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Special report
Assessment of the Cuban marketplace | June 2015
Navigating the uncharted waters of doing business in Cuba
The Cuban marketplace and potential
Cuba is the largest island in terms of land mass and most populated
country in the Caribbean. The country is home to 11.2 million residents,
of which nearly 20.0 percent live in the capital of Havana, making it the
country’s largest city. According to the Office of National Statistics in
Cuba, population growth in Cuba has remained relatively flat since 2005,
losing roughly -0.1 percent of its resident base per year. Projected
population decline is expected to continue into 2020, decreasing by 1.1
percent to 11.1 million. Although these projections were compiled before
the announcement, it remains more probable than not that births and
deaths will stay relatively in line given the country’s population base
(discussed further below). For any significant population growth to occur,
a large uptick in in-migration would be needed; however, until wholesale
changes are made to Cuba’s political and economic system any
significant increase in new residents to the island is unlikely.
Cuban population figures are also weak when compared to other
developing economies. Currently, residents over 65 years of age
comprise 13.5 percent of the island’s population. For comparison, that
cohort comprises only 7.6 percent in Brazil, 7.0 percent in the Dominican
Republic, and just 5.8 percent in India. To offer further perspective, the
senior citizen population of the United States, a fully mature and
established economy, makes up 14.5 percent of the overall population.
Meanwhile, on the other end of the cycle, only 16.3 percent of the
country’s population is under the age of 14. This composition is markedly
different from other expanding economies and current demographic
projections do not present the case for economic expansion. This is a
contributing factor to the push for economic reforms from within the
Cuban government and its attempts at attracting foreign investment
(discussed further below).
Average annual population growth rate
1.0
0.5
Growth rate (%)
Opportunistic investors are intrigued by the amendments to the U.S.Cuba economic embargo announced at the close of 2014. After more
than five decades, restrictions under the Trading with the Enemy Act
have been “relaxed” by what has been dubbed the Cuban Thaw. Yet this
prospect of new opportunity has left many unknowns. How will the
establishment of business relationships with Cuban entities and a
communist political system be implemented? Are the potential economic
gains worth the risk and stress of navigating unclear regulatory burdens
and legal stipulations? We explore these concerns herein by first
assessing the current market conditions and evaluating past indicators for
viable business opportunities. We will also investigate future potential due
to regulatory changes and outline possible challenges of engaging with a
once forbidden economy. Understanding these fundamentals will be key
to determining the financial viability of entering the Cuban market.
0.0
-0.5
-1.0
-1.5
-2.0
2005 2006 2007 2008 2009 2010 2011 2012 2013
The Cuban government is also hungry for foreign investment to bring
about quality employment opportunities. Cuba boasts one of Latin
America’s most skilled and highest educated labor forces. Despite a
near 100 percent literacy rate, 41.0 percent of the workforce is employed
in the “community, social and personal services” sector, which has an
average annual wage in Cuban Pesos equivalent to US$220, a figure
that has increased only 2.6 percent annually since 2008.
To put the economic scale of Cuba in perspective, the country’s GDP is
$68.2 billion, slightly higher than that of Sri Lanka, and just below that of
the state of New Hampshire. However, unlike New Hampshire, the lack
of access to goods and services in Cuba makes it incredibly difficult to
afford items beyond basic needs. Goods that have reached near
saturation in the United States such as internet access or high-tech
equipment are considered opulent in Cuba.
Current infrastructure
Cuba encompasses 42,400 square miles and is the most connected
island in the Caribbean. The country boasts over 5,000 miles of railroad
tracks and 37,800 miles of roadways, of which just under half are paved.
Despite the vast web of transportation routes traversing the island, much
of this infrastructure has fallen into disrepair after years of neglect from
the Cuban government, which is another contributing factor in the
country’s efforts to attract foreign investment. One of the largest
infrastructure projects that came to fruition with the aid of foreign entities
was the Port of Mariel, located roughly 30 miles from Havana.
Cuba’s infrastructure at a glance
Airports with paved runways
64
Railways
5,097 miles
Standard gauge
5,054 miles
Narrow gauge
43 miles
Roadways
37,815 miles
Paved
18,259 miles
Unpaved
19,286 miles
Ports and terminals
8
The Port recently underwent an extensive $1.0 billion renovation, led
primarily by the Brazilian construction and engineering firm Odebrecht,
which is currently completing renovations at Miami International Airport.
The project, which was completed in early 2014, included the deepening
of the shipping channel to accommodate Post-Panamax vessels, new
gantry cranes, and increased container capacity to 1.0 million TEUs.
According to the Portfolio of Opportunities for Foreign Investment issued
by Cuba’s Ministry of Foreign Trade and Investment, there are 25
projects in four specific industries open to foreign investment within the
Zone, primarily in the biotech/medical field. However, since its
announcement in late 2013, no major foreign investment has occurred
(U.S.-based companies are still prohibited from participating in the
initiative due to the embargo, as it would require entering into a contract
with the Cuban government). According to the Brookings Institute, one
hindering factor (besides the fact the site is still far from completion) is the
need to hire local labor, which can be prohibitively expensive. Although
the worker receives minimal income from the state, the government
requires companies to pay them substantially more. In this sense,
investors can see greater returns in developing operations in countries
where free trade zones exist, such as Panama, where uncertainty is
mitigated by a legitimized government.
With the opportunity for U.S. companies to ship construction materials to
improve infrastructure to private sector contractors (discussed further
below), U.S. building supplies companies may benefit from the new
market, but that is contingent upon projects actually breaking ground.
Trading activities
Though not widely known, the United States is the fourth largest trading
partner with Cuba in terms of imported goods (Cuba cannot export goods
to the U.S. due to the embargo, but limited quantities generated by
Cuba’s private sector will now be permitted under the new guidelines).
Under the Trade Sanctions Reform and Export Enhancement Act
(TSREEA) of 2000, certain authorized goods are permitted to be shipped
to Cuba from the United States, much of which flow through Port
Everglades (Fort Lauderdale). Healthcare products and medical devices
have been allowed to enter Cuba from the U.S. since 1992 under the
Cuba Democracy Act (CDA), but trade under this stipulation remains
minimal.
Annual export value to Cuba from the U.S.
$800.0
$700.0
$600.0
$500.0
$400.0
$300.0
$200.0
$100.0
$0.0
For more information, contact: Marc L. Miller | +1 954 233 3427 | [email protected]
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Trade opportunities
Perhaps the broadest change to the U.S. policy toward Cuba will affect
trade, although the U.S. is still not permitted to import large quantities of
goods from the island nation, and still imposes restrictions on the types
of goods that can be shipped to Cuba and who can receive American
goods. In order to assess the future of trade with Cuba, even if the
embargo is fully lifted (though, at this stage it is more like when), the
country’s infrastructure needs to be examined.
Although, limited in capacity and restricted by inadequate infrastructure to
handle the offloading and distribution of goods to Cuban markets, the Port
is positioning itself as a transshipment hub, similar to the Port of Kingston
(Jamaica). Also included in the project, though still under construction, is
a 180-square-mile special development zone for manufacturing and
industrial development.
Millions
A new provision of the sanctions allows for U.S. citizens to send up to
$2,000 per quarter to family members in Cuba, otherwise known as
remittances. This figure is up from $500 per quarter today, and may
allow for greater purchasing power for certain Cuban citizens. However,
the Cuban government collects roughly 25.0 percent of all funds
transferred as an exchange fee. Additionally, the average wage of a
Cuban American is $24,400 per year according to analysis of Census
data by the Pew Research Center. This figure is higher than the general
Hispanic population in the U.S., but it is still difficult to fathom an
individual sending nearly one-third of their pre-tax income overseas. The
current level of remittance is not likely to see significant change soon.
©2015 Jones Lang LaSalle IP, Inc. All rights reserved.
The United States shipped over $5.0 billion of authorized goods to Cuba
since 2001, primarily agricultural commodities. Trade volumes peaked in
2008 and substantially decreased since that time by a nearly 60.0
percent overall drop in imports (in dollar value) from the U.S. between
2008 and 2014. According to the U.S.-Cuba Trade and Economic
Council, the competition from other nations as well as the Cuban
governments’ financial decision-making have played a major role in this
decline. Another factor is the payment terms set in place by TSREEA,
requiring the Cuban government to pay a cash advance before these
goods are shipped. Fortunately, the amended regulations will ease that
burden by permitting a form of financing. In addition, the changes will
allow for a broader range of goods to enter the Cuban market, possibly
leading to increased goods exported from the United States. It is
important to note; however, development plans and economic expansion
would have to occur prior to any significant trade increases.
Export volume by U.S. port, 2014
Brunswick, GA
Port Everglades, FL
New Orleans, LA
Norfolk-Newport News, VA
Pascagoula, MS
Jacksonville, FL
Southern Louisiana, Gramercy
Mobile, AL
Port of Greater Baton…
Beaufort-Morehead City, NC
$0.0
$3.1
$24.9
$22.3
$22.2
$20.3
$19.0
$16.7
$20.0
$44.7
$43.4
$36.1
$40.0
Millions
Previously, only goods for humanitarian, medical and agricultural
purposes could be shipped from the United States to Cuba, but the
relaxed regulations now allow for the shipment of a wide range of
products to the island, though only to private-sector entities and small
farms. It is estimated that anywhere from 350,000 to 450,000 workers
are a part of the private sector (or cuentapropistas as they are known),
which would equate to roughly 9.0 percent of the active workforce, many
of which are employed in small retail and service shops where goods are
often sold at a premium compared to state-operated merchants. This is a
marginal opportunity to increase trade export volumes to Cuba from the
United States, but the expanded role of telecommunications present
opportunities. While the new regulations allow for certain goods to be
exported from Cuba to the United States, the types of goods are strictly
limited and must be purchased from the Cuban private sector in order for
U.S. businesses to obtain them.
Telecommunications and other infrastructure
The amended regulations allow for the importation of software and
hardware necessary to increase telecommunications to and from Cuba,
both from an infrastructure standpoint and for end-users.
Telecommunications operators are an exception when doing business
with Cuba and are allowed to participate within the framework of the
Portfolio of Opportunities for Foreign Investment.
For more information, contact: Marc L. Miller | +1 954 233 3427 | [email protected]
Currently access to the internet is strictly limited, highly censored and
cost prohibitive; furthermore, private residences are not permitted to have
internet access. There are currently about 1.6 million internet users in
Cuba, but purchasing a computer is still prohibited, so access is granted
at public places for a fee. Additionally, there are approximately 1.7 million
cellular phones on the island, but the telecommunication infrastructure is
ill suited to handle modern demands of telecommunication beyond voice
calls and text messages, for which rates are also cost prohibitive for the
average citizen. Sources with direct experience of the situation estimate
charges range from US$1.15 per minute for voice calls and between
US$3.00 and US$4.00 per half hour of internet usage. Given the average
Cuban wage, these are not options for most citizens.
For this reason, the Cuban government has elicited foreign investment to
build up this infrastructure, similar to its efforts to rebuild its insufficient
transportation infrastructure. The opportunity to import telecommunication
infrastructure and building supplies is certainly there, at least once an
operator feels secure that their investment will be protected. Unlike
transportation infrastructure, which is a one-time project, large
telecommunication providers, which can now legally connect with Cuba,
would continue to have an operational presence in the country. However,
without legal clarity large investors are (and should be) weary of
undertaking a project without certainty that they will see returns on their
efforts and investments.
Similar to the importation of goods from Cuba, services can be
outsourced to private labor in Cuba. As previously stated, the Cuban
workforce is highly educated, which – in the longer term – can benefit
U.S.-based technology and medical companies by tapping into a labor
force otherwise off-limits. While U.S. corporations would not be able to
directly hire these workers, private sector Cubans can be contracted to
work on maintaining the telecommunications infrastructure,
troubleshooting, and other high-tech related occupations that will be
needed to grow and maintain services.
Tourism and hotel development
Perhaps the industry with the greatest long-term opportunity for U.S.based companies to enter Cuba is within the hospitality sector and
associated industries. For example, Airbnb has already expanded
operations to serve visitors to the island; in addition, airlines are
announcing new flights to the country (i.e., JetBlue) and four ferry
services have been approved by the U.S. Department of Treasury to
embark from Florida ports. Although leisure travel is still prohibited for the
general public, there are 12 categories people can fall under to obtain a
travel visa to Cuba; however, reports indicate there is little enforcement of
these protocols.
So, while the new regulations ease travel restrictions, as well as the
amount of money visitors can bring and spend in Cuba, widespread
tourism will not be seen until the embargo is officially lifted and
companies can invest in building a solid hospitality infrastructure.
According to the most recent data, 92,300 Americans traveled to Cuba in
2013, representing only a fraction of the overall 2.9 million visitors
annually. It should be noted, though, that the number of Americans
traveling to Cuba has more than doubled since 2008.
©2015 Jones Lang LaSalle IP, Inc. All rights reserved.
Top visitor feeder markets to Cuba
Millions
2008
2009
2010
2011
2012
2013
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Large resort hotels are the preferred location when staying in Cuba, as
most of the private residences and smaller accommodations do not have
modern amenities Western tourists come to expect, such as air
conditioning, which is virtually non-existent on the island. According to
Cuba’s National Office of Statistics, the 127,400 hotel rooms in the
country had an average occupancy of 54.6 percent in 2013, questioning
the need for new development and demand in Cuba. Resort
development remains a priority for the Cuban government, though, and
many international companies have entered into joint ventures with the
government to construct and operate hotels, such as Melia Hotels
International SA, a Spanish-based hospitality company. Under current
guidelines, a hotel developer would need to be a private enterprise for
building supplies to be transported to Cuba from the United States – the
Cuban government has a majority interest in nearly every hotel on the
island, and owns most of the prime sites in tourist locations, making it
difficult for foreign companies to secure a foothold on attractive
opportunities.
Hotel inventory and occupancy in Cuba
Occupancy
59%
59%
58%
58%
57%
57%
56%
56%
55%
Number of rooms
68,000
66,000
64,000
62,000
60,000
58,000
2009
2010
2011
2012
2013
56,000
According to the Brookings Institute analysis of the Portfolio of
Opportunities for Foreign Investment, international participation in lowrisk projects will be severely limited and require the government’s private
joint venture partner to provide financing and international marketing
services, but will limit active participation to management contracts with
no ownership stake in the properties.
For more information, contact: Marc L. Miller | +1 954 233 3427 | [email protected]
With more normalized relations with Cuba, there is sentiment of pent-up
demand from Americans wanting to visit the island. Last year, nearly 7.2
million Americans traveled to the Caribbean, representing 10.5 percent of
total international travelers originating from the United States (based on
air travel only). Further, an increasing number of Americans are traveling
abroad in general: in 2014, over 68.0 million Americans traveled abroad,
a 16.8 percent increase from 2011, when the new methodology for
tracking international travel was installed by the Office of Travel and
Tourism. Travel to the Caribbean increased 18.9 percent during that time,
as access to the Caribbean has improved. Based on those figures, it is
safe to assume there will naturally be an increase in visitation to Cuba
once all restrictions are lifted; however, it does not support anecdotal
evidence presented in news reports of a mass pilgrimage to the island.
Overall impacts of the “Cuban Thaw” and opportunities
There is a tremendous level of uncertainty surrounding the Thaw and how
U.S. companies can interact with the Caribbean nation, and speculating
on safe and strategic investment opportunities is extremely premature.
While the announcement of relaxed trade relations with Cuba was
received with great anticipation for what’s in store for American
businesses and opportunities for investment, thorough analysis of the
amended regulations and their practical application reveals limited
potential. Initial reactions to the news were viewed through an American
imperialistic lens; however, it is important to remember that Cuba is a
sovereign nation that has been operating for more than half a century
without economic relations with the United States. Once the embargo is
lifted by Congress, which is unlikely to happen with Cuba’s current regime
(or any similar installation), U.S.-based companies will remain largely on
the sidelines; further, challenges will remain, as non-U.S.-based firms
have been able to secure a foothold on the island in America’s 50-year
absence.
To quote an excerpt from the U.S.-Cuba Trade and Economic Council’s
Economic Eye on Cuba report from April 2015:
“If the government of the Republic of Cuba views the December 2014
announcement and January 2015/February 2015 regulatory changes as a
means to influence the political process in the United States, [there] likely
will be meaningful purchases of products under provisions of the TSREEA
and CDA and telecommunications equipment; and building
materials/supplies and agricultural equipment and supplies to and through
authorized entities.
The government of the Republic of Cuba will determine whether greater
leverage exists from not increasing purchasing levels as a means of
encouraging those impacted United States-based parties to seek further
regulatory and legislative changes. Members of Congress, Governors, and
other political actors will increase their visits to the Republic of Cuba as
media coverage of the visits will be generous. However, if too many visitors
return without commitments for purchases of products manufactured in their
respective states, the media’s generosity will lessen…. as will the political
actors and, eventually, companies.”
We have already seen numerous economic envoys to the island since the
announcement was made, and while many report a positive and fruitful
experience, no solid contracts or purchase orders have been reported,
but the process is still in its infancy and worth keeping an eye on. Having
said that, no location is keeping a closer eye on the situation and potential
opportunity than Florida, particularly South Florida.
©2015 Jones Lang LaSalle IP, Inc. All rights reserved.
Florida’s proximity to Cuba and long standing ties to Latin America and the Caribbean position the state favorably for being the focal point for
companies to enter the Cuban marketplace. Already, Port Everglades exports $43.4 million of goods to the country through the Crowley Maritime
Corporation, second only to the Port of Brunswick (Georgia). In addition, with 1.3 million Cuban residents (76.5 percent of which reside in South
Florida), Florida is a primary feeder market for visitors and remittance to the island. With loosened regulations, Florida will have an even greater
impact on the economy of Cuba, but it is unclear how much the state will benefit from the new relationship, particularly from a real estate
standpoint.
On the industrial front, TEU volumes generally correlate with industrial occupancy:
PortMiami TEU volume and Miami-Dade industrial occupancy
TEU Volume
Occupancy
94.0%
93.0%
92.0%
91.0%
90.0%
89.0%
88.0%
87.0%
86.0%
Port Everglades TEU volume and Broward industrial occupancy
2007 2008 2009 2010 2011 2012 2013 2014
TEU Volume
920,000
900,000
880,000
860,000
840,000
820,000
800,000
780,000
760,000
740,000
On a square foot basis, the correlation suggests that for every one TEU
flowing through the respective ports, 135 square feet of industrial space
is occupied. While this by no means represents an absolute, and many
other factors contribute to industrial occupancy, taking this as a baseline,
the TEU volume flowing from Port Everglades to Cuba equates to
roughly 560,000 square feet of demand (4,141 TEUs in fiscal year 2014;
83.0 percent in frozen chicken).
Given the commodities that comprise the majority of exports to Cuba
from Port Everglades, there is little reason to believe trade through the
Port will substantially increase as both Florida and Cuba produce very
similar agricultural products. The new regulations allow for expanded
types of products to be exported to the island, though the additional
market is relatively small. Also, with an increasing number of economic
convoys from across the U.S. investigating trade opportunities with
Cuba, there is a distinct possibility that trade will be routed through
numerous ports across the country, especially considering that frozen
chicken is the primary export from South Florida. Further, Florida’s
agricultural industry is wary of fully lifting the embargo, as many of the
products produced in Cuba are the same as what Florida grows, which
could result in Florida losing market share when distributing products
within the U.S., according to the Florida Farm Bureau Federation.
Given the uncertainty relating to the new regulations with Cuba, as well
as the prospect of increased trade and interaction between the two
nations, expertise on how to navigate international trade and banking will
be necessary. Law firms and financial institutions will likely increase
personnel experienced in such matters, resulting in demand for office
space. Miami is home to the second largest number of international
banks in the U.S. and is a central post for doing business with Latin
America and the Caribbean. Moreover, with well-established ties to the
region and concentration of Cuban-Americans, South Florida is a natural
location to benefit from these expanded operations. However, it is
For more information, contact: Marc L. Miller | +1 954 233 3427 | [email protected]
95.0%
94.0%
93.0%
92.0%
91.0%
90.0%
89.0%
88.0%
87.0%
86.0%
Occupancy
1,200,000
1,000,000
800,000
600,000
400,000
200,000
2007 2008 2009 2010 2011 2012 2013 2014
0
difficult to quantify just how much demand for office space this will
generate, particularly over the short-term, as banks are weary of opening
business operations in Cuba due to both cost and uncertainty. At this
stage, U.S. businesses remain in a “wait and see” mode.
Our preliminary analysis of the amended regulations and the viability for
doing business with Cuba suggest that approach is prudent. Given the
lack of purchasing power on the island and strict limitations of who can
receive goods from the U.S., the Cuban marketplace likely cannot
support any significant increases in imports – this is especially true for
more expensive items such as high-tech devices like cell phones and
computers. While opportunities exist for building suppliers and
telecommunications companies, the hurdles to doing business with the
Cuban government can be seen as a barrier that brings additional costs
to the process.
When the announcement was made, the initial fervor presented the
illusion of a gold rush; however, this process of integration with Cuba,
even when the embargo is fully lifted, is going to take decades. Before
Cuba becomes an attractive investment opportunity for U.S. companies,
and particularly developers, greater transparency about laws (primarily
real estate laws), upgraded logistics and banking infrastructure need to
be established, and some form of ownership insurance would need to be
in place. Until that day comes, businesses would be wise to seek
expansions in more economically sustainable and transparent markets
across the globe.
Sources: World Bank; IMF; US-Cuba Trade and Economic Council; Cuban Office of
National Statistics; Miami Herald; Department of Commerce; U.S. Census; Pews Research
Center; Brookings Institute; ULI; Port Everglades; Port Miami; Cuban Ministry of Foreign
Trade and Investment; U.S. Treasury; World City; WLRN; Institute for War and
Peacekeeping; Sun-Sentinel; Bradenton Herald; Finance and Commerce; The Observer;
World Fact Book
©2015 Jones Lang LaSalle IP, Inc. All rights reserved.