Doing Business in Cuba

Doing Business in Cuba Under the Burden of the U.S. Embargo

Vanessa Cooksey & Kira Van Niel • August 1, 2016

MNGT 9950: Issues in Business: Entrepreneurship in Cuba

“If Cuba had a national word…that word would be ‘complicated,’” proclaimed Cuban tour guide Cynthia Bordon Garcia, as she concluded a week [July 17-23^rd] with a group of Webster University graduate students. Exploring entrepreneurship in Cuba, the group visited more than 15 businesses and cultural institutions and heard from historians and tourism experts in their quest to understand the social and economic landscape in Cuba and possible entrepreneurial opportunities on the island.

A particularly historic time to visit the country that sits 90-miles south of Miami, Cuba and the United States are updating their political relationship status to “thawing” as July 20, 2016 marked the one-year anniversary of re-established diplomatic relations between the two countries. The beginnings of relationship building between the Obama and Castro administrations started as early as 2009 when the U.S. Treasury Department formally lifted nearly all U.S. restrictions on family travel to Cuba along with limits on how much money families can send to relatives on the island (DeYoung, 2009).

Greater progress was made on December 17, 2014 with the announcement of the beginning of a process of normalizing relations between Cuba and the U.S. aka the “Cuban Thaw” (Broder, 2014). Since then, Cuba has seen a marked increase in American tourists and business interest in the last year.  According to the International Monetary Fund, an estimated 10 million American tourists will visit Cuba per year. Last year, Cuba hosted 700,000 U.S. tourists (Elliot, 2015).

Clearly stunted by the U.S. trade embargo established in 1959, Cuba’s communist government and economy is developing and has depended primarily on trade relationships with the top export destinations of China ($311M), the Netherlands ($157M), Spain ($141M), Senegal ($92M) and the United Kingdom ($67.3M) with exports like raw sugar, refined petroleum, rolled tobacco, hard liquor and raw nickel (OEC, n.d.).

While a majority of Cubans work for the state, an increasing number of workers are moving to the private sector. Restaurants and social enterprises are growing segments in Cuba as they allow greater opportunities for private ownership and cooperative economics that support the local community. With a solid social infrastructure in housing, healthcare and education, Cubans enjoy a 99% literacy rate and average life expectancy of 79 years (World Bank Group, 2016). Fiercely loyal to their diverse heritage and culture of self-determination, Cuba has a robust arts industry that includes fine art, music and dance. 

Understanding Cuban culture and politics is critical when considering business opportunities in Cuba. A few points to consider:

• Cuban consumers don’t appear to be in a hurry to adopt the “things over people” mentality that sometimes comes with a free market, consumer-driven economy. An excessive number of chain or franchise restaurants and extreme luxury goods may experience slower adoption rates by consumers as well as receive the cold shoulder from the government as the desire to keep Cuban social norms and culture in tact is important to both residents and the government. Based on a lecture during a visit to the U.S. Embassy, a spokesperson shared that the Cuban Government will be conservative with the entrance of many franchise and chained businesses to ensure Cuban interest over foreign gain is preserved.

• Patience with the centralized information, communication and technology infrastructure is critical as it has limited efficiency and automation in even routine things like checking passports and boarding passes or baggage at the airport. The current infrastructure will require billions of dollars to handle increasing transportation demands as foreign trade relationships increase. To be a competitive nation, Cuba must make investments in their infrastructure. Currently, American Telecommunication firms can export to and install equipment in Cuba. Per our discussion with Professor Alejandro Delgado with the University of Havana, construction knowledge is currently taught at the university but has failed to influence the construction workforce. To keep up with the demand of 21st century building technology, and sustain a new tourism wave, Cuba must identify the resources to improve their trade workforce and redevelop their infrastructure.

• Public transportation is of critical concern. Visible during the visit, buses, cars and roads are decades overdue for upgrades.  While a ride along the oceanfront in a vintage convertible Chevy is charming, it shows lack of investment and the potential for expensive liabilities to investors. Cubans have stretched their resources to keep their classic car fleets in operation, they are forced to use aftermarket parts from third party suppliers and manually perform maintenance and repair.
• The U.S. and Cuba are making swift strides in removing barriers to a stronger commercial and cultural relationship including scheduled air service, educational, professional and cultural exchange, and direct transportation of mail (U.S. Department of State, 2016). However, there is no clear timeline for when the trade embargo will be lifted and until that happens getting simple supplies and resources to run a business will continue to be difficult.
• The presence of a two currency system. The Cuban Convertible Peso (CUC) emerged as a second currency and was pegged to the U.S. dollar. Initially, the Cuban government implemented CUCs to be used in the tourism industry and for luxury goods. Over time, the unintended consequence of the CUC was the emergence of a classist divide based on access. The CUC essentially created an adverse effect on earnings based on industry. Those who work in the tourism industry are compensated with tips in CUCs vs state-paid workers who are paid in the Cuban Pesos (CUP). The preferred currency in several retail stores is the CUC, worth 25-times more than the CUP (Malten & Brooks, 2011). Doctors, engineers and teachers are paid at a far less rate that bartenders and cabdrivers. An increase in tourism will continue to disrupt the state run workforce who may abandon professions like medicine and education to gain more income in the tourism industry.
• Energy production and consumption is highly monitored and is a consideration for business development. According to Greenbiz: “the country will need massive foreign investment to revitalize its energy sector.” (Gouri, 2015). In addition to investments needed for infrastructure development, foreign capital is required to develop a modernized power grid. Currently, the island nation must deploy energy conservation tactics such as periodic blackouts in smaller cities to sustain larger urban centers like Havana.
• Consider a joint venture (JV) when determining business structure. A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants’ other business interests (Investopedia, 2016). From hotels and golf courses to entertainment companies, collaborative financing, management and ownership between the industry and government tend to find success and sustainability.

There’s an African Proverb that says, “If you want to go fast, go alone…If you want to go far, go together.” This is sage advice for entrepreneurs looking to do business in Cuba. Whether the opportunity is a small business or expansion effort of a U.S.-based Fortune 500 company, joint-ventures and cultural immersion to gain greater understanding of the people and their needs provide the best opportunity for success.

References

Broder Jonathan. (17, December, 2014). How the U.S. and Cuba Ended Their Cold War. Newsweek Retrieved on July 26, 2016 from http://www.newsweek.com/exclusive-how-us-and-cuba-moved-past-decades-hostility-293075

DeYoung, Karen. (3, September, 2016). U.S. Removes Almost All Restrictions on Family Visits to Cuba. Washington Post. Retrieved on July 28, 2016 from http://www.washingtonpost.com/wp-dyn/content/article/2009/09/03/AR2009090303810.html

Elliot, Christoper. (14, August, 2016). What Americans should expect when traveling to Cuba. Fortune. Retrieved on July 28, 2016 from http://fortune.com/2015/08/14/cuba-travel-us/

Gouri, Shashank.  (25, August 2015). “How Cuba’s reopening could change its energy future” GreenBiz. Retrieved on July 31, 2016 from https://www.greenbiz.com/article/how-cubas-reopening-could-change-its-energy-future

Gonzalez Alonso, Pablo and Lee, Alec (16, March, 2016). Harvard Business Review: The Potential and Pitfalls of Doing Business in Cuba. Retrieved on July 12, 2016 from https://hbr.org/2016/03/the-potential-and-pitfalls-of-doing-business-in-cuba

Investopedia. (2016). Definition of Joint Venture. Retrieved on July 31, 2016 from http://www.investopedia.com/terms/j/jointventure.asp

Malter, Jordan and Brooks, Abigail. (5, January, 2015). Did you know Cuba has two currencies? CNN Money. Retrieved on July 24, 2016 from http://money.cnn.com/video/news/2015/01/05/cuba-currencies.cnnmoney/index.html

Personal Conversation. Delgado, Alejandro. University of Havana. Occurred on July 20, 2016 during Webster University visit to Cuba.

Personal Conversation. Cliver, Bruce. Foreign Officer Spokesperson, Occurred on July 20, 2016 during Webster University visit to Cuba.

The Observatory of Economic Complexity  (n.d.) Cuba. Retrieved on July 28, 2016 from http://atlas.media.mit.edu/en/profile/country/cub/

U.S. Embassy in Cuba. (26, July 2016). Spokesperson. Retrieved on July 28, 2016 from http://www.state.gov/r/pa/prs/ps/2016/07/260306.htm