Why Price Caps Are The Best Way of Cutting Costs in MotoGP and WSBK
With the announcement of the introduction of price caps for brakes and suspension in MotoGP from 2015, the Grand Prix Commission, MotoGP's rule-making body, appears to have finally found an effective way of controlling costs in the series. Instead of trying to control costs indirectly and seeing their efforts kicked into touch by the law of unintended consequences, the rule-makers have decided to attempt to go straight to the heart of the problem.
Will capping prices unleash a whole set of unintended consequences of its own? Will, as some fear, the move to cap prices lead to a drop in quality and therefore a reduction in R&D in the areas which are price-capped? And will the price cap act as a barrier to new entrants, or stimulate them? These are hard questions with no easy answers, yet there are reasons to believe that price caps are the most effective way of controlling costs, while the risks normally associated with a price cap, such as a reduction in quality, are lower in a racing paddock than they are in other environments.
Classical economic theory proposes that under normal conditions, high-value markets such as the one for brakes and suspension in MotoGP encourage both innovation and new entrants into the market. High prices offer relatively high margins of return, and should make it a highly competitive market. This, in turn, should also stimulate research and development, as companies look for technological advantages over their competitors which they can use to increase sales. The race track would appear to offer a perfect benchmark, pitting one brand of equipment against another, and the stopwatch and results sheet providing an objective comparison between products.
Unfortunately, however, racing paddocks are a long way from being perfect markets. There are many, many distortions which mean that any attempt to manage costs via traditional economic methods will fail. The usual law of supply and demand requires the existence of two parties making rational decisions on whether to do business together. If the prices of a seller are too high, then a buyer will go elsewhere, looking for a similar alternative available at a lower price.
The problem for motorcycle racing is that Homo Economicus is not to be found in the paddock. As strange as it may seem, motorcycle racing paddocks are some of the most conservative engineering environments imaginable. "If it wasn't used on a 1962 Matchless, it can't be any good," one frustrated engineer quipped to me once, describing the fear of revolutionary change which exists within the paddock. Teams choose to stick with technologies they know and understand, only accepting change once proven elsewhere, and only accepting change in small, evolutionary steps, rather than as a huge revolutionary leap.
This conservatism is not restricted to mechanics and engineers. It is very much shared by riders as well. Earlier this year, Tech 3 crew chief Guy Coulon explained the way that riders view equipment: "Nearly every time, riders prefer to use the same things as others," he said, "so that is why we have less and less [Moto2 chassis] manufacturers. And everybody wants the same brakes, and the same suspension, because if you have a different suspension and you are behind others, it is because of the suspension, even if your suspension is working very well."
The hubris which every rider requires to sustain the effort needed at the very top level of motorcycle racing leads them to believe that if only they were on exactly the same equipment as every other rider on the grid, they would be winning, or on the podium at least, at every race. The riders believe - rightly - that the rider is a huge part of the competitive equation. Riders therefore want to eliminate as many external factors as possible, to improve their chances of making a difference in the race. Having the same bike, the same tires, the same suspension, the same brake, all that leaves more down to their own talent, and therefore gives them a better chance of winning, they feel.
All these factors drive the market inside a motorcycle racing paddock towards a single solution, creating a de facto monopoly. Instead of buyers allowing sellers to compete among themselves on price and quality, the buyers - in this case, the teams - compete against each other to secure the services of the prime supplier. With virtually no competition, sellers are free to charge what they want, and to charge a premium for special customers - though to their credit, the margins being generated could only be described as generous, rather than unreasonable.
One mark of how distorted the market is can be seen on the swing arms, fairings and mudguards of the MotoGP bikes. Not all of the stickers promoting manufacturers of suspension, brake components, chains, etc are paid for. For some brands, having the sticker on the bike is part of the deal in being allowed to purchase the parts. In other words, the teams are paying twice: once for the components, and once in terms of sponsorship space.
Creating a more open market inside of motorcycle racing is not simple. The bars to entry are high, as even established names such as Showa have found. As tire and chassis design evolves, other components have to change to cope with the different challenges being thrown at them. The best tool to helping adapt to those new circumstances is data, and lots of it, but the only companies with any data are the existing suppliers. Showa struggled at many circuits, as they had only the Gresini team in both MotoGP and Moto2 to work with. At some tracks, the suspension worked well; at others, it did not. Ohlins, on the other hand, had a huge amount of data in almost every class to work with, as they had so many riders on so many different bikes.
Each year, Ohlins gathers yet more data, on both the existing and the previous generations of tires, engines and bikes, allowing them to create a benchmark against which to measure any modifications they might make, and giving them a competitive advantage from the start. Any team using Ohlins knows that the Swedish suspension firm can provide them with a workable baseline to start from, needing only fine tuning to perfect. Newcomers do not have the masses of historical data which Ohlins does, and so face a much more difficult task in finding a baseline setup. Without that baseline, teams face a lot more work at every circuit, to assemble the data they need before they can even start working on chasing the final few tenths of a second.
The entry of WP into Moto2, with Sandro Cortese in the Intact GP team, should make for an interesting test case. WP already have a lot of data from their Moto3 season with KTM, but moving up to Moto2 sees them start from almost nothing again. WP clearly have the technical ability, but will face serious challenges in 2013, with just Moto2 rookie Cortese using their suspension.
Capping prices will do nothing to solve the 'data gap' faced by suspension and braking newcomers into the MotoGP paddock, of course. The only way of solving that problem would be to make the data already amassed by the existing manufacturers available to newcomers as well, but this would meet with justifiably fierce resistance. Existing manufacturers such as Ohlins and Brembo have invested a lot of time and money in gathering and analyzing that data, and the lessons learned have also found their way into consumer products. Such data is clearly commercially sensitive, and it goes far beyond the remit of any race series organizer to demand that it should be made freely available.
And that data is one of the reasons why the greatest fear of opponents of a price cap is probably unjustified. Capping prices on components may reduce income for the component manufacturers generated by selling to teams, but that income is not the main reason the manufacturers of all sorts of components go racing. There are two main motivations for taking part in competition: marketing, and research and development. The reason that the suspension and brake component manufacturers request of their paying customers that they display their brand name on the bikes is because the exposure helps them build brand recognition and brand reputation. This makes their consumer products more desirable, and means that they can charge a premium on their products. The premium earned from thousands of consumer sales goes a long way to paying for participation in Grand Prix motorcycle racing.
But consumers will not pay solely for glamor (though arguably, they will: a massive proportion of the premium charged by luxury brands is purely down to the perceived glamor of the brand). They demand function alongside form, and the extreme environment which a motorcycle race unquestionably is provides an excellent arena for technological innovation, or at least evolution. While consumers are unlikely to use the full potential of Ohlins 48mm forks or Brembo monobloc radial calipers, the lessons learned from using those parts at the race track help improve the consumer parts. Stiffer brake calipers provide a more stable braking platform, something which is just as useful when slowing for traffic lights in the rain as it is when hauling up an RC213V for San Donato at Mugello. And while racing is not a necessary part of R&D, it is an extremely useful platform, and a challenging environment for training engineers to think on their feet and look for solutions in unexpected places.
Those two reasons, marketing and research and development, represent intrinsic value to component manufacturers. They provide a return on the investment the company makes, helping raise the profile of their brand, and helping improve and refine the products they sell to consumers. They are reason enough to justify participation in motorcycle racing, without requiring any direct financial return from the series. While existing manufacturers would clearly take another look at their racing budgets, they cannot afford to slow down the pace of development. If, for example, Ohlins were to decided to cut back on the development of their racing suspension, they would make it more attractive for competitors to enter. The gap which any newcomer faces would look a lot less insurmountable in those circumstances, posing a direct threat to the marketing benefits Ohlins gains from racing. Both Ohlins and Brembo have very good reasons to keep up the pace of development, regardless of the price they can charge.
An example of why price capping is unlikely to affect development can be seen in rider safety gear. The vast majority of riders in the MotoGP and World Superbike classes are sponsored by leather manufacturers, and pay nothing at all for their leathers (in fact, most riders are paid large sums of money to use a particular brand of leathers). The pace of development is high, with each brand making improvements in its equipment almost on a month-by-month basis. The past few years have seen the introduction of in-suit air bags as the most obvious development, but many smaller but equally crucial steps have also been made. Racing leathers fit better, dissipate heat better, are more comfortable, less likely to split open, and provide better protection every year. Brands such as Alpinestars, Dainese, REV'IT and Spidi make continuous improvements to their products, despite receiving no financial return from their riders. The return on their investment is in terms of marketing, and in technical improvements that help persuade customers to shell out their hard-earned cash for the manufacturers' products.
World championship motorcycle racing is an ideal platform for both marketing and for research and development. Imposing price caps on certain key components helps cut costs for the teams, but it also forces the manufacturers of those components to recognize the benefits they gain from competing. Price caps, kept at a level which is both affordable for the teams and helps cover a reasonable proportion of the costs for the manufacturers, are the best way forward for motorcycle racing.
It is much more efficient and effective to limit prices directly if you want to cut costs, than try to limit costs by imposing technical restraints. The first thing which teams and factories do with the money saved by imposing technical restraints is spend more money trying to work their way around the technical rules. The second thing they do is spend more money in other areas, which then require more rules to contain costs. Prices are a lot easier to control than technology.
Will price caps be completely effective at controlling costs? Probably not; the law of unintended consequences means that teams will continue to spend as much money as they can get their hands on, and the rich teams will continue to beat the poorer teams. But a price cap will do exactly what it says on the tin, to use a common phrase. Direct costs for specific components will be limited. That, in itself, is better than some of the other rules which have been brought in to try to achieve the same objective. And that, in the long term, is a good thing for the sport.