When President Obama pledged to begin loosening the U.S. trade embargo with Cuba last December, many in the business world, of course, took notice. During his State of the Union address, he asked Congress to “extend the hand of friendship to the Cuban people,” and completely lift the embargo. Despite Republican opposition, U.S. Chamber of Commerce President, Thomas Donahue predicted last month the restrictions would be eradicated before the next presidential election.
A few business schools are pro-actively preparing their students to capitalize on the potential emerging market. In April, the Wharton School hosted a “Cuba Opportunity Summit” for American executives aiming to capitalize on the relaxed sanctions. More recently, Columbia Business School took a team of students to the country to meet with political leaders and business owners after spending six weeks in New York studying the current Cuban business climate.
At first glance, the new policies seem like a burgeoning business frontier. At the beginning of the year, Mauro Guillen, a Wharton professor, told Poets&Quants it has been quite a while since “business schools have found themselves in a situation in which they needed to do something about a part of the world.” Guillen also said, “I don’t think in the last 15 years we’ve had anything like Cuba.”
CUBA CONTINUES TO HAVE “THREATS FOR BUSINESS”
Indeed, there is great potential. First, the tourism market could explode for the island located 90 miles from American shores. Additionally, Cuba’s rich agricultural market has companies such as John Deere, Caterpillar, and the Home Depot eager to find ways to tap into the country’s economy. Not surprisingly, stereotypical American giants McDonald’s, Pepsi Co., and Bud Light aim to strategically enter the newfound market.
Nevertheless, doing business in Cuba could come with dithering and risk. At Wharton’s Summit in April, Glenn Ware, partner and practice group leader for anti-corruption, corporate intelligence and strategic threat management at PwC, made clear that akin to any new market, “there are threats for business.” Ware said those threats range from unstable supply chains and corruption risks to labor and political issues.
The Columbia students experienced many of those threats first-hand. Two of the main issues according to graduating Columbia MBA Mario Rodriguez-Graniel are “access to capital and burdensome taxation.” Rodriguez-Graniel’s career with the Organization of Economic Cooperation and Development and Spain-based Banco Santader has led him to do business or attend school in France, Spain, Canada, and the United States and to take a particular interest in Cuba’s economic future.
STRAINED RELATIONS PERSIST FOR SOME POLITICIANS
On one hand, Rodrigues-Graniel says, many small business owners in Cuba are excited at the potential business opportunities from vacationing tourists. And they also believe the normalization of relations with the U.S. could lead to a boom in cigar exports. On the other hand, some Cuban policy decision makers and politicians still hold a grudge against the American government that dates back to the Bay of Pigs invasion in the 1960s and the start of the trade embargo.
“When you talk to political officials, there is a resentment,” Rodriguez-Graniel explains. “There is a subtle feel that the U.S. turned its back against Cuba. Then they (government officials) felt like the U.S. wanted to impose their will and turn Cuba into another state.”
The Columbia students spent time meeting with government officials and business owners alike. Even the locations of meetings showed obvious differences between the two nations. Typically, discussions were informal, held on beaches and in nightclubs, rather than offices. Still, the overwhelming takeaway from business owners is that they were hoping to capitalize on what they hope will be an influx of tourists with money to spend.
A TAX STRUCTURE NOT CONDUCIVE TO SMALL UP-STARTS
If that occurs, it may encourage a new wave of entrepreneurship on the island, even though Rodriguez-Graniel says that governmental rules and regulations “make it almost impossible” to start or run a business. “The tax structure in Cuba is if you make more than $10,000 you pay 60% of taxes,” he points out. “They also have a multiplier of revenue in terms of employees you have that makes it where if you have too many employees, you might actually pay more than you make. You would never have a business with more than 10 people.”
The odd tax structures have led many companies to become more innovative and creative in getting around those regulations. One example Rodriguez-Graniel spent time learning about was a local spa called 02 in Havana. According to Rodriguez-Graniel, a company with as many employees as 02 can be taxed up to 150%. To combat those unreasonably high rates, Rodriguez-Graniel says 02 has “developed an effective model by leasing each room in the wellness center to their employees, which creates many small separate tax-paying entities operating under one roof.”
For example, hair stylists will lease salon spaces and masseuses will lease treatment rooms. The Cuban spa has even gone as far as partnering with mail carriers to do guerilla marketing by attaching small fliers promoting O2 to mail being delivered in an effort to evade strict advertising regulations for private enterprises.