Aug 24, 2022 in Business Essays

Nestle

Operating Environment for Foreign Firms in Cuba

This paper will use the case study of Nestle to understand Cuba’s policy regarding foreign firms. In the 80s, the country put strict policies that discouraged foreign firms from investing in the nation. However, Fidel Castro made a significant change by encouraging foreign firms to invest in the 90s when the country was experiencing an economic crisis. The situation did not last long, and Castro revised the policy whereby he encouraged local industries to make more investments. Nestle made a joint venture agreement with a local company Coralac after entering into the market in the 90s. Since then, the company has experienced significant success in the country where it is the highest-earning foreign company. Also, it has the largest number of employees due to its increased activities in Cuba, which is also an indication of success. However, there are various challenges to investing in Cuba associated with the country’s policies for foreign firms. One of the major aspects of these policies is interference from the government. The government keeps changing the investment policies, which creates instability for the foreign firms. Also, the ten to fifteen years period given before review of the policy terms does not allow for long-term planning. Additionally, the dual currency system of the nation is a significant hindrance to the foreign investors since the value of the currencies differs. The local companies use the more affordable currency when pricing their products, while the foreign businesses use the more expensive currency. Due to this, the competition is not fair, thus making the foreign firms’ products unaffordable.

Cuba significantly changed policies on how foreign firms invest in the country after the Cuban revolution. Upon gaining its independence, the country’s government discouraged foreign investments as a way of promoting local economic sovereignty. However, the policies were amended in the 1990s due to an economic crisis. In an attempt of preventing the collapse of the economy, Fidel Castro introduced methods of attracting foreign investors, which was only short-lived. After the Cuban economy picked, the policies were reversed in order to allow local businesses to thrive. For this reason, the Cuban investment environment is unstable for foreign firms. The instability in the policies is evident since by the year 2008, half of the foreign investors have exited the market.

The Cuban government interferes with the foreign firms’ investment policies, which is inconvenient for business. In Cuba, foreign firms are expected to pursue joint ventures with the government, which are the most common type of business. With this type of business, the government only allows the multinationals to conduct their operations for ten to fifteen years. Afterwards, the terms are reviewed. Because of this, there is no assurance on the terms of foreign firms’ investment in the country. Additionally, the unstable environment affects the financing of the companies as they are limited to fifteen years and thereby cannot make long-term decisions. This lowers the value of the investment opportunities of the foreign firms. Also, the dual currency of the country considerably affects the foreign firms. For example, they have to pay their employees in Cuban peso but trade with the government using convertible peso. Although the workers are paid using the local currency, foreign firms have to loan employees from the government whereby they pay using the convertible peso. Since the convertible peso is more expensive than Cuban peso, the multinational companies are deemed to pay to employees more than the local companies. For this reason, competition is not fair in the region.

Another point is that the foreign firms have to price their products according to the convertible peso, while the local companies use the Cuban peso. Through this type of pricing, the foreign firms’ products appear to be more expensive and unaffordable for the locals. Due to the unaffordability of the products, they have to target the tourists. However, the number of tourists is low. Therefore, it is impossible for the organizations to make reasonable profits. Moreover, the companies cannot produce consumer goods as it is impossible to sell to the locals where the demand is high unlike that of tourists. With the obstacles, foreign firms cannot stand the competition in the industry, and the only option is to quit. Therefore, the environment for foreign firms’ investment in Cuba is unfavorable.

Nestle’s Ice Cream Business Success

The company entered the Cuban market in the 1990s when it signed an agreement with the then president Fidel Castro. The agreement was a joint venture whereby the organization would build a factory on the island. The company entered a joint venture with Coralac, which owned forty percent while Nestle owned sixty percent. Like any other foreign firm in the country, Nestle had challenges in reaching its customers. Also, it underwent the ten to fifteen years policy, which was a limitation to its decision-making.

Despite the challenges that the company has faced, it has significantly succeeded in Cuba. Most importantly, the company has survived in the industry unlike other businesses that opted out of the market. Nestle’s presence in the country is evidence that it is doing great by achieving its goals and objectives. Firstly, Nestle in conjunction with Coralac successfully opened a 7.9 million USD factory in El Cotorro. The factory has a capacity of 12 million liters of ice cream. By the year 2015, the organization was capable of producing eighty percent of the capacity, which was a success to the business. In addition, despite having no access to media and broadcast, Nestle still reached the customers, which also marked the success of the organization. They reached their customers through the Internet and use of the joint venture.

The performance of Nestle over the years is another proof that the firm has experienced significant success. For instance, in the year 2014, Nestle together with Coralac had an overall profit margin of fifteen percent in the ice cream business. Additionally, compared to other foreign firms in the country, Nestle had the largest profits, which is an indication of their success. Below is a table that shows the profits difference of the foreign companies in Cuba.

From the table, it is evident that Nestle made 100 billion US dollars in revenue, which is more than any other company. Also, the company’s market capitalization is 252 billion USD, which is more than any other foreign business. It also has the largest number of employees, which is an indication that the company has more tasks to perform. With more responsibilities, it is a sign that the multinational experiences success.

However, there have been challenges that have prevented the company from realizing its full potential. For instance, the company has faced challenges with the suppliers since they decline to supply Nestle with milk. The domestic production of Cuba is small and cannot meet the requirements of the enterprise. Additionally, the government has strict regulations on dairy farmers that prompted the firm to import the product. The process has significantly affected and delayed the success of the organization. Besides, Coralac has jeopardized the goals of Nestle by not offering the necessary support. For instance, Coralac has audited the suppliers for quality control instead of guiding and training the farmers on the best methods of ensuring quality milk production. Also, competition from the most established and dominating brand Coppelia has prevented the company from achieving full success. Additionally, the local brands are more affordable than that of Nestle.

Nestle’s Future Success Position

Nestle can only evaluate or position itself appropriately for future success through the conduction of a SWOT analysis. In this case, it will be in a position of identifying its strengths, weaknesses, opportunities, and threats. Most importantly, Nestle is viewed as the largest global food and beverage company. With the recognition, it can utilize its products in marketing as a business that offers quality products to its customers. Apart from that, Nestle’s joint venture in Cuba is a strength it can maximize. Through the partnership, the company is in a position of interacting with the customers more than other foreign firms. By opening more stores, it will move closer to the consumers, making it possible to increase its profit margins. In this case, the customers will also develop trust with the business and its products, thus fostering an increase in sales. Additionally, it will enable Nestle to beat the local firms that offer competition to the company. Besides, the management of the company can make use of their research and development capabilities that can contribute to a better understanding of the consumers.

However, there are various weaknesses that may affect the performance of the company. For instance, the local companies are diversifying their activities, which threatens the success of the company. Besides, the political interference from the government hinders the progress of Nestle. Additionally, the price of Nestle’s products is high, which makes them less affordable to local population.

Prospects for Future Investment and Economic Growth in Cuba

Cuba is a growing nation offering great prospects for future investments. However, the policies towards foreign firm investments hinder many organizations from venturing into the nation. Although the policies were meant for the local businesses to grow and the country to attain economic sovereignty, it left many gaps that the local industries could not fill due to financial constraints. For instance, foreign firms in Cuba sell their products to the consumers using the convertible peso, which is of higher value and thus unaffordable for the locals. Because of this, only the tourism industry is heavily invested in by the foreign enterprises. This is evident from the fact that forty-two percent of foreign investments are directed to the tourism industry. The high investment by the foreign firms is due to the dual currency system, whereby multinationals have to settle for the convertible peso.

There are various industries that are underinvested and might experience growth in the near future. The world is changing fast, and governments are embracing diversification. For this reason, the Cuban government may deem it necessary to invest in the underdeveloped areas by encouraging foreign investors. Agriculture, communication, transportation, construction, and food industry are some of the promising areas. In agriculture and food industry, the amount of foreign investments is only 2% and 7% respectively. Nestle is the major food foreign investment company in the region, and this may attract other firms to venture in the market. Since Nestle is in a food and beverage company, it demands a lot of milk to utilize the full capacity. However, the milking production in the country is below average capacity, which is an opportunity for investment. Nestle can therefore maximize on the opportunity by advising the farmers on the best farming methods. According to the data provided, 3,207 cows are required to satisfy the demand for milk in the country. In this case, other foreign firms will see the opportunity and try to enter the market. Also, the government of Cuba may change the foreign investment policies to boost the underdeveloped sectors, thereby opening investment opportunities.

Conclusion

In retrospect, Cuba’s business environment for foreign firms is not favorable. The dual currency system significantly affects the growth of the foreign firms since the products become unaffordable. Also, political interference with foreign firms’ activities discourages other companies from investing in the country. Nevertheless, Nestle has experienced success through a joint venture in Cuba. It is currently the highest-earning foreign company in the nation. To increase its profits, Nestle should train and advise the farmers on better ways of farming to increase its supply. Also, foreign companies may increase investments in the country due to developments in technology and change in investment policies.

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