Could US businesses find a place in a competitive Cuban economy?

American businesses eying Cuba could certainly expect manifold opportunities with President Barack Obama’s announcement last December that the U.S. is normalizing relations with the Caribbean island country. All eyes are now on whether the 54-year-old U.S. trade and investment embargo against Cuba will be lifted. But even if the sanctions go away, U.S. businesses will have to earn their place as they compete with Cuba’s existing business firmament and relationships, thanks to its friendly relations with numerous other countries, according to Mark Entwistle, former Canadian ambassador to Cuba and founding partner of Toronto-based boutique merchant bank Acasta Capital.

“There is a view that when U.S. businesses can return [to Cuba], there will be a gold-rush bonanza return,” said Entwistle. “Some people may even have sugarplums dancing in their minds — sort of a return to the good old days. That’s not how it’s going to happen.” He pointed out that Cuba has existing and reliable business and commercial relationships that have been going strong for decades now, “and the United States will find its place.”

Entwistle was a panelist at the Cuba Opportunity Summit held on Wednesday at the Nasdaq MarketSite in New York City, which was organized by Knowledge@Wharton, Wharton’s Lauder Institute and Momentum Event Group. The Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111 interviewed him recently on the coming Cuban business opportunity. (Listen to the podcast at the top of this page.)
During his interview with Knowledge@Wharton, Entwistle said that a view often exists in the U.S. “that Cuba is an empty vessel [and] it’s there to be filled up,” and that it is an isolated country. “Yet, the rest of the world has been there and has been there for a long time,” he noted. “You can count on the fingers of one hand the number of countries that don’t have a normal relationship [with Cuba].”

“Some people may even have sugarplums dancing in their minds — sort of a return to the good old days. That’s now how it’s going to happen.”– Mark Entwistle

Stefan Selig, U.S. undersecretary of commerce for international trade, echoed Entwistle’s views at the Cuba Opportunity Summit, where he was a speaker. Companies should not be under any illusions that there is “some economic miracle that’s going to happen,” he said, as Knowledge@Whartonreported.

Hunting Grounds

Entwistle identified some sectors of the Cuban economy where U.S. businesses could find opportunities. Among them are infrastructure for the Cuban hospitality industry and knowledge industries such as biotechnology and pharmaceuticals. He noted that the number of Americans traveling to Cuba is set to increase from 90,000 last year and an estimated 100,000 this year to four million after travel bans are lifted, citing industry forecasts. That number is over and above another three million people from other countries who travel to Cuba annually. “Cuban infrastructure literally cannot absorb this volume of people,” he said.

Cuba has also developed strengths in biotech and pharmaceuticals, in line with a decision made more than a decade ago to diversify away from its sugar industry, said Entwistle. “They managed to make multiple discoveries — the intellectual property in Cuban biotech and pharma is quite stunning,” he added. “In biotech, the fundamental challenge for the Cubans is not making the scientific discoveries because they don’t have a lot of bells and whistles in their labs.” According to Entwistle, there is “a heck of lot of brainpower in Cuba” for U.S. companies to tap into.

However, Cuba’s biotechnology and pharmaceutical industries have faced constraints in raising capital and commercializing their discoveries, said Entwistle. “That part of it they cannot do because the global capital markets do not have the confidence in the Cuban system, frankly, right now,” he said. “They need partners. That part could uplift Cuban biotech and pharma, obviously of great benefit to the partner companies as well, because of the intellectual property.” U.S. businesses will also have a “strong competitive advantage” in sectors where transportation costs are involved, he added. (Cuba is just 94 miles away from Key West, Florida, on the southernmost tip of the U.S.)

“The intellectual property in Cuban biotech and pharma is quite stunning.”– Mark Entwistle

Overwhelming Partnerships

Even as the U.S. and Cuba warm up to each other, Cuba will be cautious about depending too much on the relationship, according to Entwistle. “One thing that is embedded quite deeply in the DNA of successive generations of Cubans, and certainly in the political leadership, is that never again will there be a reliance on a single overwhelming partner,” he said. He noted that in the 1950s, U.S. companies owned two-thirds of the Cuban economy, including utilities, telephone and power companies, and up to 80% of its sugar lands. “[U.S. businesses] will find a much more competitive market than there is even today,” he said. “Cubans are always tough negotiators, [and are] always after the best deal.”

As U.S. businesses approach Cuba, they will also find an economy in the throes of change. “Cuba is evolving; I don’t know if Cubans know where exactly it’s going right now,” he said. He noted that over the past 15 years, Cuba has steadily liberalized its economy and removed many business and travel irritants. “Cuba is unrecognizable from what it was even 10 years ago and Cubans believe in their country’s evolution,” he said. “There is a sense of movement there.”

This article is published with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania.” Publication does not imply endorsement of views by the World Economic Forum.

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Author: Mark Entwistle draws on a rich and integrated mix of professional experience over three decades and across disciplines in business, political risk assessment, diplomacy and international affairs

Image: Morning commuters are seen outside the New York Stock Exchange, July 30, 2012. REUTERS/Brendan McDermid.