While others falter, Mercedes Accelerates Racing Effort

Daimler AG's decision to double down on Formula 1 racing—a move it reinforced on Wednesday when its Mercedes unit signed on star driver Michael Schumacher—has left many in the auto industry scratching their heads.

Formula 1's inherent excesses, from its premium price tag to its huge carbon footprint, would appear to violate the prevailing Zeitgeist of belt-tightening and conservation. Yet unlike archrivals Honda, BMW AG and Toyota Motor Corp., both of which recently abandoned the racing circuit amid concerns about its image, Daimler is convinced the sport's popularity in key emerging markets and Mr. Schumacher's star power will make the decision pay off.

"It would be a missed opportunity" not to take advantage of the "world stage" Formula 1 has to offer, Daimler Chief Executive Dieter Zetsche said in a letter to employees last month, defending the company's renewed focus on Formula 1 and investment in a new stand-alone team.

Formula 1, considered by aficionados to be the world's premiere auto-racing circuit because of its speed and challenging courses, remains one of the largest and most glamorous draws in international sporting events. It's also a big business. It generates some $3.9 billion in annual revenue from sponsorship deals, broadcasting rights, corporate hospitality spending and other fees, according to Formula Money, an annual review of the sport's finances.

Though it has a marginal following in the U.S., it attracts huge TV audiences in Europe, the Middle East and Asia. Despite the extravagant costs, car makers have until recently been among the biggest backers because of Formula 1's sporty, dynamic image.

Mr. Schumacher was a major factor in the sport's popularity until his retirement in 2006. In addition to his often dramatic wins on the racetrack for Ferrari, the German driver and his brother Ralf, a driver for BMW, gave the sport an intriguing narrative of fraternal rivalry.

More recently, however, Formula 1 has suffered. A dearth of star drivers has driven television viewership down, and the sport has failed to overcome its gas-guzzling reputation. The circuit has been plagued by other problems as well, from a race-fixing scandal to infighting between the sport's owners and teams.

Those aren't the only reasons Daimler's deeper engagement in the sport was viewed with surprise. The move comes as Mercedes has been struggling to stanch falling car sales and push through deep cost cuts.

"In these economically difficult times, the company should invest in better marketing of its real cars," said Erich Klemm, head of Daimler's works council, after the company announced last month that it would buy a large stake in the successful Brawn GP (grand prix) team with Abu Dhabi's Aabar Investments and rebrand it Mercedes.

Daimler has defended the investment, saying it can take advantage of Formula 1's marketing muscle at an affordable price. To rein in the sport's sky-rocketing costs, Formula 1 recently installed spending caps, restricting test driving and the number of engines and gearboxes teams can build. Teams that employed as many as 1,000 staff in more freewheeling days will be allowed roughly a third of that by the end of next year. As a result, Daimler anticipates its participation in Formula 1 could soon cost the company less than €60 million ($85.5 million) a year, or a quarter of its Formula 1 budget in earlier days. More at Wall Street Journal

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