Doing Business in Cuba

Doing Business in Cuba

This post is part of a retrospective series exploring business, tourism and politics in Cuba today.

Plastic Molding Technology Inc.’s CEO Charles A. Sholtis traveled to Havana, Cuba, on March 20 to investigate the island’s market potential for plastics manufacturing as U.S. restrictions ease.

Havana

View of the city of Havana, Cuba, on March 22, 2016.

A road less traveled by most Americans for over 50 years, Sholtis ventured to Cuba as part of a plastics industry delegation lead by the Society of the Plastics Industry (SPI). He served as representative for plastics processors on a fact-finding mission, returning with first-hand knowledge on the current business climate.

Cuba is a complex island, stubbornly stuck in the past while moving swiftly into the future. Those who travel across the Straits of Florida to explore the potential for opening up shop often come back more confused than optimistic.

Business remains mostly as usual in this regimented society—the market is beginning to crack open and U.S. relations are starting to thaw, but the process of getting American investment to flow into Cuba remains slow and restricted.

So what does this mean for the plastics industry?

Obstacles on the Island

Though there is potential for growth as the embargo loosens, Sholtis said he is only cautiously optimistic about any American ventures taking root in the Cuban plastics industry.

“We are excited about the prospect of a new market opening up close to the U.S., but we have softer expectations at this point that rapid progress can be made,” Sholtis said. “While the groundwork has been placed, there is considerably more work to do before we can make any significant investment.”

The need for American investment in Cuban industry is clear, Sholtis said. The delegation had a rare glimpse of Cuban life while touring two state-run manufacturing operations: a facility manufacturing polypropylene bags and textiles, and an injection molding operation supplying food packaging and plastic dinnerware to the island’s hospitality sector.

During America’s absence, other countries moved to fill the missing pieces of Cuba’s supply chain. “The plastics factory was running ancient Chinese machinery, and the influences of Europe remain throughout Havana,” Sholtis said. Several machines were off line and pillaged for spare parts, since replacements are not readily available on the island. The textile factory was more up-to-date, but imports polypropylene from China, a heavy cost burden versus importing the material from the U.S.

Cuban Capitol Bldg

The capital building in Havana, undergoing renovations.

The delegation also met with Adriana Barceló Permuy, the general director for industrial management at Cuba’s Ministry of Industry. The ministry stated Cuba expects an 83 percent increase in tourism of the next five years, broadening opportunities for manufacturing disposable goods as hotels open up 70 percent more rooms.

A report from the ministry states the U.S. embargo has been the main obstacle for Cuban industry development since 1960, and the country was “forced to choose distant markets” for financing, materials and technology. A removal of the embargo is necessary to open up American investment in the plastic disposables sector, according to the ministry.

While the exponential growth of tourism means enormous market potential for plastics on the island, no clear path forward was revealed during the fact-finding mission.

“U.S. industry should proceed with caution,” said Sholtis. “We don’t really know what we can and cannot do until the embargo situation is cleared.”

Cuba’s Vision for American Business 
The Hotel Ambos Mundos in Old Town Havana.

The Hotel Ambos Mundos in Old Town Havana.

While the government is cautiously updating the socialist economic model, many contracts with U.S. companies progress painstakingly slowly, and almost all come with caveats. The most recent example is the Carnival Cruise route confirmed last week—the ships will sail May 1, but Cuban Americans are not allowed to board the ships per Cuban government laws.

However, the seeds of privatization are planted with recent Cuban approval of independently run restaurants, room rentals, barber shops and taxi services. An estimated one-third of the workforce is composed of private citizens running their own businesses—a growing cuentapropista class of entrepreneurs.

Other examples of economic development are focused on the Mariel Special Economic Zone (ZEDM). Dutch consumer products company Unilever recently gained approval to open a plant there, after Cuban officials agreed to let Unilever take the controlling interesting in the joint venture. The company is investing $35 million USD in the plant, which will employ 300 and open by 2018.

Even with this progress, Sholtis emphasized Cuba remains a socialist regime with deeply entrenched politics and substantial imbalance between the government and its people. The state collects an estimated 50 to 80 percent of all business revenue produced in Cuba, according to Bloomberg Business. All roads lead to the Grupo de Administración Empresarial, or GAESA, the gatekeeper organization founded by Raul Castro and run by his son-in-law.

Cuba’s vision for the future is sustainable socialism, and it may be difficult for Americans to understand the “Cuban way”.

Moving Toward Normalized Relations 

Substantial competition may crop up regarding business ventures in Cuba, as the country has been doing business with Canada, China, Europe and Latin America since America withdrew. Large monetary investment will receive priority approval. The changing government model, combined with a relatively small and thinly stretched government bureaucracy, means long waiting periods for business approvals.

The island has a highly qualified workforce, however, an important consideration for small businesses looking to expand into Cuba. Building relationships with both the government and the Cuban people is crucial.

According to Bloomberg, “Pivoting the island from central planning and state monopolies to an open economy engaged with US wont be easy.” While opportunity exists to enter the newly opened Cuban market, it’s up to Congress to take the final steps to truly normalize business relations. After that, it remains unclear how an American business can both succeed and make a profit in Cuba.