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Cablegate: Activities of the Brazilian Firm Souza Cruz In

R 201345Z JUN 05
FM AMEMBASSY BRASILIA
TO SECSTATE WASHDC 1812
INFO USINT HAVANA
AMEMBASSY BUENOS AIRES
AMEMBASSY MONTEVIDEO
AMEMBASSY ASUNCION
AMCONSUL RIO DE JANEIRO
AMCONSUL RECIFE
AMCONSUL SAO PAULO
DEPT OF COMMERCE WASHDC
NSC WASHDC

UNCLAS BRASILIA 001636

SIPDIS

SIPDIS

STATE FOR WHA
NSC FOR BREIER
TREASURY FOR OFAC

E.O. 12958: N/A
TAGS: ETTC BR CU
SUBJECT: ACTIVITIES OF THE BRAZILIAN FIRM SOUZA CRUZ IN
CUBA

1. (U) Recently the Brazilian magazine Epoca published an
article recounting the experiences of the Souza Cruz company
(controlled by British American Tobacco) in doing business
in Cuba. The article, a translation of which is set forth
below, is instructive as it speaks of the day-to-day
difficulties in operating on that island as well as the
degree to which U.S. sanctions have posed a barrier to
investment in Cuba.

2. (U) Begin Text of Unofficial Translation.

PROFIT REVOLUTION

Meet Brascuba, the Souza Cruz capitalist enterprise in Fidel
Castro's socialist territory

Isabel Clemente, from Havana

The minimum wage in Cuba increased 125 at the beginning of
the month. It went from 100 pesos (US$4) to 225 (US$9).
This increase was celebrated not only by Cuban workers, but
also by a group of Brazilian executives. They are
administrators of the Souza Cruz company, partner in one of
the few private business dealings on Fidel's island. Souza
Cruz is associated with a Cuban state-run company to
produce, sell and profit in a country that has fought
against capitalism since the revolution of 1959. The
Brazilian enterprise in the Pinar del Rio industrial
district has shown itself to be an adventure worthy to be
lived by Cubans during the revolutionary years.
The objectives of the Brascuba cigarette factory are purely
capitalist. Their 220 employees, of which only three are
Brazilian, produce cigarettes for the domestic market and
export. When you circulate through Havana, you see many
billboards celebrating the revolution. Between a panel with
a photo of guerrilla Che Guevara and another protesting
American imperialism, there is a lone ad. "Cigarrillos
Romeu y Julieta - Una exquisita pasion", announces Brascuba.
The company has its eye on the low-income population, who
love cigarettes. Cuba has one of the highest percentages of
smokers in the world. If there wasn't a law restricting
smoking in public places, there would be around four smokers
in every group of ten anywhere around Havana. They are
"companeros", as people are known in Cuba, in numbers large
enough to consume 2 billion cigarettes a year; an attractive
market for the tobacco industry, which doesn't mean doing
business is easy.

The Brazilian adventure in Cuba started ten years ago, in
the middle of U.S. pressure against Fidel Castro's socialist
regime. At that time, British American Tobacco (BAT), Souza
Cruz controlling company, decided to invest in the island,
but feared eventual retaliation from the United States
against countries that helped their troublesome neighbor.
With the Brazilians in the lead, the British believed the
U.S. actions would be milder, said Souza Cruz financial
director Dante Letti, who was then in charge of managing
factory start-up. They were right. The only reaction
happened in 1996 when Milton Cabral, then director of Souza
Cruz, was approached by the U.S. Consul in Rio de Janeiro.
The U.S. government wanted to know if Souza Cruz was
occupying a building taken from the Americans during the
1959 revolution. But the building belonged to BAT
themselves before the guerrillas took power, according to
company records.

Since then, the partnership has been productive for both
sides. The Cubans provided the tobacco, famous
international brands, and the building, while the Brazilians
brought technology, equipment, their own brands, and money.
In a decade, Souza Cruz invested US$28 million and lent
another US$50 million to the subsidiary. Today, the company
invoices US$24 million a year and are in the black.
Specializing in the black cigarettes market niche, with
strong taste and smell, Brascuba has famous cigar brands
like Cohiba and Romeu y Julieta. They export to 20
countries, and just this year their sales to Europe should
go up 18 . But when you look at the results for the decade,
they don't look as good. During this period, the company
only removed US$12 million from the island, that is, they
are running at a loss. Considered normal in the country
known for long lines in stores and restaurants, making money
requires patience. "If you put it on paper, the deal
doesn't make sense, but no one comes to Cuba thinking short-
term", said Nicandro Durante, president of Souza Cruz.

One of BAT's short-term problems is the competition in
cheap, unfiltered, low-quality cigarettes. These aren't
pirated brands like you see in Brazil. They're second-class
wage increase, the minimum wage is only 225 pesos, or US$9.
Another problem are the U.S. trade sanctions, that make
foreign sales difficult. Our costs have gone up a lot,
especially freight. If it weren't for the embargo, we could
purchase raw materials from the U.S. which would come out a
lot cheaper," said the co-president of Brascuba, Brazilian
Jose Beniques. "Ships take 90 days to get here from Europe.
We are forced to keep four months worth of stock because of
the long lead time", said the other president of the company
67-year-old Cuban Adolfo Dias Suarez, a political scientist,
ex-combatant from the revolution.

And besides the hefty trade barriers, there are everyday
difficulties when working in a country in extreme crisis.
The problems start right away. To open a factory in Cuba,
the Brazilians spent three years in meetings in Havana, a
good part of them by candlelight (blackouts lasted 16 hours
a day in 1992). To renovate the building (from the 19th
century) that was falling apart, took two years of
construction. The delay wasn't due only to the difficulty
of the work, but also because the Cuban workers liked the
cafeteria so much that they didn't feel like finishing the
job. Exchange of gifts was the norm, and led to anecdotal
episodes. To please the Cubans, the Brazilians donated
street clocks to the city of Havana, something new on the
island, until then completely isolated and dependant on
outdated Russian technology. The problem is that the
machinery malfunctioned in the Caribbean heat. They got the
time and temperature wrong, besides showing the yet unknown
Hollywood cigarette brand. They became a standing joke.
The clocks were removed, and sometime later the brand came
out on top. Today Hollywood (an Americanism not typical for
the Cuban authorities) is among the most consumed cigarette
brands in that region. From the Cuban Brazilian interchange
have emerged weddings, whole families exported to Brazil,
and at least one diplomatic incident. A Cuban sent to the
Rio de Janeiro Souza Cruz headquarters for training, didn't
show up at the airport on the day of his departure. The man
surfaced days later in the USA where he decided to live; one
more episode in the Brazilian capitalist adventure on
Fidel's island.

What is Brascuba?

- they produce 1.8 billion cigarettes per year

- they are the largest Latin American exporter of black
smoke (i.e., a heavy type of tobacco)

- Invoiced US$24.21 million (2004)

End Text of Unofficial Translation.


Danilovich

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