Saturday, 12 February 2011

Company Focus – Williams Grand Prix Holdings – Remoulding Itself for Future Good Years.

It was recently announced that Sir Frank Williams of motor racing fame, was to publicly list his company Williams Grand Prix Holdings upon the Frankfurt Bourse. Having seen monumental change in the world of F1 over recent years, race-teams and their backing companies have had to significantly re-adjust to the new-norm seen in the sport. Change created by not only alterations in technical regulations set by the FIA to close the competitive chasm between teams, but also the major contraction in R&D and operational budgets as consequence of the corporate sponsorship squeeze from the previous financial crisis.

This generated a period of cash-burn for most teams during the lean period, and so necessary new impetus to both raise new funds and be hyper-critical regards the 'cost-benefit' of expenditure in manner not seen in F1 for decades.

Not surprisingly, the sourcing of team funds has been perhaps the most critical of issues as the sport re-emerges for a newer, more responsible era.

That issue perhaps most pertinent for Williams GP, given arguably an untenable present long-term position, squeezed between the funding prowess of top teams and EM backed newcomers, aswell as suffering from lack of technical reach seen by the 'podium 3'. Competitiveness on the grid is still correlated to budget spend, top talent and operational strength costs. Thus we see the 'well-off' Ferrari, McLaren-Mercedes & Red Bull Racing who have proven their performance to date quickly rebound in sponsorship levels. There has been a re-emergence of vehicle manufacturers' own factory-teams, including Renault, Mercedes and BMW-owned Sauber. Aswell as plethora of newer names ranging from new-entrants from EM countries with strong corporate backing, such as Force India, HRT-Cosworth (though based in Spain) and Marussia Virgin Racing. And lastly old GP names like Lotus-Renault, itself Malaysian backed.

Thus even though holding the #4 position from the 2010 season, and so envy of many below, the competitive and operational headwinds for Williams appear substantial and it has had to act. Being seen to do so now with its floatation roadshow in which it seeks to sell 27.4% of the business in order to better secure its future, and recapture its glorious past, as seen in the mid-1990s. That sentiment was all apparent at the IPO presentation, with the period's winning Williams-Renault race-car proudly displayed next to Sir Frank & Patrick Head (co-founders), Adam Parr (chairman) and Toto Wolff (non-exec): a typical modern board formula in a company seeking regeneration of revered seniors and far-reach financiers.

Over the last 50 years of so Grand Prix motor racing has been through a development trend that is the envy of many other sports. From the early post war days of amateur mechanics and drivers, its popularity grew alongside that of mass European car culture, drivers such as Juan Manuel Fangio and Sterling Moss and became heroes, representing combined virtues of gentlemanly competitiveness.

It was the external influence of television that acted as a watershed – especially so colour television in the late 1960s in Europe - and with that direct reach into peoples homes came a new era wherein the grand prix cars themselves became not only 'mechanical platforms' to modify and tweek between races, but critically four wheeled sponsorship 'marketing platforms'. For Formula 1 - its name derived from the FIA regulatory formula dictated – a new age appeared in which a team's budget size became directly linked to its ability to innovate and robustly operate within F1's regional traveling circus. Thus with the increased stakes laid on the table by expectant sponsors, so the pressures grew on teams to win, and the combine of 'gentlemanly-competitiveness' became distinctly tilted, a 'by hook or by crook' attitude prevailing until as the participants themselves joked at the time, Grand Prix has morphed from traveling circus to that of a globe-trotting mad-house; the wheels of which spun ever faster.

(Frank) Williams Racing was born into this watershed era, informally set-up in the early 1960s as to serve his personal auto-racing interests in saloon cars and Formula 3, and matured with the “employment” of Piers Courage* as team driver in F2 in 1968, and F1 in 1969 using a surreptitiously purchased Brabham car which gave success, much to Brabham's chagrin.

Thus unlike other GP participants such as John Cooper, Jack Brabham and Bruce McLaren who were self-constructors of cars , Frank Williams instead initially played the role of 'broker', conjoining other people's separate technological skills and driving skills into one 'Williams' package.

[NB * drivers like the Eton educated Piers Courage (of Courage brewery family) personified the 'old-world' 'old-money' atmosphere that that was quickly disappearinghaving previously stretched from before the likes of 'Tiger' Tim Birkin & Joel Woolf Bernato at Bentley in the 1920s up until Lord Heskith's Racing outfit in the mid 1970s for which James Hunt drove. Hunt exemplified the new 'playboy' guise of driver, the correlate of which Heskith perpetuated with latter Penthouse magazine sponsorship. And so the innate transformation into a new type of GP commercial structure was set].

Williams used a used a De Thomaso-Ford designed chassis-engine configuration in 1970, then a previous season '70 March vehicle for 1971. 1972 financial backing by Motul Oils and Politoys gave the funds to buy a new March to run for the season and create an in-house build facility, so as to critically allow for construction control giving the FX3 chassis. For '73 these backers were replaced by Marlboro (cigarettes) and Iso (fridge producers), evolving the chassis into the FX3B. These backers exited for '74, the strained team finances meaning strategic allocation of finite resources over the season, gaining a single point for the year. For '75 a new FW04 chassis and mixed drivers set gave a second place in the German GP bringing in much needed funds. For '76 Williams sold 60% of the ongoing Racing concern to the oil magnet Walter Wolf, renaming the outfit as Walter Wolf Racing which also brought on-board the Heskith team car.

Frank Williams' own self-determination was being lost, and understandably unhappy he left to set set-up Williams Grand Prix Engineering in 1977 along with Patrick Head who had been the previous team's chief engineer, and backed by sponsors Saudi Airlines. Success came within a few years, winning in '79 and taking a championship titles in '80, in '82, in '86, in '87 (drivers title),

Patrick Head has been Williams' right-hand-man as technical director until 2004, then taking on a more broad business remit. He designed the FW10 car in 1984 which gave the team its first carbon-fibre constructed chassis, which mated with turbo-charged Honda engines gave the team near equal standing with the likes of Ferrari and McLaren who seemed to previously enjoy a technical lead. Honda's engine supply switch to McLaren left Williams using below par Judd engines for '88 and so momentary loss of competitive momentum for the company during that year. This was re-energised by the Renault engine deal of 1989 and largely supported the teams track prowess.

In the 1990s Head brought in Adrian Newey as chassis designer, and Williams became dominant in the sport, between '91-'97 seasons taking 5 constructor titles and 4 driver titles. With such glory and shared internal recognitioncomes management friction, and so Newey eventually departed for McLaren. (Indeed Head mentored many up-and-coming F1 designers who have since moved to other teams, Ross Brawn perhaps being the most visible now principle of his own team, having bought out Honda GP in 2009).

After the '91-'97 winning streak, '98 onwards was less auspicious Williams forced to use Mecachrome engines (ie blue-printed 'pattern-type' Renault engines produced by Mechachrome with no/little R&D support) and an old-specification, regulations modified car. This chassis-engine combine of an effectually un-evolved car leaving Williams off-pace. Between 2000-05 BMW engines were adopted, with in 2000 finishing 3rd in the constructor's championship, 2001 3rd again, 2002 improving to 2nd, 2003 2nd again, 2004 dropping to 4th, 2005 dropped again to 5th. An acrimonious relationship developed between Williams and BMW given lack of success and in 2006 BMW bough Sauber Racing to set up its own team. In 2006 Williams used Cosworth engines but dropped to 8th in the constructors' title, in 2007 regaining to 4th with AT&T sponsorship, 2008 saw drop to 8th as Williams Toyota, 2009 up slightly to 7th and reaching 6th in 2010 using the 'old' Cosworth engine package and re-adorned with AT&T sponsorship.

Hence 'Williams F1' as it became known, has had a volatile ride, both frustrated by its inability to compete against the big-hitters such as McLaren-Mercedes, Ferrari and now the emergent Red Bull Racing (Renault engined). It effectively sits at a half-way-house, neither previously attached to the engine supply and R&D resources of a major car producer, nor with the substantial financial backing of a owner-sponsor such as Red Bull. Thus it must find its own way forward, as it always has seeking that magical combine of genius chassis/vehicle engineering and supply of state of the art F1 engines. Thus little in real terms has changed internally for Sir Frank Williams, but what has changed has been the contextual environments that Williams Racing has had to cope with, both in terms of the ferocity of competition and the ability to access financing – during what has been a period of fiscal drought - to keep the business moving forward.

Thus in recent years he and Patrick Head have had to perform the typical strategic task of 'situational analysis', no doubt with the assistance of the company's bankers, who themselves recognised the reality of the untenable situation Williams Racing faced.

In notional terms, the downturn years between 2008-2010 should have theoretically offered Williams F1 a golden opportunity for revival, given that major auto-company backed teams such as Toyota, Honda and BMW left Grand Prix and the budget's of competitor teams were heavily slashed given the pull-back in corporate advertising spend. Yet though the budget differentials did undoubtedly shrink, the effectual gain the top 3 teams had gathered over the preceding years allowed them to maintain dominance.

Moreover, even though AT&T is a large-cap firm with the steady typical income of most infrastructure firms, no doubt even it had to shrink its F1 contribution over that 3 year period, hence the 2010 car's decals (the FW32) show the additional 'broad-basket' spread of sponsorship from others such as primarily Philips (electronics), PDVSA (Venezuelan), Bridgestone (tyres), Perelli (tyres), Thomson Reuters (newsfeed), Randstad (recruiters), Oris (watches), Green Flag (vehicle rescue), GAC (logistics), RBS (banking) etc. In short in shows the new dominance of those companies well positioned to face the future out of the western down-turn, and demonstrates the almost diminutive participation by the banking world, as with with the largely UK government owned RBS (Royal Bank of Scotland). Williams also displays its own logo with the wording 'Hybrid Power' alluding to its own engineering capabilities.

Thus Williams has had to massively re-draw its sponsorship base, seeking much from few such as the Dutch and Venezuelan, and little from many others, the new FW33 2011 season car recently announced no doubt seeing similar prime sponsorship swapping relative to the geography of each world championship race, yet the Venezuela decal appearing in publicity shots as that country's literal tourism and investment vehicle.

Of course for the last 40 years, running a race-team has been as much about gaining as many income streams as possible, and so expanding the commercial base to add stability, growth and provide cash-cushions for leaner times. This apparent from 'up-stream' pursuits such as design, engineering and the manufacture of standard race series single seaters, aswell as 'down-stream' brand related activities such as typical merchandising activities ranging from logo applications on T-shirts, umbrellas and the like, through to more coherent brand extension efforts such (as for the F1 world) use on production cars., and latterly the creation of consumer experiences such as FIAT's Ferrari World theme park.

Similarly, beyond the 'shirts and caps' merchandising, Williams previously bridged the perceptional association between F1 & production cars with its engine supply partner Renault in the mid '90s. The co-branded Clio Williams model came in 2 series and sat at the top of the Renault performance brand tree. (This tie-in initiative preceded by the Mini Cooper, Lotus Cortina, Sunbeam Lotus and latterly by Honda's 'Jordan' Civic; a natural commercial conclusion for any winning auto-manufacturer that can gain additional credibility via the racing association).

However, today in stark commercial terms this past is but a faded, distant memory of little application presently, given the team's improved but 'off-podium' performance and no relationship with a major car manufacturer.

[NB the car caused a mini craze amongst Paris' own financial playboy "pilots" to personally re-run the infamous early morning city-scape race film 'C'etait un Rendezvous' - see youtube - but obviously not condoned then or now]

Similarly a decade previously Williams undertook the engineering for the Group B Metro 6R4 (4WD) campaigned in the 1984 World Rally Championships by Austin-Rover, yet likewise a distant memory.

[NB Even if that engineering know-how were maintained these 26 years on, it would probably be of little real-world application today given that the car was designed as a dedicated longitudinal mid-engined supercar, and truly valuable current 4WD IPR serves the need for FWD derived transverse architectures – see previous post regards the BorgWarner purchase of Haldex – with Haldex holding similar patents on the niche market of mid-engined 4WD systems].

Prior to the engine supply deal with BMW in 2000, Williams' Motorsport division was commissioned to produce LMP class cars for BMW which ran in and won the 1999 '24 Hours Le Mans' race, this engineering project creating valuable external links that would be latterly leveraged.

More recently, in 2008 Williams tendered for the vehicle build contract to supply the re-emergent Formula 2 series announced by the FIA, last seen in 1985. However, it expectantly lost-out to Jonathan Palmer's own offering, itself a close-coupled derivation from MotorSportVision's own previously well received low-cost single seater business model, itself set within the MSV motorsport business hub which also owns/manages race tracks and thus has the prime remit of creating its own synergistic activities, which also draws it closer to the needs of the FIA. Williams Engineering, was thus left to 're-appropriate' its basic vehicles concept and market it under another guise.

Thus, recent years have not been kind to Williams both on and off the F1 circuit, and the recent situational analysis demonstrates that real headwinds remain, the need to create a truly viable business plan core to its long term survival; the beginning of which is the the ability to attract long-term, 'long-hold' investors ideally with something useful in the way of commercial synergies to also bring to the table.

Hence the re-appraisal of its commercial activities and funding sources from chairman Adam Parr (in post since 2006) and his more recent non-exec Torgan Christian Wolff. The conclusion reached being company floatation on the buoyant Frankfurt exchange.

[NB From only a very surface evaluation of Williams' contextual circumstances, it is a conclusion which investment-auto-motives also believes to be the firm's best funding path].

Of all stock exchanges the Frankfurt Bourse is undoubtedly the best upon which to list. This because of Germany's comparatively buzzing economy thanks to exports and healthy domestic demand, hence it has the focus of global investors and the very pertinent fact that the Bourse represents a true 'meeting place' between the many types 'old-school' German industrial companies which have the dual facets of stout conservatism in their operational outlook and enjoyed the export wave of recent years related to cars and capital goods.

Thus a virtual hive for both investors and floatation-seekers with interested in automotive related companies. This has been obviously to Parr and Wolff.

[NB Parr joined Williams in 2006 having worked as an investment banker in equities analysis, Mining sector M&A, then within Mining and also passed the Bar. Wolff is an investor within the German auto-sector, with primary interests in HWA AG and BRR Rallye Racing. HWA AG directly supports Daimler's own national saloon car race team (in the DTM) and produces limited edition road cars, whilst BRR Rallye Racing is a specialist rally-race parts retailer. Wolff is also an amateur FIA accredited racing driver].

Here in the UK, although over the worst of the financial crisis it is recognised that in this new 3-speed global economy (#1Asia, #2 USA, #3 Europe exc Germany) that a seemingly 'natural' listing on the LSE's AIM would be at the present time an irrational route. Instead taking a place on the Deutsche Borse is far more prosaic, since not only the 'hive' mentioned for the sector, but also because the Bourse is itself in in talks with the NYSE regards alliance or merger, so as to create a western exchange powerhouse which would be metaphorically 'turbo-charged' compared to other 'naturally-aspirated' exchanges.

This then potentially avails Williams Grand Prix Holdings to the 2 most prolific western exchanges, which sit in their favourable positions thanks to their respective nation-state stances on industrial/export policy and fiscal/devaluation policy, and so garnered investment activity.

Thus for Sir Frank, Head, Parr and Wolff it is the only realistic track to take.

Moreover, investment-auto-motives believes it is intended to put the company right under the noses of Daimler, BMW and VW AG. So as to both tempt the idea of mutually rewarding engine supply deals into the future (even after the BMW experience), and more importantly to tempt the idea of a German auto-manufacturer actually buying into Williams to support their own F1 ambitions. Having already witnessed the Mercedes factory team enter the grid aswell as supplying engines to others, the possibility of BMW wanting to extend its reach beyond its poorer performing Sauber (#8 in 2010) must not be dismissed. And moreover, in such a 'German context' Williams would surely be ecstatic at any possibility of courting VW AG, given VW's previous motorsports involvement with its Audi LMP wins at Le Mans and its desire to maintain global reach; thus a Williams-Audi arrangement via VW shareholding in Williams GP Holdings might be the Board's ultimate goal.

The Williams GP future starts here, and having taken the correct road with the Deutsche Bourse must now demonstrate itself as having a sound business model for the company at large, beyond the purely track ambitions of the F1 team. The two are obviously synergistic, but every aspect of the company's capabilities must be viewed 'in the round' and beyond the typical GP obsession.

Track success of course brings its rewards, both financially via sponsorship deals for the following season aswell as opening up opportunities elsewhere, Williams knows this all too well. It must have kicked itself after its mid-90s golden era for not having exploited the opportunity more so, then having to watch its greatest rival McLaren latterly enjoy the F1, merchandising and SLR niche-car production fruits with its race-partner Mercedes, fruits that gave a new state-of-the-art business base, and today the ability to develop the carbon-fibre based McLaren MP4-12C supercar, thus adding to its own production car legacy after the iconic F1 model.

This example of such F1 and commercial success of its rivals is no doubt both a bug-bear and an inspiration for Williams GP Holdings. This time round calls for not only adroit engineering InsPiRation in which the 'IPR'* content is fully exploited (as we see with its own 'hybrid' self-advertising), but also critically either a need for greater business acumen than seen in the mid 90s or an improvement in execution abilities of the plan at large.

As the board wholly appreciates, steering an F1 business is as hard as steering an F1 car, and reaches far beyond the correlate of Qualifying and Quarterly results. Ultimately, both undoubtedly benefit from the essential control of that all important competitive 'red mist'.

Post Script*
IPR & technology trickle-down appeared to be a central theme in the private equity firm Genii's previous wish to purchase SAAB, so that it may create commercial and technology couplings with its Renault F1 stakehold.