Thursday, August 6, 2009

BMW Getting Lesson In Economics

BMW has a problem: it wants out of Formula 1, and it wants out this year.

BMW has another problem: they have confused "replacement cost" with "resale value". In trying to find a way to transfer the ownership of the team to Peter Sauber, BMW thinks that the team is an asset that has a value, and therefore they want to be compensated for handing over ownership of that asset to another party. Under most circumstances, that would be reasonable thinking. I have something of value that you want; therefore you pay me if I am to agree to give it to you. The thing is, while the team facilities and equipment would undoubtedly cost money to replace, this doesn't really have any bearing on the actual value of the team.

It is a fundamental point of economics that an object's value is dictated by a willing buyer meeting willing seller. So if I have a Formula 1 team that would cost say $300 million to replace in terms of staff and facilities, but I can't find someone willing to pay me $300 million for it, is it actually worth $300 million?


In this case, BMW's demands for money as a part of the sale means that quite probably the sale won't go through. This is because the revised Concorde Agreement has been signed by everyone else, and to alter the agreement now would require all other signatory's consent. And as the Schumacher testing debacle shows, such unanimity is hard to come by.

The sad thing is that by insisting on a particular value for the team, BMW has effectively dropped its value to nearly zero, plus any proceeds from winding up the team by selling its components.

In this situation, everyone loses: Peter Sauber loses a team he spent so much time and effort building, F1 loses a capable participant, and BMW ends up with more mud on their face.