Cuba Offers Up Opportunities and Headaches for American Entrepreneurs

Cuba Offers Up Opportunities and Headaches for American Entrepreneurs
by David DeVoss AUGUST 3, 2016, 11:52 AM EDT

Regulations are loosening in the Communist country, but the business
climate remains uncertain.

Zach Smith built his $15 million travel business by offering customized
tours of exotic locations in Latin America. But in order to stay ahead
of the competition, the 35-year old, Seattle-based entrepreneur knew he
needed a new attraction. He stumbled upon an answer when President Obama
announced the U.S. would reestablish diplomatic relations with Cuba in
2015: His company would offer trips to Havana.

Unfortunately, Smith had no idea how to locate prospective vendors,
establish credit or obtain government permission to do business in the
country. His credit card didn't work in Havana — the island's economy
relied almost exclusively on cash. While a tourist might carry enough
money to pay for a holiday weekend, no company could risk bringing in
bricks of bills to cover ongoing expenses.

And so late last year, he flew to Havana for a three-day, $2,600
English-speaking tour of the city, designed for U.S. business men and
women looking to do business in the country. "We went to an automobile
factory, met with a Cuban attorney handling real estate transactions,
visited the office that operates Cuba's ports and got a briefing from
the organization that handles all external investment," he remembers.

Sonia Laguna, who was born in Cuba and raised in the U.S., started
giving these tours last April. Most of the 30 U.S. executives and
entrepreneurs she has taken so far are interested in real estate, the
hospitality industry, pleasure boat charters, bilateral trade and
establishing small factories in the "free zone," i.e. the
180-square-mile special economic area outside Havana near the Port of
Mariel, where foreigners who get Communist Party approval can establish
a business and own 100% equity. "I take them to government offices
responsible for foreign investment and introduce them to Havana's
cuentapropistas — small private entrepreneurs the government allows to
operate taxis, shops, restaurants and garages," Laguna says.

Normally when a nation welcomes Western investment, multinational
corporations are first through the door. This hasn't happened in Cuba
because of the U.S. embargo against Cuba, first imposed in the 1960s and
strengthened in the 1990s.

While the embargo is still in effect, President Obama has indicated he
wants to hasten Cuba's transformation to a market economy and continues
to use his executive authority to exempt certain businesses from the
congressional embargo. Washington believes Americans investing in
agriculture, construction, trade and tourism are more likely to work
directly with individual Cubans rather than state enterprises, so these
sectors have been opened to U.S. investment.

Tourism is already booming. More than 94,000 U.S. tourists visited the
country in the first four months of 2016, nearly double the number from
the same period the previous year. A few large companies have already
established tentative beachheads in Cuba: Airbnb has 4,000 rental
properties in Cuba, the company's fastest growing market, a Sheraton
Hotel opened in June and a Starwood-managed hotel will open in August.
Meanwhile, eight U.S. airlines have been approved to fly to Cuba, and
Carnival Cruise Lines is selling tickets for excursions that will dock
briefly in the country later this year.

Most new trade in the immediate future, however, is expected to be
conducted by small and medium-sized enterprises like Smith's travel
company, which have more in common with Cuba's cuentapropistas. After
his tour's conclusion, Smith stayed in the country for three extra days,
retained an attorney and found a photographer to take publicity shots
for his website. Since then he's returned to Havana twice and
commissioned several employees to prepare for the eventual arrival of
inbound travelers. (Native-born Americans are free to travel to Cuba if
they are part of an established tour that provides a visa and round trip
ticket, while naturalized Cuban Americans must get a special visa or, in
some cases, a Cuban passport to use in place of their American one.)

"Cuba's infrastructure is underwhelming, but Havana has a good feeling,"
Smith says. While the Communist Party "remains firmly in control,"
Havana welcomes capitalist investment, expertise, machinery and
management as long as Western influence stays within the economic sector.

"I was very encouraged by what I saw on my two trips to Cuba this year,"
says Maria Contreras-Sweet, the administrator of the Small Business
Administration. She views home repair and construction as two of the
biggest untapped markets. "A lot of preservation is taking place by
Cubans committed to the restoration of historic Havana," she says. "A
lot of people I met wanted to restore their homes but they need hardware."

Reza Haghayegh, president of the LHP Group, a Miami construction and
building supply company, made the same observation when he visited
Havana in March on one of Laguna's tours. "I think there's a niche
market for large stepping stones that can be used on patios and
driveways," he says. "Everything can be made there; I just need to bring
in molds, machinery and vibrators."

Attracted to Havana by its lifestyle, cuisine and proximity to Miami,
Haghayegh has filed the necessary paperwork to start a joint venture.
"I'm going for a second visit next month and hopefully the door will be
open by the time the approvals are granted."

Chicago resident Kimberly Wallace traveled to Cuba earlier this year to
do background research for a novel. But after several days roaming
Havana, Wallace, who has experience in grocery retailing and food
packaging, realized that Cuba lacks a wholesale food industry. "I'd go
to paladares and some of the items on the menu wouldn't be available
because the restaurant had run out," she says. "I asked how they
replaced products like butter and olive oil and was told they flew to
Mexico and went shopping at Sam's Club. It's amazing that somebody has
to leave the country in order for food to come in."

In July, Zona+, a quasi Costco opened in Havana, but Wallace thinks it
falls short of being a true food distributor. She plans to fly to Havana
in September to seek approvals for her own wholesale distribution
company that will bring U.S. foodstuffs to Cuba in bulk and return to
the U.S. with sugar, avocados and a Cuban fruit called mamey.

The Obama administration is not letting the embargo stand in the way of
increased bilateral trade. Recently, it loosened rules on financial
services so that U.S. banks could extend credit to companies doing
business in Cuba although thus far only one financial institution,
Stonegate Bank in Pompano Beach, FL, has issued a credit card good for
transactions in Cuba.

Maria Contreras-Sweet urges entrepreneurs to look at the Small Business
Administration's loan products. Options include working capital loans of
up to $5 million to fund export transactions and an International Trade
Loan Program, which helps small American businesses trying to enter the
international market by guaranteeing up to 90% of a loan used for
working capital financing and debt refinancing.

"Being mindful of the current limitations on trade doesn't preclude an
honest and direct conversation now on what is possible in the future,"
she says. In other words, the situation in Cuba is still uncertain, but
there are already a lot of opportunities for U.S. entrepreneurs.

Source: Cuba Offers Up Opportunities and Headaches for U.S.
Entrepreneurs - Fortune -
http://fortune.com/2016/08/03/cuba-entrepreneurial-opportunities/