Cuba's not as open for business as everyone thinks
Five months ago, Jonathan Blue made the decision to add a special team to his private investment firm, Blue Equity, in Louisville, Kentucky. Three people would research the Cuban market, looking for opportunities as relations ease between the two countries.
"We think that it's inevitable that one day Cuba will open up for us," Blue said. "For us not to be prepared for a market of 12 million strong less than 90 miles away would be a shame."
Blue isn't the only American with an eye on Cuba -not by a long shot-but many of those businesses won't find the going as easy as they may like.
President Barack Obama's decision last December to start a rapprochement with Cuba sparked broad hopes for more open economic relations. Many American companies are taking a hard look at the largest island in the Caribbean, trying to gauge the business opportunities that could await them. Last week's move by the president to remove Cuba from a list of state sponsors of terrorism is more confirmation that the island could be open for business.
"We want to be proactive ahead of time," Blue said. "We're trying to gauge what the needs could be."
American multinationals have been looking at the Cuban market for the last 20 years, said John Kavulich, the president of the U.S.-Cuba Trade and Economic Council, a non-profit organization that provides information about Cuba to businesses. Kavulich said that by June of this year, the "relationship between the two countries should be more normal than it has been for the last 50-plus years."
However, he argued that normalizing relations won't mean easy business for Americans.
"People forget it's not only about what the U.S. does, it's also about what Cuba does," he said. "Cuba can only buy what it can afford."
The Cuban market is still a narrow one for U.S. companies trying to do business, for reasons pertaining both to the law and its consumers. And companies shouldn't assume that Cuban consumers will rush to buy their products, just because they are American brands.
"This is not Dubai just 90 miles south of the U.S., saying, 'Please sell us your products,' " Kavulich said.
There likely will be opportunities for mining, agribusiness and tourism in the event that sanctions are further lifted, said Kirby Jones, a consultant on business in Cuba with Alamar Associates. But, he said, Americans cannot rely only on brand power; they need to figure out how the Cuban market works, what it needs, and who the competitors are.
"Cubans are patient. They've done without the U.S. for 50 years, and they have Brazil and China now," he said. "For example, cornflakes are sold there, but it's not Kellogg (NYSE:K), it's someone else who is cheaper."
Jones advises industries to lobby the Obama administration for what is called a general license, which would allow certain goods to be sold to Cuba even without a complete end to the embargo by Congress. Such a license is issued by the Commerce or Treasury departments and covers any goods or services not allowed for export to a sanctioned country.
"If I were an association of manufacturers, for example, I wouldn't press Congress, because that would be a waste of time," he said. "I would press the administration for a general license saying that my products are important to the Cuban people."
American companies gearing up to do business in Cuba also will have to familiarize themselves with the applicable American laws, said Jake Colvin, vice president of global trade issues at the National Foreign Trade Council.
"First they need to understand what U.S. law permits and not get wrong footed by that," he said. After more than 50 years of regulations, there is a lot of fine print when it comes to Cuban trade.
The Cuban market has been considered forbidden fruit for American corporations since 1962 when President John F. Kennedy officially broke ties with the Communist state. However, in 2000, Congress passed the Trade Sanctions Reform and Export Enhancement Act (TSREEA) making it possible for American companies to export food and agricultural products to Cuba on a cash basis. The Cuban Democracy Act of 1992 made it possible for the sale of health-care products. Now Obama has begun to liberalize them more.
Colvin's other piece of advice is to build relationships, because Cuba is a long-term game. "The Cuban economy is highly relationship-based, so you can't expect to hop on a plane and sign a deal the next day," he said.
Colvin said American companies are still in an enthusiastic phase and haven't yet transitioned to a serious, exploration phase. He anticipates that it could be another year or two before U.S. firms really understand the Cuban market.
"The reality is that the business that American companies want to do will be tempered, at best, by the Cuban government's willingness to do global trade, plus the reality on the ground there," he said.
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