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Reconnecting Cuba

For international companies, the last Communist country in the Americas is a compelling market — if they have the right approach. See also “Frontiers of Prosperity: Cuba in Pictures."

I found out how much opportunity there might be for large companies in Cuba on a sweltering August afternoon on one of Havana’s busiest thoroughfares. I ducked into a minuscule shop that seemed to specialize in passport photos and photocopy services. But all the customers I met were purchasing an item that wasn’t advertised at all: a tiny USB stick filled with a terabyte of information and called el paquete semanal, or “the weekly packet.”

Yoan, the 26-year-old clerk, would give me only his first name. He said that every week, an unnamed distributor delivers a fresh packet filled with an eclectic assortment of content: pirated Hollywood films, telenovelas produced in Miami, stand-up comedy, the Spanish-language Wikipedia, and Revolico, Cuba’s semi-legal answer to Craigslist. The material found on the packets is hardly revolutionary; in fact, according to Yoan, episodes of America’s Funniest Home Videos were more frequently found than anything political. But el paquete functions as a mass-distributed, curated version of a world that most Cubans lack the means or opportunity to access. “Everyone I know buys el paquete,” Yoan said. (See “India’s Triple Play” for a similar story halfway around the world.)

The Cuban customers in that shop, hungry for information from the world outside, have had little access to the Internet, which is slow or nonexistent in their country. That fact alone is an invitation to foreign companies — and not the only one. Since U.S. president Barack Obama announced the easing of U.S. sanctions against Cuba in December 2014, nearly every day has brought news of U.S. cruise ships, entrepreneurs, baseball teams, agriculture producers, fashionistas, or Kardashians landing in Havana.

Cuba is not the average frontier market. The U.S. Congress has so far resisted Obama’s call to lift the embargo that has been in place since the early 1960s, and Cuba’s government is openly ambivalent about how much to embrace foreign companies. Like China when it first allowed foreign direct investment in the 1980s and 1990s, Cuba requires that outside companies do business through joint ventures with local companies. In almost every case, setting up the joint venture is an exercise in patience. Local officials examine the merits of the partnership and produce red tape that seems designed to generate more red tape. As in China, the government’s influence colors every aspect of business, and Cuban political leaders continue to express suspicion about U.S. motives. They also clearly remain intent on controlling the speed and trajectory of any economic development there.

 
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But there are some important differences between Cuba and China, starting with the reasons for businesses to go there. Cuba has a population of only 11 million, so to companies, it lacks an incentive to crack an enormous untapped market. And it’s an impoverished country with infrastructure not much better than what one would find in the poorest states in sub-Saharan Africa. More than 50 years of Communist rule and U.S. sanctions have brought down the island’s once-thriving economy.

Moreover, China opened to the outside without barriers imposed by the United States, but the U.S. embargo on Cuba remains a significant hurdle. It requires U.S. companies to get approval from their own country before they can make any moves into Cuba. And whereas China launched its open-door policy with a strategy in place — offering tax holidays, rewarding businesses that cultivated local ties (in ways that didn’t always harmonize with U.S. laws), and requiring local employment and technology transfers aimed at boosting China’s own knowledge economy — Cuba doesn’t have a clear-cut plan for using foreign capital to its advantage, or for fostering economic growth in other ways.

The door that Obama and Cuba’s president, Raul Castro, cracked ever-so-slightly ajar in 2014 has brought a boost to the tourism industry — a record 3.1 million visitors, nearly 150,000 of them from the U.S., according to Cuba’s Office of National Statistics — and a surge of interest from other industries. But the island’s economic problems are bigger than just the U.S. embargo. Castro’s government had been highly dependent on Venezuela as a trading partner, and particularly dependent on the Venezuelan oil that Cuba bought at a very low price and re-exported for hard currency, but the 2013 death of Venezuelan president Hugo Chavez and the decline in oil prices have mostly put an end to that activity. Although companies from all over the world have a presence on the island nation, they have been hampered by a combination of state control, a sluggish economy, and the potential for the U.S. to punish those that trade with Cuba. Now, with the potential for the U.S. to continue lifting sanctions, there’s a big question as to whether Cuba will start its own path to reform.

Another important question also remains unanswered: what this frontier market can offer companies that venture in. Cuba has limped along with a state-controlled economy that produces nickel and cobalt and sends high-end cigars and rum to developed countries other than the United States. Although there are estimates of oil reserves under its waters, exploration of offshore drilling potential hasn’t had positive results so far. This is a country that badly needs a competitive edge in the global economy, and the most likely possibility is evident in that tiny, crowded store I visited: a highly educated population eager to work in the knowledge economy.

In their five and a half decades in power, Cuba’s Communist leaders have consistently promoted universal literacy, and in recent years they have invested large sums of money in education in the STEM (science, technology, engineering, and mathematics) subjects. This investment has paid dividends — of a sort. Each year Cuba produces thousands of new graduates in scientific and technological fields; many of them possess the skill set to contribute to the telecommunications industry.

The country’s surplus of doctors is also noteworthy. Since the 1990s, Havana has sent doctors across the Americas to countries such as Venezuela and Brazil. In 2011, the government’s Center for Molecular Immunology, based in Havana, released a lung cancer vaccine that is currently undergoing FDA review. The vaccine still has months of review and trials ahead of it, but it underscored Cuba’s potential as a source for medical research — an asset that could be of great use to U.S. pharmaceutical companies. Cuba could also emerge as a leading destination for medical tourism, giving people access to developed-world medical services at emerging-economy prices. The island’s colonial architecture, cobblestone streets, and relatively undeveloped beaches have already transformed it into an attractive destination for film producers.

But creating industries around the local talent will take a great deal of reform. Many people have left Cuba because they can’t earn a living there. Medical school graduates joke that if they stay, they’ll have to get jobs as taxi drivers to earn a living. Cuban workers are paid in the local currency, the Cuban peso (CUP), as opposed to the Cuban convertible peso (CUC). Thus their salaries, low to begin with at an average of US$20 to $40 a month, can buy nothing outside the domestic market, but a taxi driver who picks up foreign tourists might be able to accumulate hard-currency tips. Cuba has been hesitant to consolidate the two currencies for fear of destabilizing state-owned enterprises; however, a single currency would be an important signal of the economy opening further to the outside world.

Medical school graduates joke that if they stay in Cuba, they’ll have to get jobs as taxi drivers to earn a living.

Meanwhile, for business leaders who have decided to enter Cuba soon, the economy looks as though it has nowhere to go but up. Throughout Havana, where nearly one-fifth of the population lives, Cubans brave long lines in shops to obtain goods and services. They travel through the city in dilapidated vehicles. Their appetite for a consumer economy was apparent in 2011, when economic reforms allowed private businesses to spring up, particularly family-owned restaurants called paladares.

The possibilities have been encouraging enough that a number of U.S. companies have secured licenses to do business in Cuba and take tentative first steps onto the island. Verizon lets its mobile phone subscribers, when they visit Cuba, access the network for a roaming charge. In July 2015, MasterCard became the first major U.S. credit card to allow transactions in the country. Cargill has been leading an effort to do away with the trade embargo, and was a main force behind the creation of a business alliance called the U.S. Agriculture Coalition for Cuba, which seeks to capture more of the market in a country that imports some 80 percent of its food. Starwood Hotels and Resorts Worldwide opened its first hotel there in June 2016, and has a deal to run others. Netflix, looking to the future, is already making its video streaming service available, even though very few Cubans have the Internet connection or financial means to pay for it right now.

Technology Libre

The potential for growth is particularly strong for information technology companies, yet growth remains elusive. According to Nearshore Americas, a U.S.-based consulting group that has conducted extensive research on Cuba, the country has a potential IT workforce of 25,000 to 100,000 people, skilled in a variety of fields including software testing, networks, and software development. IT workers on the island earn an average salary of around $500 a month, which is a fraction of what their U.S. counterparts can command. In Miami, Spanish-speaking IT business owners regularly outsource coding work to freelancers in Cuba for this reason. Nearshore Americas research director Sean Goforth says that more than half of the 300-plus Cuban IT workers it has surveyed since 2015 reported working for a foreign client. Many of these clients are based in the United States.

The symbolism of Silicon Valley embracing Cuba’s potential as an IT hub was underlined by Obama’s visit in March 2016, when leaders of Google (and its parent company Alphabet), PayPal, Priceline, Airbnb, and Stripe accompanied him. Some companies, such as Google and Airbnb, had been active in the country before. An exploration of Cuba’s business future can’t avoid the example of Airbnb, because it was the first to demonstrate an online business model that works well there. This approach, based on linking travelers with individuals who rent out rooms, fits with Cuba’s service economy and culture, and it embodies no political agenda.

Casa Onelia, where I stayed during my research for this article, is a large, brightly colored mansion situated on Calle C, a tree-lined residential street in the middle of Havana’s elegant Vedado neighborhood. Like many other homes in the area, Casa Onelia is a faded beauty — a throwback to an era 60 years ago, when Vedado was a playground for the country’s rich. Inside, a grand atrium gives way to a living room full of vintage furniture. An old-fashioned television set sits underneath a pencil sketch of Fidel Castro, Cuba’s ruler from 1959 to 2008. The only objects in the old wooden bookshelves are medical texts from the 1950s. Casa Onelia, which has been owned for decades by an extended family named Ortiz, appears virtually unchanged from the country’s pre-revolutionary past, like a prehistoric insect preserved in amber.

Houses like Casa Onelia exist across Cuba and, along with the country’s fleet of vintage cars, form the archetypal image of the country’s Castro-era stagnancy. But the house is about to receive a facelift — and so are many others like it. In April 2015, when Airbnb launched services in Cuba, the family that owns Casa Onelia signed up. Now, prospective visitors to the house can browse, rent, and pay in full for a room before setting foot on the island. In a country where financial uncertainty is the norm, this guarantees the Ortiz family a rare and valuable safety net.

During my visit in August 2015, only one of the six bedrooms in the house was available for rent. But in the coming years, the Ortiz family plans to open several more of their rooms to paying guests, and to use the income to turn their rustic backyard — currently the domain of the youngest son’s beloved pet roosters — into an elegant terrace. It’s easy to see how they’ll afford it. According to Jessica Cox-Ortiz, an Australian married to a member of the family, revenue from Airbnb rentals will eventually boost the family’s income to 30 times that of the national average.

“When I first saw the family home, I knew that visitors would fall in love with it as I had,” Cox-Ortiz told me. “And if we continue to be successful [in renting it], our family will make significant progress in their financial lives.”

Airbnb’s subscriber base more than doubled during its first four months in operation in mid-2015. Around that time, 32-year-old cofounder and chief technology officer Nathan Blecharczyk told Fortune that the “entrepreneurial spirit is everywhere in Cuba” and that the country is “well positioned to reap the rewards of the global economy.”

Barriers to Growth

Other technology companies may not achieve a similar level of success. “Airbnb discovered that there was already a large bed-and-breakfast industry in Cuba,” says Richard Feinberg, a Cuba expert at the Council on Foreign Relations and author of the new book Open for Business: Building the New Cuban Economy (Brookings Institution Press, 2016). For example, there already were casas particulares based in Cuban homes, providing tourists an alternative to the tired state-run hotels. By contrast, Amazon — which now allows customers to ship purchases to Cuba — may not find a ready market. “Apart from a few people who get remittances or who work in the tourist industry,” Feinberg says, “Cubans don’t have any money. They don’t consume.”

Although the government has begun to invest in making the Internet available, only about 5 percent of the Cuban population has regular Internet access at home, one of the lowest rates of Internet penetration in the world. To go online, the vast majority of Cubans must queue up to buy access cards sold by ETECSA, Cuba’s state-run telecommunications monopoly, and find one of a few dozen Wi-Fi hot spots strewn about the capital. The cost of one hour of Internet in Cuba — $2 — is a significant expense to most Cubans. Those who can afford that hour endure some of the slowest connection speeds in the world. In one 2015 survey conducted by Nearshore Americas, 45 percent of the respondents reported connectivity speeds of 1 MB per second; Internet speeds in the Dominican Republic tend to be 10 to 20 times greater. A large number of Cubans, particularly those living in smaller cities and in the countryside, simply don’t use the Internet at all.

But this paradigm is quickly beginning to change. In March 2015, a famous artist nicknamed Kcho — a public figure thought to be personally close to the Castros — attracted international publicity by providing wireless Internet at his cafe. The Cuban government then opened 35 new Wi-Fi hot spots around the country and reduced the hourly cost of Internet access by half. Now Kcho has put together an exhibition of Google artifacts at the Museo Orgánico Romerillo in Havana: a glimpse of technology made public under the guise of art. According to a government white paper leaked by Nearshore Americas, these tentative steps are merely a prelude to even greater changes. By 2017, the ruling regime plans to make 3G data available to mobile phone users living in urban areas, and to expand broadband access to universities nationwide. The following year, the paper says, all government officials — including those in municipalities — will be connected. By 2020, the government plans to extend private Internet access to 90 percent of the population.

This image of the future was apparently not far from Obama’s mind on December 17, 2014, when he announced that the United States would move toward normalizing relations with Cuba. In his statement introducing the policy change, Obama spoke of ending Cuba’s isolation and opening the country up to the “interconnected world.”

“I believe in the free flow of information,” the president said. “Unfortunately, our sanctions on Cuba have denied Cubans access to technology that has empowered individuals around the globe. So I’ve authorized increased telecommunications connections between the United States and Cuba. Businesses will be able to sell goods that enable Cubans to communicate with the United States and other countries.”

Coming into Cuba

How can global enterprises and entrepreneurs enter Cuba successfully, making the most of its talent and proximity to the U.S. and Latin America? One answer comes from entrepreneurs such as Ramphis Castro. A 32-year-old native of Puerto Rico (and unrelated to Cuba’s ruling brothers), Castro has conducted a number of “startup weekends” in markets, such as Yemen and the Palestinian territories, typically not associated with high-tech commerce. Last fall, Ramphis Castro organized a delegation in Cuba and came away impressed with the ingenuity of the people.

“The [Cuban] population is far and away the most educated of all the countries I’ve visited in Latin America, in both depth and breadth,” he told me. “I’ve met many Cubans who have left the country and started very successful companies elsewhere. From my very first engagement within the country, I could see from how they communicated that the bar was high. These were highly educated, highly trained people.” As Cuba opens, he said, Cubans will increasingly compete for work in the global workforce. “Virtually no other market has the combination of baseline healthcare and baseline education that Cuba has,” he said. He added that Cuban companies will also be increasingly competitive, especially now that they can open bank accounts in the United States.

And then there are the global enterprises seeking to enter Cuba. Ramphis Castro, who accompanied Obama on his March visit, claimed that the political thaw would offer tremendous opportunities for U.S. and European companies. “Doing business in Cuba is still much slower than anyone would like,” he said. “But it’s a thousand times faster than it was even six months ago.”

Achieving success still depends on managing the political nature of the economy: recognizing the priorities of the Cuban government, and putting those before the market demands of the people. The companies that succeed in Cuba will be those that develop a strategy tailored to this country, rather than adapting their standard developing-world playbook. And although companies whose initiatives threaten government control will be met with resistance, those that do not explicitly undermine the ruling regime have the potential to thrive. History is on their side.

It is now 57 years since Fidel Castro overthrew the dictatorship of Fulgencio Batista and aligned his government with the Soviet Union. During the Cold War years, the United States government engaged in systematic attempts to overthrow him. Rhetorically at least, this emphasis has eased. In April 2015, Obama met with Raul Castro at a Summit of Americas conference in Panama and assured the Cuban president that the United States was “not in the business of regime change.” Nevertheless, the U.S. State Department budget for 2016 includes a $20 million provision to aid Cuban victims of political repression, support civil society, and encourage free speech — initiatives that the Cuban government regards as threats to its sovereignty.

In 2014, when Washington was deep in negotiations with Havana regarding normalization, the U.S. government revealed that it had secretly launched a Twitter-like social media platform called “ZunZuneo,” Cuban slang for a hummingbird’s tweet, in 2010. The program initially sent text messages to unsuspecting Cuban users with information about nonpolitical subjects, but the plan was to develop a network, then create public action through flash mobs intended to disrupt order. Ultimately, the program topped out at 40,000 subscribers before disappearing mysteriously in 2012.

This episode — an attempt to foment grassroots resistance to the Cuban government — accomplished little except to confirm Havana’s suspicion that the U.S. views technology as an agent for political change. And this suspicion will doubtlessly hover over U.S. companies’ efforts to establish a foothold in the country.

“High-level Cubans will ask why they should give the U.S. the gift of widespread Internet, so that [the U.S.] can engage in regime change,” says Kirby Jones, the founder of Alamar, a Maryland-based consultancy. Jones has traveled to Cuba regularly as a journalist, consultant, and businessman since the early 1970s. “And there are examples of the U.S. doing exactly that. It’s hardly a pie-in-the-sky idea.”

Cubans who are suspicious of outsiders’ motives have in fact treated the Internet as an invader. The experience of Google is instructive. In June 2014, former Google CEO Eric Schmidt and two other company officials made a highly publicized visit to the island, where they met with government officials as well as Yoani Sanchez, a well-known dissident blogger. Following his return to the United States, Schmidt characterized the trip — which received no mention in the official Cuban media — as a success, and called on the U.S. government to end its trade embargo of the island. But the next year, evidence surfaced that Google’s approach to the Cuban market had not been entirely smooth. In June 2015, José Ramón Machado Ventura, the second-highest-ranking official in the Cuban Communist Party (behind Castro), announced that a United States–based Internet company had offered to provide wireless Internet across the island — but the government refused. This company was apparently Google.

“Internet access is a great opportunity and at the same time a great challenge, because new technologies are novel and vital, not only for person-to-person communication, but also for development,” Machado was quoted. “[Google isn’t] doing this so that Cubans can communicate with one another; rather, they’re doing it with the goal of penetrating us on ideological grounds, in an effort to make a new conquest.”

Google, which declined comment for this article, never confirmed that it had made such an offer. But its inability to pull off a large initiative in Cuba nonetheless highlights the differences between Cuba and, say, Uganda, whose Internet infrastructure Google recently invested large sums in improving. The central African nation, like Cuba, is relatively stable and underdeveloped. But the country lacks the historical baggage with the U.S. that characterizes Cuba; Washington, for instance, has never tried to undermine Uganda’s government through subterfuge. For Google, success in Cuba may require making compromises with Havana that the company has been unwilling to make with Beijing; in 2010, after China refused to stop censoring search results, Google moved its Chinese servers to Hong Kong, where they remain today.

Waiting for the geriatric Castro regime to collapse or reform itself is also a losing strategy. The Cuban government permits no organized opposition to its rule, and the Communist Party appears to be well positioned to survive the death of its founding leadership. Raul Castro has anointed Miguel Díaz-Canel, a 55-year-old career bureaucrat, as his successor — and no evidence currently exists that the putative next president of Cuba intends to alter the trajectory of his country’s politics.

“Whoever is planning to do business in Cuba should be planning to do business with the current government for the foreseeable future, not some radically changed, altered system,” says Ted Henken, a professor at Baruch College who specializes in Cuba. “The Cuban government doesn’t foster a great investment climate, but it’s good to know who you’re going to be dealing with. Foreign investors have to do a lot of homework, and find the right people to talk and engage with, because [they] have to go through the government and not anyone else.”

For Google, Henken says this might mean focusing on initiatives that fit more neatly with government wishes, such as improving geographic coverage for Google Maps or building a digital catalog of the country’s museums.

Even companies that overcome this hurdle must contend with other limitations and roadblocks, including some that have emerged since Obama’s normalization overtures began. The most difficult challenge is the relative absence of a consistent regulatory framework in Cuba. This gap has left several companies unclear about how they can and cannot operate in the country. Despite liberalizations introduced under Raul Castro, the Cuban government remains “extremely bureaucratic, centrally planned, and structured,” says Alana Tummino, the director of policy and head of the Cuba Working Group at the Council of the Americas, who has written extensively about Cuba and has accompanied delegations of U.S. businesses to the island in the past year.

This leaves unclear answers to even basic legal and regulatory questions. Do you have the right to operate your business in the country and, if so, will you encounter problems if you achieve success and begin to scale up? Will the Cuban legal system protect your intellectual property? Or might copycat domestic firms soon emerge to compete for market dominance? What happens to your enterprise if things go badly — for example, if there is a dispute over labor relations or intellectual property? And the Cuban government’s relative lack of foreign currency means that foreign companies may face delays in getting paid.

“There are real challenges,” says Tummino. Global companies are “going to have to create a business in Cuba and see what the government approves or disapproves.”

Still, Henken believes that companies interested in the market should jump in, even if the possibility of failure is high. “If I were a venture capitalist or an entrepreneur, I would get in there now,” he says. “It’s a learning process. You’re going to lose money. Cuba isn’t a huge country, it’s not a huge market, but there’s a lot of growth potential.”

Once again, the deciding factor may well be human capital — the people of the country. On my last day in Havana, I went to the once-grand Hotel Nacional de Cuba near Havana’s famed Malecon, a sea wall that divides the city from the waters to the north. In the 1950s, the hotel was a regular hangout for U.S. gangsters like Bugsy Siegel and Meyer Lansky, men who spent untold sums in Havana’s casinos. Today, the hotel still receives tourists from around the world. In its lobby, I met Carlos Alzugaray Treto. A 72-year-old retired diplomat, Alzugaray Treto was cosmopolitan, erudite, and fluent in English — a result of having spent considerable time in the United States. He recounted meetings with government officials less than 10 years ago where his laptop elicited looks of suspicion from stodgy old ministers. Now, he said, the putative next leader of Cuba, Diaz-Canel, has been seen carrying an iPad.

Alzugaray Treto is no fan of Communist economics. “Central planning, frankly, sucks,” he said, laughing. But, recalling his youthful visits to the Hotel Nacional and its opulent foreign presence, he said he had no desire for Cuba to return to where it was. “We want to move forward in this country,” he said. “Not backward.”

Author Profile:

  • Matt Schiavenza is a writer in New York. His work has appeared in the Atlantic, the New Republic, the Daily Beast, Fortune, and other publications.

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Reconnecting Cuba