WASHINGTON – The recent moves toward liberalizing trade and diplomatic relations between the U.S. and Cuba are being met with cautious optimism by the American auto industry.
President Obama has been relaxing the 54-year trade restrictions after announcing a policy u-turn on Dec. 17, but only Congress, controlled by Republicans, can lift the economic embargo entirely.
Republican senators have promised “robust” debate but liberalization critics are prominent in both parties, including prospective 2016 presidential candidates. The U.S. Chamber of Commerce welcomes the move.
Such political uncertainty has clouded the picture for automakers, parts suppliers and industry analysts. Many see the Cuban market as ripe for development, but barriers to entry remain, including Cuba’s still largely state-controlled economy, a lack of dealer network and financial infrastructure for car sales, poor road quality and non-convergence in safety and emissions standards.
U.S. sanctions and Cuban government policy have left the island with a vehicle-ownership rate of just 38 per 1,000 people, according to data compiler NationMaster.
Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, MI, says Cuba could be a lucrative market.
“Frankly, there’s been a dearth of automotive product since 1957,” he says. “Most people don’t have much choice in what they drive. But we know they like driving. As the tourism industry rapidly develops, they’ll need rental vehicles, tour buses, shuttles, all kinds of vehicles.”
The U.S. exported about 1.9 million vehicles last year, mainly to Canada and Mexico, according to the International Organization of Motor Vehicle Manufacturers.
Should cars really start to flow to Cuba, just 90 miles from Florida, automakers will have to decide whether the country comes under their Latin American marketing divisions or the U.S. divisions for exporting purposes, McAlinden says, citing Jacksonville, FL, as a key export gateway.
U.S. automakers have ramped up production in Mexico, which produced some 3 million vehicles in 2013, and which is supplying the Caribbean market.
Kenneth Elias, a partner at the Maryann Keller & Associates automotive consultancy, sees the prospective Cuban market being dominated by smaller, less expensive cars and vans common to Caribbean islands. “Affordability will be the driver of sales,” he says, adding that if the Cuban government imposes draconian taxes or tariffs imports, “sales will go nowhere.”
New Cars Virtually Unaffordable
The U.S. auto sector has glimpsed the potential challenges since Jan. 1, 2014, when the Cuban government lifted restrictions on private-vehicle sales in place for a half-century. The move was part of a raft of recent economic-liberalization measures, but it came at a price: government markups of up to 400%, with the tax revenues destined for improving the public-transport sector.
Prices of the newly available vehicles therefore are among the highest in the world; a ’13 Peugeot 508, for example, is listed for sale at more than $263,000.
In a country where the average wage stands at about $20 a month, such prices mean new-car ownership remains little more than a fantasy for ordinary Cubans.
The reality of the newly relaxed restrictions was brought home in statistics reported by Cuba’s export-import corporation CIMEX, which announced that six months after the restrictions had been lifted, just 50 cars and four motorbikes had been sold. The average sale price of just over $23,700 suggests most were secondhand.
According to Jorge Duany, director of the Cuban Research Institute at Florida International University, if the trade embargo is lifted, U.S. manufacturers likely will face high government tariffs.
“The Cuban government would like to keep a close grip on transactions and so far they have shown a very strong tendency to be the major intermediary between foreign capital and Cuban consumers,” he says.
U.S. companies also would have to play catch-up with companies that already have access to the Cuban government and tourist car-rental market, most notably Chinese manufactures such as Geely. It has made public claims it currently controls 50% of this limited Cuban market.
However, one advantage U.S. manufacturers have is brand recognition and an affinity with U.S. cars that has been strengthened by decades of Cuban reliance on its fleet of pre-1959 classics.
“There is a strong attachment to American cars compared to the Chinese cars, which may be cheaper but not necessarily more attractive to the general public,” Duany says. “If the practical issues are ironed out, it might be an interesting opportunity for many of the car manufacturers in the United States.”
Big Potential Market for Pre-Revolution U.S. Car Parts
U.S. parts manufacturers are cautiously optimistic. “Trade will be focused on service and replacement parts along with local procurement to support knock-down kit assembly as the vehicle parc in Cuba turns over,” says Dave Andrea, senior vice president-industry analysis and economics, at the U.S.-based Original Equipment Suppliers Assn. “But again, political, legal and market mechanisms need to be better known,” he cautions.
Krysta Messier, an analyst at the Automotive Aftermarket Suppliers Assn., says suppliers in America’s Southeast region would be the biggest beneficiaries of demand as Cubans begin “putting correct parts into vehicle shells, rather than duct tape and Band-Aids.”
Indeed, says Linda Spencer, Specialty Equipment Market Assn. director-international relations, “one of the first groups of U.S. manufacturers to benefit are likely to be those who create products for classic cars.
“Thousands of pre-1960 U.S. vehicles create demand for all sorts of products to maintain these vehicles. A source of pride in Cuba this pool of old cars represents the world’s largest pool of classic cars used as daily drivers anywhere in the world.”
Some estimates indicate there are about 60,000 of these in operation.
Currently, most Cuban car owners are forced to keep their vehicles moving any way they can, manufacturing parts in home workshops and using innovative replacements that range from tractor engines to using shampoo as brake fluid and house paint as coatings.
“They do whatever they can to keep the cars running,” says Brenda Priddy, an auto industry photographer who has organized Cuban cultural exchanges for car enthusiasts. “Any replacement pieces can be different, the trim, the steering wheel…they’ll use whatever they can find.”
– with James Bargent in Medellin, Colombia
