SEMA eNews Vol. 13, No. 12, March 25, 2010

How Education, Oil, and Corporate Taxes Impact Future American Business

  offshore oil platform
  Although the U.S. has oil reserves offshore and inland, Dr. Timothy Nash says developing alternative energy sources will extend the usefulness of petroleum beyond gasoline and foster economic stability.

Entrepreneurs, such as SEMA members, have historically helped the United States become the greatest economy in the world, according to Dr. Timothy Nash, associate professor of economics and business at Northwood University.

Nash, also an associate professor of economics and public policy at the DeVos graduate school, hosted a seminar on the global U.S. economy at the 2009 SEMA Show discussing the impact of education, rising oil prices and corporate taxation policies.

Joseph Schumpeter, author of Capitalism, Socialism and Democracy, argued in the '40s that capitalism had fed and clothed more people and raised the standard of living for more people than all of the combined economic systems throughout history.

But he warned capitalism would sow the seeds of destruction for those who benefited most from it. Jealousy, envy and a lack of understanding about business would lead to the decline of a capitalist system. This prediction is not imminent, Nash said, but there are things Americans need to do to ensure the survival of the country and its economic model.

The United States is becoming a more educated economy and the cornerstone of a successful economy is intellectual capital or the ability to conceive new products and ideas and bring them to fruition.

“Today, only 24% of the American population has a bachelors degree or higher," Nash noted. "There is a strong correlation between education and per capita gross domestic product (GDP). China is becoming a much more educated and productive population."

Nash suggests entrepreneurs re-evaluate their businesses and ask what they can do to reinvent themselves and how they can become a more technologically driven, consumer-oriented company. The U.S. economy is three times the size of China and more than four times the size of Japan, but the world is changing. The rest of the world is becoming freer and more innovative, and trying to duplicate the American dream in their own countries.


Oil Dependency

The United States is the largest consumer of oil in the world, Nash added. When oil prices are up, the auto industry and aftermarket suffer. Oil went from a record high of $147.28 per barrel on July 12, 2008 to just below $35 in December 2008.

“The trigger to every price increase is conflict,” said Nash. “As we move from the surge under President Bush to a strong effort by President Obama to bring peace to Iraq and Afghanistan, we’re going to see oil settle in a non-conflict-based price of $40–$60 per barrel, taking into consideration the increased oil demand from the emerging economies (Brazil, India, Russia and China).”

Americans are highly dependent on petroleum and natural gas and have made it difficult to increase our dependency on clean coal where the technology is available because of our country’s environmental positions, according to Nash. The technology for renewable energy is not there yet but it’s not going to make up for oil, natural gas or coal in the short-term. And even though the United States is the largest producer of nuclear energy in the world, it’s only 8.4% of our GDP, whereas in France, nuclear power is 45% of its GDP. Countries that have oil reserves and may want to harm us cannot threaten France the way they threaten the U.S. because a large portion of their energy is from nuclear power, according to Dr. Nash.

“In addition, most Americans don’t realize that oil is used in synthetic fibers, which is about 25% of our clothing," Nash said. "It is a derivative in about 60% of our pharmaceuticals, so we need to look more rationally at alternate energy policies the way many of our friends and competitors around the world do. We say Europeans are more environmental than us, yet the English and Norwegians produce oil off floating oil derricks in some of the roughest waters in the world in the North Sea, yet we have a problem doing so off the coast of California and Virginia. There’s more shale oil in Montana, Wyoming and Colorado than there is in Saudi Arabia and Kuwait combined, but we make it difficult to recover it. The demand for oil is more than just the auto industry. The more we have alternate supplies of energy in other areas, the more we can use oil for other areas beyond gasoline.”

China rush hour  
China is poised to be the largest single market in the global automotive economy by 2020, says Nash.  

On the Rebound?
The world economy is just over $70 trillion and in 2009, for the first time in recorded history, the global economy was actually negative, despite strong growth in China, according to Nash. The U.S. economy is recovering from what he calls “the tale of two Octobers.” In October 2007, the Dow Jones industrial average was just over 14,000 and by October 2008, it had fallen to below 8,000 and would eventually fall to 6,500. Now it is beginning to rebound, and it is above 10,000.

Dr. Nash predicts difficult times ahead relating to government spending. The 2009 budget will show the federal government will have just less than 60% of the federal spending that will be mandatory, which means the law must be changed to cut spending. Today’s unemployment is at about 9.7% nationally. During the recession of the early '80s, it was at 10.9%. He conceded that Americans have lost a lot of jobs, but as a percentage of the employment base, the losses have not been as great as they were in the '80s.

Though it appears the U.S. economy is on the rebound, Nash is concerned about whether this is a real economy simply because trillions of dollars have been injected through government programs and the Federal Reserve.

“We’re talking about increasing corporate income taxes when countries such as Germany have cut their corporate income tax from 52% to 27% this year,” Nash added. “In the last 10 years, while we've kept our income tax at almost 40%, many countries around the world have cut their taxes. If American businesses are to compete domestically and internationally, our tax on business is too high. We keep talking about rich people not paying enough taxes. According to 2007 IRS tax data, the top 1% of income earners paid more than 40% of federal personal income taxes.

"Another worry is our national debt, which is close to becoming 100% of our GDP. If we don’t do something about this, it makes our credit rating, and the ability to borrow money, more difficult. If our economy does recover and interest rates begin to go up, the cost to the government to borrow money to pay off the national debt will also go up.”


Effects of the Bailout

There were some good things coming out of the bailout for the automotive industry, Nash said. “General Motors before bankruptcy had $125 billion in debt, and after bankruptcy it had $55 billion in debt. It needed a $16 million new-car sales market in the U.S. to break even. Today after bankruptcy it’s $10 million, so it’s expected GM should be profitable this year and the foreseeable future. We’re not sure how Chrysler is going to do however, and Ford, which took no government dollars, may be at a competitive disadvantage going into the future.”

According to JD Power & Associates, the U.S. economy in 2010 should be up 13%. U.S. automobile sales bottomed out in 2009 at 10.4 million light trucks and SUVs, and this year it should be up to 11.7 million. The emerging economies have made up a large portion of the increase in global demand. Over the next three to five years, China’s capacity, production and per capita income are expected to grow. Last year, China surpassed the United States as the largest producer and consumer of automobiles, largely due to the dramatic decline in the U.S. market.

In 2000, the United States had a record high of 17.4 million new vehicles, which bottomed out in 2010 at 10.4 million. Nash believes the United States should regain the lead in production by 2012, but by 2020, the size and growth of the Chinese market will make it the largest single market in the global automotive economy.

  Dr. Timothy Nash
  Dr. Nash believes the innovative nature of the automotive aftermarket creates opportunities in the wake of new-car dealer losses and new-car dealer service premiums.

“Challenges to the automotive market on a global basis include the weakened dollar, but as it improves, we’ll see some interesting factors as it relates to imports and exports,” Nash explained. “Hopefully, the emerging economies will be more open for trade and the purchase of U.S. products both in new cars and the aftermarket. U.S. consumer spending will increase in the second half of this year.”

Nash predicts that in the future, oil prices will not be dramatically affected by the increased demand in the emerging economies. Instead, inflation and conflict will drive oil prices up. The potential for inflation in 2011 and beyond, because of all the money the Federal Reserve has injected into the economy to try to prevent a downturn, could also lead to higher interest rates and oil prices.

“There are tremendous opportunities in the automotive aftermarket because it is the most inventive side of the United States and global economy,” Nash said. “The loss of new-car dealerships will give the aftermarket an opportunity to step up with used-car centers and service centers. In many parts of the U.S., it’s about 20% more expensive to have vehicles serviced at new-car dealerships versus the aftermarket. A number of dealers are looking at opportunities from SEMA because it’s difficult for their companies to provide the necessary licensing agreements for the dealer to put aftermarket products on vehicles coming out of the new-car showroom.”

Nash is guardedly optimistic about the U.S. economy going forward. By 2013, consumers will buy about 15 million new vehicles. He says the rebound won’t be as quick as the downturn, and the United States does have challenges regarding taxes and the national debt. But when all is said and done, the U.S. economy will still be the envy of the world.

Our national government and even individual companies, however, must become more effective and efficient to compete in a growing global economy. As it relates to the auto industry, Nash sees the greatest opportunity in the aftermarket and specialty-equipment industry.

Download the entire webinar session: "State of the Global & U.S. Economy: An Automotive Perspective."

Check out the SEMA webinar schedule to view upcoming SEMA webinar sessions and topics. To learn more about SEMA webinars, visit www.sema.org/webinars.  

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