Unilever and British American Tobacco invest - A new realism in Cuba

Unilever and British American Tobacco invest: A new realism in Cuba
By: Richard Feinberg

The global consumer products company Unilever Plc announced on Monday a
$35 million investment in Cuba's Special Development Zone at Mariel.
Late last year, Brascuba, a joint venture with a Brazilian firm, Souza
Cruz, owned by the mega-conglomerate British American Tobacco (BAT),
confirmed it would built a $120 million facility in the same location.

So far, these are the two biggest investments in the much-trumpeted
Cuban effort to attract foreign investment, outside of traditional
tourism. Yet, neither investment is really new. Unilever had been
operating in Cuba since the mid-1990s, only to exit a few years ago in a
contract dispute with the Cuban authorities. Brascuba will be moving its
operations from an existing factory to the ZED Mariel site.

What is new is the willingness of Cuban authorities to accede to the
corporate requirements of foreign investors. Finally, the Cubans appear
to grasp that Cuba is a price-taker, and that it must fit into the
global strategies of their international business partners. Certainly,
Cuban negotiators can strike smart deals, but they cannot dictate the
over-arching rules of the game.

Cuba still has a long way to go before it reaches the officially
proclaimed goal of $2.5 billion in foreign investment inflows per year.
Total approvals last year for ZED Mariel reached only some $200 million,
and this year are officially projected to reach about $400 million. For
many potential investors, the business climate remains too uncertain,
and the project approval process too opaque and cumbersome. But the
Brascuba and Unilever projects are definitely movements in the right
direction.

In 2012, the 15-year old Unilever joint-venture contract came up for
renegotiation. No longer satisfied with the 50/50 partnership, Cuba
sought a controlling 51 percent. Cuba also wanted the JV to export at
least 20% of its output.

But Unilever feared that granting its Cuban partner 51% would yield too
much management control and could jeopardize brand quality. Unilever
also balked at exporting products made in Cuba, where product costs were
as much as one-third higher than in bigger Unilever plants in other
Latin American countries.

The 2012 collapse of the Unilever contract renewal negotiations
adversely affected investor perceptions of the business climate. If the
Cuban government could not sustain a good working relationship with
Unilever—a highly regarded, marquée multinational corporation with a
global footprint—what international investor (at least one operating in
the domestic consumer goods markets) could be confident of its ability
to sustain a profitable long-term operation in Cuba?

In the design of the new joint venture, Cuba has allowed Unilever a
majority 60% stake. Furthermore, in the old joint venture, Unilever
executives complained that low salaries, as set by the government,
contributed to low labor productivity. In ZED Mariel, worker salaries
will be significantly higher: firms like Unilever will continue to pay
the same wages to the government employment entity, but the entity's tax
will be significantly smaller, leaving a higher take-home pay for the
workers. Hiring and firing will remain the domain of the official
entity, however, not the joint venture.

Unilever is also looking forward to currency unification, widely
anticipated for 2016. Previously, Unilever had enjoyed comfortable
market shares in the hard-currency Cuban convertible currency (CUC)
market, but had been largely excluded from the national currency
markets, which state-owned firms had reserved for themselves. With
currency unification, Unilever will be able to compete head-to-head with
state-owned enterprises in a single national market.

Similarly, Brascuba will benefit from the new wage regime at Mariel and,
as a consumer products firm, from currency unification. At its old
location, Brascuba considered motivating and retaining talent to be
among the firm's key challenges; the higher wages in ZED Mariel will
help to attract and retain high-quality labor.

Brascuba believes this is a good time for expansion. Better-paid workers
at Mariel will be well motivated, and the expansion of the private
sector is putting more money into consumer pockets. The joint venture
will close its old facility in downtown Havana, in favor of the new
facility at Mariel, sharply expanding production for both the domestic
and international markets (primarily, Brazil).

A further incentive for investment today is the prospect of the lifting
of U.S. economic sanctions, even if the precise timing is impossible to
predict. Brascuba estimated that U.S. economic sanctions have raised its
costs of doing business by some 20%. Inputs such as cigarette filters,
manufacturing equipment and spare parts, and infrastructure such as
information technology, must be sourced from more distant and often less
cost-efficient sources.

Another sign of enhanced Cuban flexibility: neither investment is in a
high technology sector, the loudly touted goal of ZED Mariel. A
manufacturer of personal hygiene and home care product lines, Unilever
will churn out toothpaste and soap, among other items. Brascuba will
produce cigarettes. Cuban authorities now seem to accept that basic
consumer products remain the bread-and-butter of any modern economy. An
added benefit: international visitors will find a more ready supply of
shampoo!

The Unilever and Brascuba renewals suggest a new realism in the Cuban
camp. At ZED Mariel, Cuba is allowing their foreign partners to exert
management control, to hire a higher-paid, better motivated workforce,
and it is anticipated, to compete in a single currency market. And
thanks to the forward-looking diplomacy of Raúl Castro and Barack Obama,
international investors are also looking forward to the eventual lifting
of U.S. economic sanctions.

Source: Unilever and British American Tobacco invest: A new realism in
Cuba | Brookings Institution -
http://www.brookings.edu/research/opinions/2016/01/14-unilever-british-american-tobacco-cuba-feinberg