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Capitalizing on Cuba
Mexico Business / November-December 1994

By Larry Luxner

From palm-fringed Varadero Beach, where billboards advertise Cubacel mobile phone service, to the port city of Cienfuegos, home of the island's largest oil refinery, Cuba's economic landscape is rapidly changing as Mexican entrepreneurs crack one of the world's last virgin markets.

In fact, Mexico -- only 130 miles from the western tip of Pinar del Río province -- now ranks as the biggest foreign investor in Cuba. Accurate numbers are tough to come by, but some observers think Mexican investment in Cuba already runs into the hundreds of millions of dollars, far surpassing rivals Canada and Spain.

"Altogether, Mexico has already invested over $1 billion in Cuba. The entirety of Cuba's debt to Mexico has now been liquidated," says Andrew Zimbalist, economics professor at Smith College and veteran Cuba-watcher.

Others are less enthusiastic. "The amount of foreign business interest in Cuba is steadily increasing," says a European diplomat based in Havana. "I don't think one can point to any breakthroughs yet."

The real breakthrough, of course, would be an end to Washington's 33-year-old trade embargo against Cuba. Much to the delight of Mexican investors, that's not going to happen anytime soon. The only official U.S. presence in Cuba is the somber-looking U.S. Interests Section along Havana's seaside Malecón, where hundreds of Cubans line up every day for tourist visas.

Yet for the moment, few U.S. officials inside appear overly concerned that their country is "losing" Cuba to the Mexicans -- or anyone else.

"There's no real foreign investment here," snaps one U.S. bureaucrat. "Your return doesn't depend on your entrepreneurial skills; it depends on your brown-nose ability. I don't think by any stretch of the imagination these could be construed as joint ventures. The state still makes all the decisions."

While it's true that the state runs the show, the diplomat's politically charged assessment of "no real foreign investment" in Cuba is highly debatable. More than half a dozen Canadian companies have mining interests in everything from aluminum to zinc. An Israeli group has poured $22 million into a sprawling citrus plantation at Jagüey Grande. And Spain's Grupo Sol has already invested $78 million in three Varadero hotel properties.

But the Mexicans don't talk just in millions of dollars. They talk in hundreds of millions, even billions, of dollars.

According to the monthly newsletter CubaNews, Monterrey businessmen Mauricio Fernández and Danny Tafich announced last year they would invest $611 million in a Cuban textile operation. The pair hope to produce 376.2 million square meters of finished plain textile annually and employ up to 35,000 people. The Miami Herald reports that a startup Mexican company, International Textile Corp., is providing 55% of the operating capital, and the Cuban government plans to supply $500 million worth of production assets and labor.

Neither Garza nor Tafich could be reached for comment. But the venture -- which involves half a dozen factory sites throughout Cuba -- appears to be the largest foreign investment in the island to date.

Other deals are sprouting from one end of Cuba to the other. Mexpetrol, a joint venture partly owned by Petróleos Mexicanos (Pemex), is negotiating to invest at least $100 million in the Soviet-built oil refinery at Cienfuegos. Guadalajara-based DSC Engineering recently bought a $14 million interest in Varadero's Hotel Tuxpan, according to CubaNews. Other Mexican firms planning to invest in Cuba include liquor distributor Grupo Domecq, which wants to import Cuban rum, and engineering and construction company Bufete Industrial, which has modernization projects for 20 hotels.

"I think some of this interest is sparked by Nafta," Zimbalist says. "Mexicans want to take advantage of North American markets and they feel they can do so by investing in Cuba. They have always had a good political relationship with Cuba, and hence they're able to work out the kinds of technical details and guarantees other countries might not be able to do."

But some of these investments have generated more controversy than cash. Last February, Cementos Mexicanos (Cemex) signed a deal to lend its technical and commercial expertise to a joint venture cement plant operated by Bancomext and the Cuban government. The company is now finding itself the object of complaints by Lone Star Industries Inc. of Connecticut, which owned the plant before Castro seized it in early 1960.

Cemex spokesman Sergio Camarena downplays the deal. "There is not much business to talk about," he says. "From time to time, we send technicians from our Spanish operations to Cuba, and we occasionally export small amounts of cement to other Caribbean countries."

Mexico's commercial interest in Cuba -- which began in 1990 -- is twofold. The Mexican government wants to recover nearly $313.4 million in debt owed by Havana as well as gain a foothold in the Cuban market before the U.S. embargo is lifted.

One of the very first bilateral deals was Cubacel, an $8 million venture between government-owned telephone company EmtelCuba and Telecomunicaciones Internacionales de Mexico S.A. (Timsa). According to Cubacel President Miguel Niño de Rivera, the cellular telephone network has been in operation since February 1993 and now has 700 customers.

"It's the only cellular joint venture in Cuba," says Rivera, whose company operates out of a restored mansion in Havana's once-fashionable suburb of Miramar. Visitors get complimentary desk calendars and plastic cigarette lighters made in Japan and imprinted with Cubacel's catchy logo.

But Cubacel isn't designed for Cubans. Rather, the service is aimed at embassies, foreign news agencies, visiting executives and others who need reliable phone service and have the dollars to pay for it. Cubacel customers pay a monthly $40 fee, plus up to 90 cents per minute for calls made during peak hours. The phones -- available to short-term clients for $7 a day -- are supplied by Ericsson and several Japanese companies. Four stations in Havana and the beach resort of Varadero make cellular service possible.

Rivera is reluctant to give sales projections, saying such numbers are confidential. But he does expect growth in tourism and other sectors of the Cuban economy. "It depends on the dynamics of the long-term market," he says. "In certain sectors, we're seeing a big increase in business."

Cellular phones allow executives and diplomats to bypass the Cuban phone network altogether, whether they're dialing across the Atlantic or across town. Without reliable phone service, Cuba is unlikely to get the foreign investment it so desperately needs. Right now, a caller attempting to use one of the few public phones still in service is more likely to get zapped with an electric shock than to get a call through.

That's where Grupo Domos plans on coming in. Earlier this year, the Monterrey conglomerate agreed to pay $1.5 billion for a 49% share of EmtelCuba. That gives Grupo Domos an all-inclusive concession for 55 years with 12 years of exclusivity.

Hector Cuéllar, director of communications for Grupo Domos, says that Cuba has about 450,000 lines in service -- or about 5 per 100 inhabitants. "Our plan is to add up to 1 million lines," he says. "After seven years, at the end of the first stage, we'll have 11 lines per 100 people. In some places like Havana, we'll get up to 20."

Grupo Domos plans to spend $750 million on expansion and modernization, Cuéllar says, in addition to the $1.5 billion already committed. Slightly more than $300 million of the initial investment will be a debt swap between Cuba and Mexico, which will be paid directly to Bancomext.

Domos also wants to select an operating partner. Company sources say four non-U.S. companies have "expressed genuine interest in participating with Domos" to rebuild Cuba's telephone network.

Cuéllar adds that his company welcomes the U.S. Federal Communications Commission's approval in mid-October of petitions by five U.S. companies -- Sprint, MCI, LDDS, WilTel and IDB WorldCom -- to offer direct long-distance service to Cuba -- the first upgrading of the U.S.-Cuba phone service in 30 years.

"The re-establishment of telecommunications between the U.S. and Cuba will assure the viability of our investment," Cuéllar says. "This will generate lots of traffic."

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