Cuba Flirts With U.S. Entrepreneurs, But Courtship Can Be Challenging
By David DeVoss
Seattle tour operator Zach Smith built Anywhere.com into a $15 million travel business by offering customized tours to exotic locations in Latin America. The 35-year old entrepreneur knew from ten year’s experience that small and medium-sized companies like his must constantly develop new destinations if they hope to stay ahead of the competition. So, following Pres. Obama’s December 2014 decision to reestablish diplomatic relations with Havana, Smith began planning to make Cuba his next new thing.
Unfortunately, he had no idea how to locate prospective vendors, establish credit or obtain government permission to do business. His credit card didn’t work in Havana, and research confirmed that the island’s economy relied almost exclusively on cash. A tourist might carry in enough money to pay for a holiday weekend, but no company could risk bringing in bricks of bills to cover ongoing expenses.
So, late last year Smith signed up for a three-day trip to Havana led by Sonia Laguna, a Cuban-born MBA raised in the U.S. whose company, Just 90 Miles, offered “Business Explorer” tours to potential U.S. investors. “Our group consisted of Florida entrepreneurs who were just as serious as Fortune 500 executives,” he remembers. “We went to an automobile factory, met with a Cuban attorney handling real estate transactions, visited the office that operates Cuba’s ports and got a briefing from the organization that handles all external investment.”
Smith stayed on three extra days, retained an attorney and found a photographer to take publicity shots for his website. Since then he’s returned to Havana twice and commissioned several employees to prepare for the eventual arrival of inbound travelers. “Cuba’s infrastructure is underwhelming, but Havana has a good feeling,” he says. “Cubans are educated and optimistic about the future, but the Communist Party remains firmly in control.”
A former Dean Witter broker and South American telecom executive, Laguna started Just 90 Miles last April, offering prospective investors four-day three-night English-speaking tours for $2,600. Most of the 30 U.S. executives she has taken so far are interested in real estate, the hospitality industry, pleasure boat charters, bilateral trade and establishing small factories in the “free zone” outside Havana.
“I take them to government offices responsible for foreign investment and introduce them to Havana’s cuentapropistas, small private entrepreneurs the government allows to operate taxis, shops, restaurants and garages,” she says. “Recently the government allowed cuentapropistas to form private companies and eventually it hopes they will employ 40% of Cuba’s workforce.”
Normally when a nation welcomes western investment, multinational corporations are first through the door. This has not happened in Cuba because of the U.S. embargo (the Helms-Burton Act of 1996) and the Communist Party’s vise-like grip on power.
A few large companies have established tentative beachheads in Cuba. Prompted by a 13.5% surge in U.S. tourism, a “Four Points y Sheraton” hotel opened recently and soon will be joined by the Starwood-managed Gran Caribe “Inglaterra.” Eight U.S. airlines have been approved to fly to nine Cuban cities. Carnival Cruise Lines already is selling tickets for excursions that will dock briefly in Cuba later this year. Passengers who alight can chase their mojitos with a Miller beer.
Most new trade in the immediate future, however, is expected to be conducted by small and medium-sized enterprises (SMEs) that have more in common with Cuba’s cuentapropistas. “I was very encouraged by what I saw on my two trips to Cuba this year,” says Maria Contreras-Sweet, Administrator of the Small Business Administration. “Private in-home restaurants called paladares are well managed by people who understand the basic principles of entrepreneurship and think in terms of prices, margins and inventory.”
Despite the embargo, American businesses already can invest in Cuban agriculture, construction and tourism. Airbnb already has 4,000 rental properties in Cuba, which is the company’s fastest growing market. Contreras-Sweet thinks home repair and construction are two of the biggest untapped markets. “A lot of preservation is taking place by Cubans committed to the restoration of historic Havana,” she says. “A lot of people I met wanted to restore their homes but they need hardware.”
Reza Haghayegh, president of the LHP Group, a Miami construction and building supply company, made the same observation when he visited Havana in March on a “Just 90 Miles” tour. “The government says it welcomes companies that want to do manufacturing in the free zone and I think there’s a niche market for large stepping stones that can be used on patios and driveways,” he says. “Everything can be made there; I just need to bring in molds, machinery and vibrators.”
Attracted to Havana by its lifestyle, cuisine and proximity to Miami, Haghayegh has filed the necessary paperwork to start a joint venture. “I’m going for a second visit next month and hopefully the door will be open by the time the approvals are granted.”
Chicago resident Kimberly Wallace traveled to Cuba earlier this year to gather background for a novel. But after several days roaming Havana her grocery retailing and food packaging experience with companies like Lee Kum Kee, Goya and Panda Food brought her to the realization that Cuba lacks a wholesale food industry. “I’d go to paladares and some of the items on the menu wouldn’t be available because the restaurant had run out,” she says. “I asked how they replaced products like butter and olive oil and was told they flew to Mexico and went shopping at Sam’s Club. It’s amazing that somebody has to leave the country in order for food to come in.”
In July, Zona+, a quasi Costco opened in Havana, but Wallace thinks it falls short of being a true food distributor. She plans to fly to Havana in September to seek approvals for her own wholesale distribution company that will bring U.S. foodstuffs to Cuba in bulk and return to the U.S. with sugar, avocados and a Cuban fruit called mamey.
The Obama administration is not letting the embargo stand in the way of increased bilateral trade. Recently, it loosened rules on financial services so that U.S. banks could extend credit to companies doing business in Cuba. Thus far only one financial institution, Stonegate Bank in Pompano Beach, FL, has issued a credit card good for transactions in Cuba.
The SBA’s Maria Contreras-Sweet urges SMEs to take a look at its loan products that include working capital loans of up to $5 million to fund export transactions and an International Trade Loan Program that helps small American businesses trying to enter the international market by guaranteeing up to 90% of a loan used for working capital financing and debt refinancing. Says Contreras-Sweet: “Being mindful of the current limitations on trade doesn’t preclude an honest and direct conversation now on what is possible in the future.”
David DeVoss is editor of the East-West News service in Los Angeles