Having enjoyed a clean start from pole in Sepang, Hamilton looked poised to re-claim the points lead with his team-mate Nico Rosberg out of position after an incident at the first corner.
However, the triple world champion’s power unit went up in flames with 16 laps to go, with a suspicious Hamilton later hinting that “something does not feel right”.
“I’m really upset about myself and my organisation because we shouldn’t let him down with an engine failure,” Lauda, who serves as Mercedes non-executive chairman, told Sky Sports F1.
“Engine failures can happen but we have to analyse more carefully what went wrong. It was a fairly new engine, so it was not something old we put in his car, so we did everything possible to make him finish all the races.
“What went wrong? I do not know, we will find out and correct it. I feel personally very sorry about him and these things can happen.”
It’s not the first time this year that suggestions about Mercedes’ bias towards Rosberg have surfaced in the light of Hamilton’s issues.
Motorsport boss Toto Wolff even confronted the rumours early in the season by branding conspiracy theorists as “lunatics”. Lauda remains confident he can reassure Hamilton that his team is supporting him.
“I can convince him and say certainly we do nothing against him. We are people working for him, we are proud of him and these things happen.
“From our point of view we do everything possible that he finishes the race and he has finished so many races, he won already two championships so on this side we are well balanced.
“Unfortunate that it happened to him, I will apologise and then we have to keep on going.”
Hamilton now trails Rosberg by 23 points, with the German recovering from his opening lap contact to third at the flag.
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