CUBA: Trade Opportunities : Mexico Jockeys for Cuban Trade : Latin America: Businesses take advantage of the American embargo to exploit new opportunities on the island nation.

Mexican diplomats are leading the international protest against the United States’ tightening of its 30-year-old embargo of Cuba, but many Mexican business executives aren’t complaining about the American policy.

The embargo--which bans commerce between the United States and Cuba--keeps powerful American competitors at bay while Mexican businesses strengthen their own presence in the Caribbean’s largest market.

Now that Cuba’s communist government is courting trade and investment to replace the economic lifeline snapped by the collapse of the Soviet Union, businesses from several nations are jockeying for position in the nation of 10 million people--a market 10 times larger than any other in the Caribbean.

Last month, 816 companies from 33 countries attended the Havana International Fair, an event sponsored by Fidel Castro’s government to encourage trade and investment.

But Mexicans, whose sales to Cuba rose 3% last year to $104 million, believe that geographic proximity gives them the edge in the race to exploit new opportunities in the island nation. However, the United States is still right next door, and Mexico’s advantage holds only as long the Americans aren’t in the picture.

“If it weren’t for the boycott, U.S. companies would be competing for that market,” said Gerardo Escamilla, Caribbean export manager for Grupo Condumex, a Mexico City-based industrial conglomerate that is among the most active exporters to Cuba. “It would be a lot different from competing against South America, where the technology is older, or the Europeans, who are so far away and cannot deliver quickly.”

The U.S. action that most recently drew diplomatic outrage was the decision to extend the 1962 embargo. The new law, put into effect in October, bars foreign based-subsidiaries of American companies from doing business with Cuba.

Mexico has been among the most vocal of the countries attacking the new sanctions as a U.S. infringement on their sovereignty.

However, the amendment to the embargo gives Mexican companies a crack at the $700-million worth of business that foreign subsidiaries of U.S. companies did with Cuba last year.

Mexico now exports to Cuba industrial goods such as copper tubing, cables and refined petroleum products. Cuba, in turn, sells Mexico mainly sugar and cigars.

But Cuba is expanding opportunities from trade in goods to offering foreigners equity interest in foreign-exchange earning industries. Mexican businesses are seeking out such deals, joining the Spaniards, who are building hotels, and the French, who are drilling for oil in Cuba.

To the Mexicans and other foreigners investing in Cuba, the ongoing U.S. embargo--like the U.S. sanctions against Vietnam--is another example of U.S. Cold War policies hurting U.S. businesses in a rapidly changing world.

“Within a year, the Cuba we see now will be very different,” predicted Danny Tafich, a Mexican textile broker who is part of a partnership that has agreed to pay $50 million for a 55% interest in a Cuban cloth factory. “There will be many more investors from countries with free market economies that will enter this country from the rest of the world. The United States is losing this opportunity, definitely.”

The timing of Cuba’s new appetite for foreign investment could hardly be better for Mexican businesses. No longer protected by high tariffs at home, Mexican companies are increasingly deciding that the only way to beat international competitors is to become global players themselves. Selling to foreign markets permits them to increase volume, improve efficiency and lower prices while overseas plants allow them to take advantage of labor costs even lower than those at home.

The Mexican government is aggressively supporting the international ambitions of Mexican businesses. In Cuba, for example, Mexico’s export-import bank has assisted Mexican companies in acquiring interests in Cuban properties by using Cuba’s debt to Mexico to effect debt-for-equity swaps.

Under the swap program, the Mexican government sells Cuba’s outstanding loans to an investor at a discount. The Cuban government buys back the debt by giving the investor an equity interest in a Cuban enterprise.

DSC, a Mexico City-based real estate management firm, recently used swaps to purchase a 50% interest in two Cuban resort hotels. “For us, it’s like Linus’ blanket, a kind of moral support from our government,” said Jose Giral, DSC general manager.

Representatives of both countries, along with investors who have used the swaps, declined to provide details of how much of a discount is being offered or how much has been invested through the program--although Mexican press reports peg the amount at $30 million.

However, Mexican investors are probably getting a bargain. Cuban debt is trading at about 12.5 cents per dollar of face value, so the discounts are probably deep.

“We didn’t just buy them because they were cheap,” Giral said. “Actually, the discounts were less important to us than the opportunity to buy (hotels).”

The hotels, he said, complement DSC’s four hotels on Mexico’s Caribbean coast.

Combined with the company’s air charter business, the purchase is a chance to bring the German tourists staying at the Cuban hotels to DSC’s Mexican resorts in Cozumel, Isla Mujeres, Yucalpeten (near Merida) or Boca Paila, a bird sanctuary close to the Belize border.

He would not specify the amount of the investment--saying only that it was comparable to prices paid for other Caribbean resort hotels. Other sources close to the deal estimated it at about $20 million.

The Cuban government is still a partner with DSC in the 335-room Tuxpan Hotel at famed Varadero Beach and the 220-room Bucanero Hotel at Santiago, near Guantanamo Naval Base on the south end of the island.

The government is expected to maintain an interest in the hotels--unless it needs to pay more debt--because they are important foreign exchange earners. Occupancy rates are about 80%.

Bancomext has also shown a willingness to finance non-swap investments, such as its assistance to Monterrey-based Overseas Industries Inc. to buy a majority interest in a Cuban textile factory. The Cuban government will retain a minority interest in the plant once the pending deal is completed.

The Soviet-built factory is now operating at about 15% of capacity because of a lack of raw materials, said textile broker Tafich, a partner in Overseas Industries whose family has a long history in the Mexican textile industry. In the next two years, he plans to increase production to 80% of capacity--376 million square meters of cloth a year--for projected annual sales of $400 million, using Mexican cotton, nylon and polyester in combination with rayon from Brazil and the Far East.

By substituting those raw materials for the former East Bloc discards that the factory previously used, Tafich said he can make cloth to sell in Canada, Mexico and South America, markets he now serves as a broker. Costs will be low, he added, because the factory is modern and Cuban labor is cheap.

Bancomext officials would not comment on the deal. Tafich said the joint venture has already agreed to earmark 25% of its profit for repayment of Cuba’s debt to Mexico and that all loans will be guaranteed by Overseas Industries.

Like many Mexican business people, Tafich is bewildered by the continuing U.S. embargo of Cuba.

“I do not agree with many of Fidel’s ideas,” he said. “I did my master’s degree in the United States (at Louisiana State University). I am a capitalist. But, in a world recession, we cannot afford to be angry with anybody.”

Mexico-Cuba Trade Sales of Mexican products to Cuba have been rising, up 3% alone last year. However, the island nation’s deepening economic crisis is drastically cutting Cuban exports to Mexico. Source: Mexican Commerce Ministry