Cuban Capitalism is Coming

Fidel can call it whatever he likes, but the word is capitalism. The Cuban dictator may not admit it, but capitalism is the force that puts food on the table, a roof over one's head and a little money in the bank. He can continue his failing experiment in Marxist madness till he dies. But after he's gone, the US is likely to end the embargo of Cuba and thereby start a capitalist revolution on the island. That might bring McDonalds to Havana, but it will also bring Cubans everything they've lived without for 50 years. For example, common US products such as house paint. And cars built after the 1950s.

Remarkably, Obama is positioned to defeat Cuban communism by simply declaring an end to the US embargo. By putting Cuba on the same footing as China, the Cuban government would crumble as American tourists and opportunists swarmed over the island, making it impossible for Castro to police the economic activities inside his national prison. Even though Obama has the opportunity to win a war with a pen rather than a sword, he is doing nothing.


Cuba Resets the Revolution

Cuba allows private enterprise, but on a very restricted scale.

September 18, 2010

For first-time visitors, one of the most striking things about Cuba is the lack of advertising on the landscape. The Socialist government has billboards bearing Fidel Castro’s likeness and his most quotable quotations. But one does not see roadside signs pitching much else.

Could the Cuba of the not-too-distant future feature signs touting “Joel’s Moving Company,” “Dayana’s Furniture Repair,” “Julio’s Boutique”?

Probably. And there will be other changes, bigger and more wrenching, if harder to see. On a scale not known for half a century, Cubans will be hiring other Cubans for small-scale enterprises, creating boss-employee relationships without the direct involvement of the Communist Party. The idea of receiving a paycheck whether one loafs, sleeps or shows up at all will be under a new challenge. And it is possible that creating a cadre of quasi-capitalists could unleash forces that the Castros or their successors will prove unable to control.

But is Cuba approaching a transformation of the kind that swept Russia and China? It is tempting to imagine so, if only because the news about a move to private employment seems so startling.

Nevertheless, experts on Cuba warn against reading any such far-reaching expectations into last week’s announcement, no matter how ambitious a task it seems to recondition Cubans for a system that will require some to sink or swim.

Yes, the Castro government is acknowledging a deep problem. But it has also always linked its core ideology to its fear and disdain of the United States and the American economic system. So its ferocious pursuit of independence from American economic influence — even as it denounces Washington’s embargo on trade — would make a radical shift to joining the global free-trade system that the United States dominates particularly difficult to explain.

A Cuban sociologist, Haroldo Dilla, predicts that in the end the new system will not enable Cubans to rise too far out of poverty, and that the government will resist a true economic opening with the world.

Which is not to say that the leadership wants no change at all. Over the two decades since Communism collapsed in the Soviet Union, Cuban officials have visited Russia, Vietnam and China and undoubtedly have taken some lessons from each. President Raúl Castro has made it plain that he views Mikhail Gorbachev’s efforts to reinvigorate the Soviet political system, which led to Communism’s collapse, as a cautionary tale. The mix of consumerism and authoritarianism that one finds in Vietnam and China is presumably a more palatable model — privatization, but with the state in firm control.

Still, the plan announced so far is much more modest than what the Asian countries have done. Instead, it seems designed simply to boost Cuba’s economic productivity in small-scale enterprises and thus loosen up a state-run economy and work force that have been sputtering for more than a decade. That goal is in line with what Raúl Castro himself said last month: “We have to erase forever the notion that Cuba is the only country in the world where one can live without working.”

The announcement of layoffs also does not represent the first time that Cuba has experimented with privatization. A host of small-scale occupations is already allowed on the island, including pizza deliverymen and party clowns. And Cubans can, if they jump through enough bureaucratic hoops, open restaurants in their homes or house guests in spare bedrooms.

It would be far more difficult for either Fidel or Raúl Castro to emulate their neighbors in the Caribbean, without challenging the basic precepts of the Cuban revolution. For decades now, many of those countries have been taking advantage of their ties to the West and the United States to diversify their economies. Cuba, instead, continued to rely on one export commodity — sugar — which the Soviet Union bought at subsidized prices. Only relatively recently has it invited some European partners for joint ventures; for example, in tourism.

But a broad opening to new manufacturing, for example, would be different. That would presumably mean welcoming an influx of private capital from abroad to produce export goods on Cuban soil. It would also probably require normalizing trade and diplomatic relations with the world’s biggest consumer market, the United States. And it might even invite efforts to return to Cuba by exiles who still have claims on industrial enterprises they left — or were forced to leave — as enemies of the revolution.

What’s more, in China and Vietnam the path toward a modern economy was carefully coordinated with a series of steps toward normalization of relations with the United States. Could Cuba’s new economic strategy be a signal of readiness for such a package? That would be difficult to say this early. Some Cuba-watchers suggest that a mass release of political prisoners from Cuban jails in recent months is such a signal. But the history of Cuban-American communication since 1958 is rife with the misreading of oblique signals, even if the prisoner release qualifies as one.

Of course, Cuba and the United States are more linked than government officials in both capitals like to admit — through family bonds, for example.

“If fully carried out, a major expansion of Cuba’s private sector will benefit many thousands of Cuban families and give Cuban-Americans opportunities through remittances to help relatives in Cuba who will be working on their own,” Philip Peters, who follows economic matters in Cuba for the security- and free-market-oriented Lexington Institute in Arlington, Va., wrote in a post on his blog, the Cuban Triangle, on Thursday.

Ted Henken, a professor at Baruch College who studies private enterprise in Cuba, epitomizes the ambivalence with which prudent Cuba-watchers are assessing the latest news. He said he was thrilled by it, but was hedging his bets on how transformative the change would be.

“This is the beginning of what we’ve all been waiting for,” he said. “It’s a major change in the way the Cuban economic system will work. It will be felt by every Cuban.” But, he added, “they still want to maintain state control. We’ll see how this plays out.”

The real test of Cuba’s latest experiment will be in how it is implemented and whether work will have a correlation with wealth, Professor Henken and other experts said. Under previous privatization campaigns, he said, “people were so hobbled by regulations that self-employment was rife with illegality and corruption because that’s the only way people could make their businesses float.”

They also had to keep wary, as all Cubans do, of the secret police, given the regime’s attitude toward private property and enterprise in general. Yoani Sánchez, a dissident Cuban blogger, cited this when she wrote the other day: “Under the strict canons of the socialist economy — planned, centralized and subsidized — self-employment has always been seen as an undesirable species of pest that periodically needs to be abated and occasionally even exterminated.”

The result has been the development of a singularly Cuban style of being enterprising — somewhere between furtive and legitimate, with the real object being to simply get along. Ms. Sánchez described one man who runs a restaurant in his house and had outlawed items on his menu. He tried to persuade his daughter to marry a top chef, the blogger wrote, to get around a rule that employees must be family members.

Earlier this month, when Jeffrey Goldberg interviewed Fidel Castro for The Atlantic magazine, one comment — hinting that the Cuban system wasn’t working for Cubans any more — drew the most attention. The former president later said that he had been misinterpreted, but within days came the announcement of the layoffs and the opening toward private employment.

Still, none of the power brokers in Cuba were calling this capitalism, and most close observers don’t expect them to use that word, whatever other changes unfold. “Overhauling their model does not necessarily mean they are importing ours,” was the way Julia Sweig, a Cuba expert at the Council on Foreign Relations who was at the interview, interpreted Mr. Castro’s comments.

Which brings us back to the matter of public relations, and those billboards: Even their presence could raise issues that Cuba’s economic planners probably have not fully thought through: Is a billboard company legal in the new Cuba? Would residents living along highways be able to rent out the land alongside their home for such advertising?

And, above all, could a privately run restaurant advertise that its rice and beans were better than those offered down the street by the state-run competition?

IPO market ends March roaring like Lion

As the month of March ends on Wall Street, tech stocks are getting hot. That's good news on many levels.

High-Profile IPO of SS&C Technologies Is Lined Up

March's IPO market promises to go out like a lion this week, with a high-profile deal scheduled to trade on the last day of the month.

Software company SS&C Technologies Holdings Inc. of Windsor, Conn., is aiming to raise as much as $161 million through a listing on Nasdaq under the symbol SSNC, but if recent pricing trends are any indicator, it could fetch more. The stock, which has an expected price range of $13 to $15 a share, probably should command $18 a share, according to research by Morningstar Inc. analyst Brad Meeks.

SS&C is no stranger to the public markets; it was traded under the ticker SSNC until 2005, when it was taken private in a leveraged buyout valued at $942 million, or $37.25 a share, including $381 million in equity from Carlyle Group. Carlyle and SS&C management contributed about $8.64 a share in the buyout. At the midpoint of its expected price range, $14 a share, the company will command a market value of $890 million after this initial public offering.

The pipeline of European companies raising money through IPOs is also expected to expand. Dutch semiconductor company NXP, owned by a group of private-equity investors including Kohlberg Kravis Roberts & Co. and Bain Capital, plans to raise more than $1 billion through an IPO, according to people familiar with the situation, making it one of the year's largest deals. NXP was spun off from Royal Philips Electronics NV in a 2006 leveraged buyout.

Over the past week two German companies, chemicals distributor Brenntag AG and cable provider Kabel Deustschland Holding AG, raised $1 billion and $1.2 billion, respectively, through IPOs.

SS&C's specialty market is familiar territory on Wall Street: It makes software and services that automate complex functions for a range of financial clients, including banks, asset managers, hedge funds and pension funds. Its products touch everything from trading and portfolio management to accounting.

The financial-services clients that SS&C serves have gone through a rough upheaval over the past two years, and that caused a 3% decline in the company's revenue in 2009. However, lower operating expenses allowed it to squeeze out a 1% increase in net income compared with 2008. But what is most likely to turn investors' heads is the company's ever-growing operating margins: 24.8% at the end of 2009, up from 23.2% in 2007.

SS&C filed for an IPO in 2007, but withdrew it a year later, citing market conditions. It is to investors' benefit that the deal has aged a bit more in Carlyle's cellar: Its consolidated total debt pre-IPO is now 3.17 times consolidated earnings before interest, taxes, depreciation and amortization, compared with 6.43 times when it was acquired. Post-IPO, when most of its proceeds are used to pay down debt, that ratio will go to 2.48. Operating margins in 2007 were 19.6%, a full five percentage points lower than they are now.

SS&C is the latest in a string of promising tech-oriented companies to reach the U.S. markets. Two weeks ago, online retirement adviser Financial Engines Inc. rose 44% on its first day of trading, and last week, semiconductor company MaxLinear Inc. jumped 34% on its debut. Ever since the middle of the month, the U.S. IPO markets have taken on a more positive tone, with the majority of deals pricing within their expected ranges—in contrast to most pricing below in January and February—and trading higher.

The result is the busiest month so far this year, with nine IPOs completed through last week, and the possibility of a few more, including SS&C, before March is over. Bankers attribute the shift in March to a combination of the types of companies coming public and an overall improvement in the broader stock market, which greatly influences IPO performance. As long as indexes don't take a sudden dive, they expect deal flow to be steady in the months ahead.

The next few months "could be as busy as March. There is still receptivity on the investor side, and we've been seeing good demand for the transactions we've been working on," says Andy Sanford, head of equity capital markets at Wells Fargo & Co.

Flight Plan for the Auto Industry

When it comes to commercial aviation, there are two certainties -- bankruptcy and better airplanes. Warren Buffett said it would have a favor to every airline investor if someone had shot down the Wright Brothers on their big day at Kitty Hawk. Instead, airlines have come and gone while engineers have designed better and better aircraft over the last 100 years.

However, it appears that Boeing now believes the creative destruction of capitalism may pose too big a threat and that a little relief is in order. How much lighter and more fuel efficient can aircraft become? To ensure its future the company has proposed a plan to improve the entire aviation industry with a mix of private and public capital. It's interesting to see this development in an industry in which every airline has gone bankrupt, and it is especially interesting considering the bankruptcies of Chrysler and GM. Nevertheless, a hundred years of existing on the edge of failure has led to extraordinary developments in aviation.

For much of the last 50 years most of the auto industry was insulated from the harsh discipline of the markets. However, those days are gone. The painful and transforming experience of the aviation industry over the last century shows that the domestic auto industry can respond with equal or greater success. No doubt it will survive and probably begin producing some great cars and trucks soon. But it's all about giving the customers what they want. Not what politicians and bureaucrats want.

MAY 23, 2009

How Boeing Fights Climate Change
The efficiency of jets has increased by 70% over the past 50 years.

Addressing climate change is a particularly difficult challenge for commercial aviation. While technologies like batteries work for cars, they don't work for airplanes that require powerful propulsion systems. The good news is that there are things we can do to significantly reduce the carbon footprint of commercial planes -- and we're well on our way.

At Boeing, we're tackling carbon emissions on three fronts.

First, we are working to make each new generation of airplane lighter and more fuel efficient. There's plenty of incentive to develop more efficient airplanes.

Historically, fuel has been the airlines' second-biggest operating expense next to labor. Last year, with oil reaching $140 a barrel, fuel costs even outstripped labor costs, rising to 40% of total airline operating expenses. So airlines have demanded increased efficiency from airplane and engine manufacturers. And manufacturers have responded big time.

Over the past 50 years, the efficiency of commercial jets has risen an astounding 70%. This means that carbon emissions per mile flown have dropped 70% -- all without a regulatory requirement for greenhouse gas emissions.

That said, we believe properly structured regulations could be useful. It's not often that an industry asks for additional regulation, but Boeing, GE and other airplane and engine manufacturers are convinced that a fuel-efficiency standard for new airplanes is an effective way to drive the development of fuel-saving technologies.

Specifically, we're advocating for an efficiency standard for new airplane designs. An efficiency standard would be straightforward and easier to implement than a standard for aircraft operators. And it would help ensure that we continue to see the kind of technological and environmental breakthroughs we pioneered with the 787. The International Civil Aviation Organization should define the new standard, just as it successfully established global standards for both airplane noise and oxides of nitrogen emissions.

While it's important to make airplanes more efficient, it's also critical that the system in which they fly is modernized. That's why our second major initiative is the work we're doing to improve air-traffic management.

Fortunately, the technologies needed to give controllers and pilots a more precise picture of weather conditions and airplane positions, and the networking technologies needed to instantaneously share that information, already exist.

Precision information, commonly shared, safely enables such fuel-saving and emissions-reducing operational changes as continuous, low-power descents, more direct routing, closer spacing, and curved approaches to landing. The challenge is getting the government to make the Federal Aviation Administration's plan for implementing these technologies, called NextGen, a priority.

The government should commit long-term funding to ensure that it's completed as swiftly as possible.

Third, we have been testing various advanced, sustainable biofuels with the goal of finding renewable fuels for aviation that don't compete with food crops for land and water and that emit 50%-80% less carbon than petroleum.

We have conducted test flights using mixtures of standard jet fuel and several different sustainable biofuels, among them fuels made from algae and camelina (a plant that produces seeds that aren't used for food). All performed extremely well in flight.

What's more, we have demonstrated that these and other sustainable biofuels have a lower freeze point than petroleum -- a very important characteristic for aviation. They also can have higher energy content per gallon.

We're confident that sustainable biofuels will be price competitive with petroleum in the long-term. But government help -- consistent with international trade agreements -- is needed to get an aviation biofuels industry up and running.

One proposal is that government could provide loans to refiners to make biofuels competitive when the price of petroleum is low and get repaid when the price of petroleum is high. We hope government officials will seriously consider such ideas because biofuels, in our view, are the ultimate answer to aviation's carbon-emissions challenge.

These three initiatives represent the best path forward for reducing aviation's carbon footprint. Establishing an international fuel-efficiency standard, modernizing air-traffic management, and commercializing an aviation biofuels industry would seriously address the issue of climate change. Our industry is eager to take on this challenge, but we need government help to make it happen.

Mr. Carson is president and CEO of Boeing Commercial Airplanes.