Coverage: Cuba is open for business – or is it?

After President Barack Obama announced that he was planning to strengthen ties with Cuba, including opening an embassy in Havana, many cigar and rum aficionados rejoiced. But what does the move actually mean?

The Wall Street Journal reported in a story by Tripp Mickle that the change isn’t going to do much to help consumers in the short term:

If the Obama administration’s move to normalize ties with Cuba does lead to an end to the U.S. embargo, it could reignite battles over the U.S. rights to sell two of the island’s most prized exports: cigars and rum.

This week’s announcement initially means only incremental change for American lovers of Cuban smokes and spirits. For those who fall among the categories of legal travel to Cuba, the administration is allowing $100 worth of cigars or alcohol to be brought back from the island per person.

Dann Carr, president of General Cigar Co., Inc., one of the largest manufacturers and retailers of premium cigars, estimated that the average traveler would be able to buy about two premium Cuban cigars to bring back to the U.S. But those won’t be legal for resale. He said that the impact will be negligible for the U.S. cigar industry unless the U.S. lifts its embargo on Cuba, which requires congressional action.

“It’s a nonevent at this point,” he said.

Cuban cigars are considered among the best in the world by aficionados. Sales in the U.S.–the world’s largest market, with an estimated $6.7 billion in annual sales, according to the Cigar Association of America—would provide a major boost to the Cuban cigar industry, which currently has more than $400 million in annual revenue, according to Richard Feinberg, a professor at University of California, San Diego, who has written reports on the Cuban economy.

Julie Creswell wrote for The New York Times that many U.S. companies have been working on how to introduce their products to the Cuban market:

But while there may be robust opportunities for some companies, especially those selling products or goods that could be viewed as enhancing Cuba’s own domestic production or helping to develop its underused resources, other companies could get the cold shoulder.

“For a company like McDonald’s, the Cuban government is going to ask, ‘How does McDonald’s coming in and selling hamburgers help the economy of Cuba?’ ” said Kirby Jones, founder of Alamar Associates, which has advised companies on doing business in Cuba since 1974. “It’s just not going to be like other regions where you see a McDonald’s on every corner.”

Despite Cuba’s long stagnation and isolation from the global economy, the potential trade opportunities go both ways. While some Americans will be itching at the opportunity to obtain the famed Cuban cigars more easily, the country also has a surprisingly robust biotechnology industry that makes a number of vaccines not now available in the United States. Another hot spot for the economy could be mining, as Cuba has one of the largest deposits of nickel in the world.

Jeremy Quittner’s story in Inc. pointed out that some weren’t happy about the new market:

For companies hoping to do business in Cuba right away, however, don’t hold your breath, as these and other changes will be anything but swift, says Seth Kaplowitz, a lecturer in finance and management, and a specialist in international business law at San Diego State University.

“Businesses will probably have the same issues that they do with China and other Asian countries,” Kaplowitz says. “This is really about the future for business, not the present.”

Perhaps the biggest issue, Kaplowitz says, is how U.S. businesses will actually operate in Cuba. It may be the sort of scenario where domestic companies must set up a wholly owned foreign enterprise, as they do now in China. WOFEs are limited liability corporations that allow foreign companies to operate in mainland China, although along narrow and proscribed lines. Such concerns are, however, expensive to set up and Cuba doesn’t currently have a developed infrastructure for them, Kaplowitz says.

Other concerns are Cuba’s pronounced governmental centralization, says Peters. Current trading partners from Canada, Europe and Latin America, for example, can only invest in projects chosen by the government, with workers similarly selected by Cuban administrators. Adding further complications for businesses, Cuba has two currencies, a convertible peso and the old peso.

Some of the biggest winners could be those in the communications space, according to a story by Andrew Khouri for The Los Angeles Times:

Telecom companies will be allowed to establish infrastructure to enable phone and Internet service.

The market is almost entirely untapped: Only about 5% of the Cuban population has access to the Internet, according to the White House. As of last year, there were only about 18 cellphone subscriptions per 100 Cubans, according to the International Telecommunication Union.

The administration also seeks to boost travel to an island that, before the Cuban Revolution, was a destination for American travelers and gamblers. The U.S. already allows Americans to visit the communist island for 12 specific purposes — including education, humanitarian projects, family visits and professional research — but that travel will be expanded and made easier under new agreements.

And as long as Americans visit Cuba legally, they can now bring back $400 worth of goods. That includes cigars, although alcohol and tobacco imports will be capped at a combined $100.

Agriculture exports also will be streamlined, a move hailed by California farm interests.

The thaw in relations is great news for the Cuban people as well as U.S. businesses. It isn’t often that an untapped global market opens, which is exciting for companies of various sizes. But what isn’t clear is how soon the free flow of goods will be. And what’s more, it’s unclear how U.S. culture will change and exploit Cuba, a place that’s been impervious to outside influence. While some contact is good, here’s to hoping there isn’t a KFC on every Havana street corner anytime soon.