Going off track: Is there a future for Formula 1 in Southeast Asia?

Singapore’s decision makers are currently considering whether to renew the contract for the nation’s Grand Prix. Malaysia has already decided to end 19 years of racing.

Editorial

Formula 1 (F1) racing in the Southeast Asian region could end as Singapore decides whether to extend its five-year Grand Prix contract.

The decision is not straightforward. The event brings glitz, glamour and significant amounts of tourist revenue but the Singaporean government covers 60% of the event’s costs for the privilege. Ticket sales for the event have fallen by 15% since 2008. The 600 million people that once tuned in has fallen by a third.

Malaysia has already decided to stop hosting the event

Neighboring Malaysia has already resolved to stop racing after 19 years of hosting the competition. The final race in Malaysia will conclude in Sepang this October.

Malaysia’s Minister of Tourism and Culture Nazri Abdul Aziz said “The cost of hosting F1 has increased 10-fold compared to the first time it was held.” He added “we are spending RM300 million a year (US$97 million)” to host the event. This pattern of increased costs and diminished returns is behind the decision to cancel.

Racing can still be good business. The MotoGP Malaysia motorcycle event serves as a popular alternative to F1 races. Ticket prices are more affordable, and the local Malays have developed such a liking for two-wheeled racing that ticket sales were double that of the Malaysian Grand Prix last year.

Singapore has a tough choice to make

Attendance to Singapore’s Grand Prix has dropped markedly in a decade but the circuit’s management reported the high-dollar hospitality suites and Paddock Club are still selling well. Around 80.7 million households tune in around the world.

Jean Ng, director of sports at the Singapore Tourism Board (STB) noted the competition’s significance for the city-state’s small-and medium-sized enterprises (SMEs). These vendors and traders had “been actively involved in race preparations and operations, such as circuit set-up [and] ticketing and security services.” Over 80% of the SGP is sub-contracted every year to these small companies, he said.

Singapore’s industries take considerable benefits from the race, but at a price

Annual revenues from tourism offset the US$150 million price tag for organising the event, added Ng. The return is estimated at US$1 billion in net economic output for the city-state over a ten-year period. An additional US$1 billion came from an expected increase in tourism and investment.

“Formula One is still the peak period for the hospitality sector in Singapore,” Derek Tan, analyst at DBS Vickers said. “But the benefits are mixed. Other hotels which aren’t at the trackside lose travellers, who stay away at that time. And generally, travel budgets, corporate budgets, are down.”

Singapore’s decision-makers will have to also consider the escalation clause in any new deal which could mean a 10% fee increase every year. Other, cheaper, options are already available for Singapore’s sports fans, such as tennis and rugby matches.

Formula 1 racing needs to adapt to survive as a prestige event

“In terms of demographics, F1 has struggled to attract a younger crowd,” said James Walton, the Sports Business Group Leader at Deloitte Singapore & South-east Asia. “Southeast Asia has a very young population and a burgeoning middle class, exactly the kind of people that they want to attract and that have propelled other brands in the region, like One Championship in mixed martial arts,” he added.

F1 can fix this gap with better “track-side entertainment,” advised those with knowledge of the industry. Liberty Media, the American telecommunications firm that purchased F1 for nearly US$6 billion last year also owns 34% of entertainment firm, Live Nation Entertainment. The company could use its superstar connections to attract big names to events, suggested local F1 concert fan Patricia Poh. This, combined with the fact that Singapore holds one of only two night-time F1 races in the world could boost sales with layers of glamour.

Negotiations are entering the final lap and Southeast Asia could miss out

The other proposal on the table is to have teams invest in F1 themselves. “The sport has been crying out for a very long time for something like this to happen,” corporate lawyer and F1 specialist, Anthony Indaimo said.

“In 2014, F1 revenues were US$2.31 billion approximately and 50% is taken by the owners,” Indaimo added. “There are only a couple of variables you need to discuss and negotiate so that everybody gets more. Prize money to the teams should be 55% as opposed to 50%. A 5% differential of US$2.31 billion is a lot. Then you also look at the revenue pie increasing and there is more for everybody,” he explained.

For now, Formula 1 needs Singapore more than Singapore needs Formula 1. There are 21 races planned for 2018 and half of those will be in Europe. The other half take place in Asia and North America. There is no direct replacement for a race in the one of the world’s fastest growing economic powers.