US companies eager to embrace Cuba face hurdles

Associated Press

December 22, 2014

In this Aug. 4, 2011 file photo, signs are displayed at the Cargill turkey processing plant in Springdale, Ark. American businesses have begun imagining ways to capitalize on last week’s announcement that the United States will restore diplomatic ties with Cuba and ease curbs on trade with one of the last surviving communist regimes. Cargill aims to sell more corn and soybeans.

WASHINGTON — Cargill aims to sell more corn and soybeans. MasterCard covets another site for Americans to swipe credit cards. Marriott sees beachfront property that needs hotels.

And outside Orlando, Florida, Danny Howell just knows there would be demand for his classic Chevrolet parts.

American businesses have begun imagining ways to capitalize on last week's announcement that the United States will restore diplomatic ties with Cuba and ease curbs on trade with one of the last surviving Communist regimes.

Their more ambitious plans would require that Congress lift the U.S. embargo on most exports to Cuba. Given sharp resistance from some in Congress, that might not happen soon. But many analysts think Congress will repeal the embargo eventually.

"It's great news — it's a totally untapped market," said Seth Kaplowitz, a lawyer and lecturer in finance at San Diego State University.

All that said, Cuba experts have a message for any business that might be envisioning easy riches:

Be patient.

        

In this Dec. 18, 2014 file photo, tourists take a ride in a classic American convertible car with the Cuban national flag painted on the trunk, in Havana, Cuba. American businesses have begun imagining ways to capitalize on last week’s announcement that the United States will restore diplomatic ties with Cuba and ease curbs on trade with one of the last surviving communist regimes. The opening to Cuba could benefit, among others, U.S. farmers, auto and tractor makers, airline and hotel companies and telecom equipment makers.

After years of rigid market planning in Cuba and the half-century-old U.S. embargo, restoring economic ties to something close to normal is likely to be complex and time-consuming. The United States must change laws and regulations, and Cuba must build an economy more hospitable to foreign investment.

"The Cuban government has a long way to go and a lot more to do," said Jodi Bond, vice president of the Americas at the U.S. Chamber of Commerce. "I don't think any businesses are under the illusion that this is going to be an easy transition or the floodgates will open."

Still, the prospects are tantalizing.

Economists at the Peterson Institute for International Economics estimate that the export of U.S. goods to Cuba could eventually reach $4.3 billion annually, up from just $360 million in 2013. And Cuban exports of goods to the United States could reach $5.8 billion, from zero now.

A full lifting of the U.S. trade embargo could benefit, among others, U.S. farmers, auto and tractor makers, airline and hotel companies and telecom equipment makers. The United States now sells Cuba about $350 million a year in farm products, including rice corn, soybeans and frozen chicken parts, according to the American Farm Bureau. A 2000 law relaxed restrictions on food and medical exports.

Those exports could surge once the United States eases restrictions on financial transactions, which could happen soon. Cuban buyers of U.S. agricultural goods are required to pay up front, though international trade is usually done on credit.

"We have been pretty much hamstrung by the financial constraints," said Devry Boughner Vorwerk, a vice president at Cargill, the agriculture giant. She called the U.S. move "a great first step."

U.S.-based travel companies have been eager to embrace the Caribbean island, just an hour's flight from Miami. Delta Air Lines, JetBlue Airways, Hilton Worldwide, Marriott International and the Carnival Corp. all expressed interest last week, though most of their plans would have to await a repeal of the embargo.

CEO Arne Sorenson said in a statement that Marriott looks "forward to opening hotels in Cuba, as companies from other countries have done already."

Apple Leisure Group, which books 2 million vacation packages to the Caribbean a year and is about to open its 38th hotel in the region, is developing a plan for Cuba.

"We could very rapidly put charters onto the island" or buy a hotel and convert it into one of its Sunscape brand resorts, CEO Alex Zozaya said. He envisions a market for the company's higher-end hotels, like Secrets and Dreams.

Eventually, that is.

"Cuba does not have the right infrastructure yet to satisfy the mid-to-high-end market," Zozaya said.

Cuba, which can appear stuck in a 1950s time warp, desperately needs investment. The island lags far behind its neighbors Haiti and the Dominican Republic in the proportion of its economic output that goes into public infrastructure like roads, factories and housing. In fact, Cuba has one of the lowest investment rates in the world, according to the World Bank.

If the embargo is lifted, U.S. refiners could find a new market in Cuba for gasoline and diesel or refining technology. Cuba has been struggling to find a partner to finance an upgrade and expansion of its largest refinery. And suppliers of electric power generation and transmission equipment, like General Electric, could help improve and expand electricity services on the island.

American technology firms will likely be interested in putting Cubans to work assembling electronic components, taking advantage of low-wage labor far closer to the United States than India and China are.

But businesses eager to break into Cuba will face numerous obstacles:

— THE U.S. GOVERNMENT

President Barack Obama's announcement only relaxed restrictions on traveling and doing business in Cuba. And even Obama's limited action will require government regulators to craft new rules. The United States, for example, will now let companies like John Deere sell tractors to small private Cuban farmers but not to government-run farms. Yet it's not clear how the eligible farms will be defined.

"All these regulations have to be written; it's not simple," says Kirby Jones, a consultant on U.S.-Cuba trade issues. "That could take weeks or months."

— CUBA'S GOVERNMENT

Havana has sent mixed messages about its appetite for foreign involvement in its economy. In March, Cuba passed a law meant to attract foreign investment. But in September, it jailed a Canadian executive on corruption charges — a move that sent a chill through the expatriate community.

"The climate for foreign investment is not that great," said Archibald Ritter, an economist at Carleton University in Ottawa who specializes in Cuba. Ritter said foreign companies that want to enter the Cuban market might be required to establish joint ventures with state-owned firms.

China required such arrangements as it opened its economy in the 1980s and 1990s, and many U.S. and other foreign companies found the joint ventures useless and costly.

—THE CUBAN ECONOMY

Cuba is hardly rich. Its economy ranks No. 69 in the world, about the size of Hawaii's. Income per person is just $6,200, according to the United Nations. That means that Detroit automakers, for example, are unlikely to enjoy big sales in Cuba.

"Nobody can buy a brand-new car," said Karl Brauer, senior analyst for Kelley Blue Book.

U.S. car sales have been banned in Cuba since 1959. Cubans have been have been forced to patch together Fords, Chevrolets and Chryslers that date back to before Fidel Castro's revolution.

Since the Communist economic system isn't likely to change soon, many of those cars will have to stay on the road for years. That could mean an opportunity for U.S. companies that make or distribute vintage car parts, Brauer said.

Enter Danny Howell, who sells parts for classic Chevrolets near Orlando. His business, Southeast Chevy Parts Inc., specializes in original parts dating to 1955.

Howell, who scours car ads and storage facilities to buy cars for parts, already sells indirectly to Cuba. U.S. citizens who have Cuban relatives often buy parts and send them to Cuba to keep the old cars running. Demand should grow as trade restrictions are eased, Howell said.

"I would be delighted if the door were opened," he says.