Ever since the Indy Racing League’s much anticipated announcement sketching out the strategy for the 2012 IndyCar chassis last Wednesday, the IndyCar community has been split. …again. …still. …whatever. There have been many that claim that the recipe of having a spec rolling chassis from Dallara and open development of the aerodynamic elements of the body work by teams and third-party manufacturers would lead to great innovation and involvement. Then there are those that think this is the worst type of policy that could have been proposed giving Dallara a tacit monopoly on the chassis construction once again. I’ll have a section at the end of this article linking to various sites arguing pro and con, and you can see the various opinions for yourself. Keep in mind that the articles that I include, whether they agree with me or disagree, I chose for their thoughtfulness, and well written, well reasoned arguments.
What I want to show you here are some numbers regarding the cost of the business of manufacturing aerodynamic body kits for the new 2012 chassis. Let me first issue the caveat that some of the estimates are rough, and I’ve tried to error on the conservative (profit-enabling) side of the equation. Also, I make the assumption that a manufacturer is entering the game in order to be profitable and that they don’t have some external marketing motivation behind their work that would make running the aero kit operation at a loss worthwhile.
The first and biggest cost for many entering the game isn’t the cost of buying a shop floor, autoclaves, and all the other necessary manufacturing infrastructure. We will assume that the company already has such equipment, is already well staffed, and ready to go. The initial cost of the venture will be the preliminary research and development of the shape of the kit. Computational physicists and engineers don’t work for cheap, and you won’t be able to pick up the tools of the trade, high-end supercomputers for CFD modeling and wind tunnels, down at the local BestBuy. Developing efficient and effective aerodynamics is a long, complex and most of all expensive process. Gordon Kirby recently posted an article in his The Way It Is column where he interviewed several key people from the other four companies that submitted proposals to the IRL. Take a look at Dan Partel’s comments.
“Do you have any idea what the costs are in doing an aero kit?” he [Partel] mused. “First of all, it takes a quarter of a million dollars to build a wind tunnel model. Then the Windshear rolling road tunnel in North Carolina costs $32,000 a day and I think it’s $20,000 a day for the Reynard tunnel in Indianapolis. So it’s going to add up very quickly to many millions of dollars.” Dan Partel, CEO Delta Wing Racing — Creating a new paradigm or tilting at windmills?, Gordon Kirby
Steve Charsley, USA Manager at Lola Cars International Ltd, also chimed in on the point of the cost of developing a body kit from the ground up, and he should know a thing or three about this business!
“If you’re going to get into it you’ve got to do it full-bore. If you do it half-baked you’re going to have an aero kit that’s inferior. So we’ve got to evaluate what the value is in us putting $5 million into an aero program to develop a kit. I’d like to think were going to do it with somebody in some type of partnership.” Steve Charsley, USA Manager at Lola Cars International Ltd — Creating a new paradigm or tilting at windmills?, Gordon Kirby
Thinking further on what kind of return there would be on the sales of these kits, keep in mind that the league has placed a price cap of $70,000 on the kits. If you could make them for a $1 a piece, then turning a profit would be significantly easier, but keep in mind that Dallara is selling their introductory 2012 aero kits for $36k. We’ll make the conservative assumption that the $36k number is selling at cost rather than at a loss. The number of kits sold will be the key number in determining whether a company will realize a profit or not. It would be ludicrous to assume that a single manufacture could shut out all others, including Dallara, so lets go with the rather optimistic number of selling to about a third of the grid, eight entries. For each entry on a well funded team, there is typically a primary and backup chassis and spare parts for both. That makes for four body kits per entry. Toss in two more body kits per entry to allow for crash damage and we’re up to 48 kits, total. That’s a lot. Even for KV Racing, that’s a lot, but we are trying to error on the side of profitability. Lastly, there will be the cost of continued development. If one is going to continue to sell kits that are competitive, this will be a vital component to the business model. Being safe, lets estimate update costs at 10% of the initial development costs at $500k per year.
Crunching the Numbers
We have our initial set of assumptions. Now lets run the numbers! The spreadsheet below shows the total expenditure and revenue during each year of the beginning in the development year of 2011 and extending through to eight years past the introduction of this new chassis, the same length of time the current chassis will have ran.
With these estimates, you’re not profitable until the sixth year of operation. Keep in mind that the contract with Dallara expires in 2015. In the third year of operation, there is still a net loss of a little over $2M. Here, I assumed flat sales. Of course, this will not be the case. The number of clients will fluctuate. Initially, the number of teams selecting a third-party kit will be low, given the huge advantage of Dallara’s at-cost pricing in 2012. If a company’s kit proves to be superior, then and only then will they attract a larger client base. This makes the first three years even more tenuous. Assuming success, beginning with a single two-car team, and by year three expanding to supplying half the grid, a company can move the switch over from being in the red to being in the black a year earlier. It still doesn’t help if the rules change in 2015 when the current Dallara contract expires.
Assessing the Results
Given the numbers above, I really don’t see how a viable business model can be built around the sale of aero kits for the 2012 Dallara rolling chassis. There is only one way this works, sponsorship. If there’s an additional marketing component to the business model, then the losses that WILL happen can be justified as a marketing cost. This is perhaps where Barnhart and others were going when the names of Boeing and Lockheed were repeated over and over during last Wednesday’s announcement. There are actually a few companies that I could see gaining value from this. As Shaun pointed out in our 47th podcast, aka The Chassis Episode, Lotus could very well enter a body kit as part of marketing strategy through KV Racing Technologies. Its remotely possible that a mid-size manufacturer such as Stohr might find value in using IndyCar racing as a platform for generating sales of their WF1 D Sports Racer or F1000 open-wheel chassis. I will admit that the latter is a bit of a stretch. In the end, the numbers just don’t add up for any group to enter the aero kit fray without having some other product to sell. Making the body kits themselves can be considered a loss-leader product at best. Where does that leave us? We’ll see lots of Dallara kits, a Penske kit, a Ganassi Kit, and a Lotus kit. …maybe.
- 20 More Years: The Dallara Century? The 2012 Indycar Announcement… — Dylan, Triple League Racing
- Initial reactions to the 2012 chassis strategy announcement — Stephanie Wallcraft, Planet-IRL.com
- And the Winner is … Cost Savings and Speedway, Indiana — Bill Zahren, PressDog.com
- Digesting Dallara’s victory — Christopher Estrada, IndyRacingRevolution.com
- The Paddock Pulse: 2012 Car-Pocalypse Edition — Tony Johns, Pop Off Valve
- The 2012 IndyCar: A Bevy Of Mixed Emotions — George Phillips, Oil Pressure