Tobacco International / January 2002
By Larry Luxner
Thanks to the 40-year-old U.S. trade embargo against Cuba,, you won't find the Marlboro man in too many smoke shops around Havana these days. And that's just fine with Brazil's Souza Cruz S.A., which produces a variety of Cuban cigarettes under a 50-50 venture with the Castro regime.
Flavio de Andrade, president and CEO of Souza Cruz, says the six-year-old venture -- known as BrasCuba -- is doing so well that its Havana cigarette factory may soon double production in order to keep up with increasing domestic and overseas demand for its brands.
"Since the beginning, this operation has been profitable," said Andrade, though he declined to say by how much. "This was one of the objectives of the project: to make the operation profitable not just for ourselves, but also for our partner, the Cuban government."
Interestingly, BrasCuba represents Souza Cruz's first and only foreign investment -- a consequence of the company's longtime affiliation with British American Tobacco Co. (BAT).
"Cuba is the most important market in the Caribbean region, and it was the only country where BAT did not have a presence," Andrade explained. "So BAT asked Souza Cruz if we were inclined to participate in the Cuban market. We said yes. It took two years from the time we started talks with the Cuban authorities, until the time we closed the deal."
Since inaugurating the joint venture in 1995, Souza Cruz has invested some $25 million in BrasCuba. Other Brazilian companies such as bus manufacturer Busscar and oil giant Petrobras have made limited investments in Cuba, but BrasCuba easily remains the biggest.
"We manage this company like we manage Souza Cruz itself," says Andrade. "BrasCuba is by far more efficient than the government-owned cigarette companies."
Andrade says that BrasCuba now has a 10% share of the Cuban cigarette market, which is estimated at 10 billion units a year. BrasCuba's brands sell at hard-currency shops throughout Cuba for an average 70 cents a pack; these range from Popular -- the best-selling brand -- at 50 cents, to Monterrey (60 cents) up to Hollywood and Romeo y Julieta, each at $1 per pack. Most of the remaining 90% consists of lower-quality cigarettes produced in Cuban government factories, though import brands do have a 2-3% market share -- and that even includes Marlboro and other U.S. brands that enter Cuba through Panama's Colón Free Zone.
According to Andrade, BrasCuba employs 400 people. All are Cubans except for three Brazilian supervisors. "I have to say we are very proud to offer this type of employment in Cuba," he said. "Another important thing is the quality of the people we have. They are very well-educated. This surprised me when we started the operations."
Yet Andrade concedes that "there's no comparison with Brazil" when discussing the salaries of his Cuban workers, which are hired by the Castro government and not directly by Souza Cruz. They earn the equivalent of $30-40 a month -- high by Cuban standards because BrasCuba is allowed to offer limited monetary incentives to boost production. That's still peanuts compared to the $280 a month earned by the average Souza Cruz employee in Brazil, but, adds Andrade, "the system in Cuba is totally different. The government subsidizes the majority of the population."
Several times during our interview, Andrade expressed concern about the U.S. State Department learning too much about Souza Cruz's operations in Cuba. Maybe that explains why BrasCuba isn't mentioned anywhere in the company's 2000 annual report or on its official website.
Even so, Andrade, who travels to Cuba two or three times a year, says he's never received any direct warnings from Washington. And he claims that one of the most contentious issues regarding foreign investment in Cuba from the U.S. point of view -- ownership of "confiscated" properties belonging to Cuban exiles now living in the United States -- doesn't apply to Souza Cruz.
"At the beginning, we had some problems related to the property ownership. But by coincidence, the property where we have our factory now belongs to our group," he said. "It was originally part of the American Tobacco Corp. many years ago, but then American Tobacco was bought by Brown & Williamson, our sister company in the U.S. Since then, we have had no problems."
Andrade says BrasCuba plans to finish 2001 with sales of 1.5 billion cigarettes. Of that, one billion units will have been sold on the Cuban domestic market, with the remaining 500 million cigarettes -- mainly Romeo y Julietas -- shipped to Europe, Mexico and other markets.
"We're putting a lot of efforts behind exports," he says. "Cuba is very dependent on hard currency, and one of BrasCuba's objectives is to help the country through exports, which we think we have the ability to develop."