in income that is coming in 2010 and 2011. We predict that our turnover will drop from £280 million (€311 million) a year to as low as £175 million (€194 million) a year," he says
These figures relate not just to the McLaren F1 team which won this year's championship with new world champion Lewis Hamilton in the car, but to the broader McLaren Group. This manufactures the SLR supercar in partnership with Mercedes. It also produces the electronic systems for every other Formula One team and operates the Lydden Hill race circuit along with the Formula One team.
The group's turnover was £242.3 million (€268 million) in 2007 and the rise to £280 million (€311 million) this year may be due in part to the introduction of the SLR roadster at the end of last year.
Dennis's strategy mirrors that being employed by much of the rest of the business world: cut costs and hope for the best. The solid foundations of the business he says, should help them as Formula One enters its "little recession". "We just hope that by 2010 or 2011 things are going to look better. How do we react to this global recession? The answer is we have to cut costs now, not when our income starts to decline. It's the same in any other business."
Formula One sits at the nexus of the car industry and the banking sector, its two major backers. However, Dennis doesn't have a high regard for either.
"They have both possibly got terminal illnesses, but the symptoms and the causes are completely different," he says. Most significantly, he is adamant the car industry should not be bailed out by central government.
"I looked at some figures two or three years ago, which said that every General Motors product had $2,000 to $3,000 of its retail price going to pay pensions and healthcare schemes. You can't function like that," he says, shaking his head.
The major manufacturers, he says, have become squeezed on margins because of overcapacity which has led to the cost of borrowing rising "so high that you can't do anything other than try to grow volume because you need cash flow". This led to pressure on prices, he says.
"There have been cars sold for significant periods of time under the cost of production purely to get cash flow. You look at that business model and anything that comes along that is a bump in the road and they don't have the ground clearance to get over it. As an industry it allowed its ride height to drop," he says.
"Now they are going to the government for all this money. They couldn't make a profit before, so what is suddenly going to change to generate revenue to pay that money back. Maybe I just don't get it, but an industry that has been troubled for such a long period of time, why is it suddenly going to get out of trouble after the recession?" says Dennis.
"The argument is obviously to save jobs, and there is a social responsibility maybe, but it seems perverse to employ someone to pay tax so that the money goes back into the system, only for it to be loaned back to the company to be given back to the employees. Is that the competitive way of managing a business? he asks.
Politicians and trade unions were next in line, as Dennis warmed to his theme: "Why have we got this whole tranche of politicians based in Brussels focused entirely on anti-competitiveness? The world has said we need competition, not protection. I just don't get it.
"Then you look at some of the bigger organisations in the car industry and the unions are wrecking the industry. Talk about shooting yourself in the foot. It should be about having a workforce that gets it and understands; if I went into one of the loos in my company and someone had written anything on the door, I'd be bitterly disappointed, because it's their door, it's their loo!"
So is Dennis anti-union? Does McLaren recognise trade unions?
"It's not a question of not allowing them in," he says, "there's just no place for them, no need for them. We are about being the best. We are not about being as good as your weakest link, were about not having weak links."
Honda's decision to quit Formula One has shaken the sport's administrators and posed some fundamental questions as to the sport's push toward a more environmentally friendly future.
The company's earth car featured a huge pixilated image of the world rather than commercial logos, and stole a march on the rest of the grid with its eco-friendly PR messaging.
"The most important issue when presenting a green image is that it is authentic and cannot be challenged," says Dennis.
"Honda's earth car was driven more by the perception they wanted the public to have of their objectives, rather than by their true objectives. But now reality has overtaken that and we do have to be more focused on technologies that are related to energy conservation," he says.
For a team like McLaren, the shift towards a greener future is "a huge cost, a mind-blowing cost. You struggle to come to terms with the change that it means for the sport."
Every team is "bouncing against the laws of diminishing returns so you back off spending because you can't see economic benefit from it", he says.
"When you open up the technical horizon it is very difficult to do it without opening a massive area of cost," says Dennis. "So we have to look at the short-term gains of how we are going to make the car more competitive with the question of: is this technology going to be saleable and have relevance to our other business interests. Sometimes you can get your mind around it, and sometimes you can't."
Honda's financial model was unique in Formula One, as the cost of the race team was borne by entirely by its research and development centre.
"If you look at Honda, there's a percentage of every single car that is sold around the world that goes to research and development, which is a completely separate entity from its production unit.
"You go to Japan and they have enormous research and development centres, which deliver the final product to the manufacturing arms," he says.
"When you look at research and development it is full of young engineers. The problem with young engineers is that they need a technical challenge. Formula One for Honda was a way of stimulating all of those young engineers to achieve technical excellence," says Dennis.
"Therefore the budget for Honda does not come from its advertising budget, or sponsorship even. Sponsorship is just something that supplements the research and development money," he adds.
Dennis is now 61 and has accumulated a vast personal fortune as well as many Formula One constructors championships along the way.
As pressure mounts on the sport to change its ways, there are rumours around the pit lane that his appetite for the job is waning and that a less hands-on role awaits, swapping the team overalls and regular pitlane presence for the suit and tie he wears today.
However, as we talk on the verge of what could be Formula One's most challenging era, the glint in the eye suggests otherwise.
