Amid a flurry of developments resulting in the reestablishment of a United States embassy in Havana in August of last year, business leaders across the world have increasingly turned their attention to Cuba. However, companies should be very careful when gauging the true opportunity presented by this relatively ‘untapped’ Market.
Aside from continued legal barriers, Cuba’s main statistics agency continues to report distorted official economic data. International financial institutions collect and utilize this data with few adjustments or addendums, making market sizing an uphill battle at best. Likewise, multinationals will still struggle to understand how the market will evolve in the medium and long term, as ongoing internal and external reforms point toward significant evolution of the current economic and political scenarios in the coming years.
Frontier Strategy Group recently published a report that: 1) explains why now is the time to prepare for a Cuba entry; 2) lays out the difficulties in sizing this market and the implications for assessing the true market opportunity across sectors; and 3) presents FSG’s view of how companies can expect the market to grow over time considering the evolution of six distinct factors.
Here, we have provided a brief overview of these three challenges:
Making the case for planning for Cuba today: FSG expects average growth for the broader region of 0.0% in 2016 up from -0.4% in 2015, with medium-term forecasts pointing to meager growth of slightly over 2.0% between 2017 and 2020. As such, multinationals are looking for new pockets of growth. With the recent rapprochement between Cuba and the U.S. it is only natural for multinationals to turn their attention to the island, which represents a potential new consumer base of just over 11 million people.
It is important that MNCs create a strategic plan for Cuba today, before it is too late. American companies are operating at a disadvantage as many non-American companies are already present in the market. Once the embargo is lifted, companies must be ready to pick up market share quickly and avoid missing the opportunity to build relations with key business partners.
Challenges to sizing the market: The official Cuban statistics are incomplete (information regarding Cuba’s current account balance are only available through 2012), and public spending categories often change from one statistical release to another. These issues are compounded by the fact that most statistics are updated on a yearly basis only.
In addition, and more importantly for the exercise of sizing the Cuban opportunity for multinationals, official statistics have introduced multiple methodological distortions over the last several decades. For example, a series of methodological changes between 2004 and 2007 included changes to the measurement of free medical and social services (including healthcare), leading to an increase in GDP of approximately 15%. The key methodological distortions likely lead to a significant overestimation of the addressable healthcare sector, but underestimate potential sales for B2C and B2B companies in the nascent private sector.
These distortions, combined with the complex effects caused by the country’s multiple currency regime, result in a potentially misleading picture regarding the potential addressable market for a given company and could lead to revenue losses if not properly addressed. The currency effect yields an overestimate of Consumer Purchasing Power (in dollar terms), and an underestimate of the relative importance of the external sector (including exports and remittances).
Gauging growth potential of the Cuban market: The Cuban economy is currently undergoing profound structural changes. An opening would bring about even more change and would significantly impact the evolution of the economy (in the public sector, or in a more developed and robust private sector). FSG has identified six key factors that will shape the future of the Cuban economy. While the lifting of the embargo is the first factor listed, and likely the most obvious, it should be noted that such an occurrence would only be the beginning of a bumpy road toward a much different market.
- Lifting of the embargo (positive)
- FX normalization (positive)
- Expanded private consumption via policy reform (positive)
- Government austerity (positive)
- Expanded private investment (positive)
- Venezuela import shock (negative)
Multinationals should continue to track developments within each of these factors to understand when and how the Cuban opportunity is likely to evolve.
Depending on the co-evolution of the six factors, FSG estimates that Cuba could see average GDP growth over the next ten years between 1.6% and 5.2%, with our base case calling for average growth of 4%. Our upside projection includes the realization of the first five factors, and a delayed phase-out of subsidized Venezuelan oil imports. Such an evolution would allow for heightened exports, greater investment, increased consumer purchasing power, and the development of a robust private sector.
Even after determining what the Cuba opportunity really means for multinational businesses, doing business in Cuba (or with “Cuba Inc.”, as it is commonly referred to) upon an opening will not be easy. Despite the proposed economic changes, it is highly likely that companies will still be required to work together with the Cuban government in any investment initiative, adding an additional layer of complexity to an already challenging market.
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