Dean Barber

Got Clusters? Don Q to the Rescue

In Uncategorized on September 23, 2012 at 2:06 pm

Rum will do the trick. I am convinced of that now.

So I’m on the roof of a five-star hotel in San Juan, the guest of the Puerto Rico Industrial Development Company, and I am talking to a senior officer of an international medical device company. Only a few feet away is a table laden with and celebrating “the Rums of Puerto Rico,” and we are at, you guessed it, a rum tasting.

I’m enjoying the view, the ocean is to my left, and downtown San Juan is to my right. It’s sunset with a light breeze. I hear a mixture of English and rapid staccato Spanish around me. All the women are beautiful, and each rum tastes better than the last.

Yes, this makes a great deal of sense.

I knew that big pharma was big here, but I didn’t know just how big or how sophisticated until I was on the ground here.  Earlier in the day, I had donned a bunny outfit (minus the tail and ears) to tour a pharma plant which I cannot name for fear that serious men will coming knocking on my door in the dead of night. Having signed a confidentiality agreement, I can neither confirm nor deny that I was actually there, depending on where there was, which it wasn’t.

Over breakfast, PRIDCO’s life sciences director, Victor Merced, gave a PowerPoint presentation, showing me and other worldly site selection consultants just how big manufacturing in the life sciences was on this island of 3.7 million people.  I was impressed.

Eleven out of the top 15 pharmaceutical and biotech companies have manufacturing sites in PR. Amgen has its largest manufacturing facility located in Juncos. More than 90 percent of its products are formulated, finished or packaged at this site, where again, I can neither confirm nor deny that I was at.

Eleven out of the top 20 medical devices companies have manufacturing sites in PR.

A little name dropping for your consideration – Pfizer, Merck, Abbott, Lilly (which I cannot confirm or deny that I visited), AstraZeneca, Johnson & Johnson (which I cannot confirm or deny that I visited), Baxter, Monsanto, Syngenta, Dow AgroSciences, St. Jude Medical, Abbott Medical Optics, Edwards Life Sciences, Roche, Zimmer, Cooper Vision, Medtronic, and Boston Scientific. They’re all here with manufacturing operations.

So, too, are Honeywell, HP, Micron, General Electric, DuPont, and Microsoft.

Maybe my biggest initial surprise was learning that tourism represented only 4 percent of the GDP, while manufacturing represented the lion’s share – $44.6 billion out of total GDP of $96.3 billion in 2010.

Doing his duty, a very personable Merced provided us all-knowing, sage-like consultants with “Puerto Rico’s value proposition,” which included economic, fiscal, legal and regulatory stability; talent and experience; and economic (especially tax) incentives, which appeared to be considerable.

There is a 50 percent tax credit for eligible research activities. There is a 0 to 1 percent pioneer tax rate for a technology, product or processes developed or manufactured in Puerto Rico. There is a 4 percent income tax rate and 12 percent withholding on royalty payments for manufacturing, but a 100 percent exemption for distributions for PR residents.

Finally, for the individual investor, there is a 100 percent tax exemption on interest, dividends and capital gains for those who have not been PR residents during the past 15 years. And there are pre-qualified free trade zones throughout the island.

But it was on the rooftop hotel deck, plied with rum and talking to the executive with the medical device company, where I came to the conclusion that it truly was the human resources – the people factor – for why this cluster of companies manufacturing for the health sciences came into being.

Success begets success and human nature, especially corporate nature, is to at least investigate why and maybe emulate. That’s why I think clusters come into being. It’s not so much what government does (I’m not so sure the governments can create an industry cluster) as what the private sector finds.

The advantages of Puerto Rico were spelled out in a June 2012 report by the Federal Reserve Bank of New York.

  • The literacy rates and educational attainment of Puerto Rico’s adult population compare favorably with those of most economies in the region, and have nearly caught up with those on the U.S. mainland.
  • The labor force is largely bilingual.
  • The economy is open and is favorably located, occupying a central position in the Caribbean and providing a gateway between the U.S. mainland and Latin America.
  • The island has extensive experience as a host to a variety of major U.S. multinational corporations.

It was that extensive knowledge base, gained through years of experience, in the art and science of manufacturing for the health sciences, which is precisely why big pharma, biotech, and medical device companies are here and continue to invest here.

That is what the executive was telling me from the hotel rooftop.  My new friend, Victor Merced, said it, but he’s paid to say it. He is, in fact, a very good salesman with a very good story to tell. (And some quotable quotes: “We go out to fish for whales for the minnows to eat.”)

But here was a private sector guy from the trenches telling me the same. Cumulative knowledge makes the difference. It trumps all. With a Don Q Gran Añejo in hand, your all-knowing, sage-like consultant finally got it.

“I guess having a cluster here allows you to steal talent from each other,” I quipped, thinking I was suddenly pretty smart.

The exec smiled. “We like to think of it as collaboration and benchmarking.”

I recently received a request for proposal from a community that sought an all-knowing, sage-like consultant such as myself to develop a cluster initiative and study. I didn’t bid on it. The problem was, there was no evidence to even suggest that a cluster existed there. Most places – I repeat, most places — do not and will never have true industry clusters. They are, in fact, few and far between, a relatively rare breed.

Puerto Rico is the exception. Here big pharma, biotech, and medical device have recognized fertile ground for manufacturing and this in spite of the fact of having a government known for red tape and permitting issues.

Puerto Rico jumped six spots on the World Economic Forum’s global ranking of the world’s most competitive economies in 2011, landing at 35th out of 142 countries on the strength of efficiency enhancers and innovation and sophistication factors.

But that does not say that Puerto Rico is not and remains a very poor place. A recent study the Annie E. Casey Foundation and the National Council of La Raza found that 56 percent of Puerto Rican children live in poverty, compared with 22 percent for the entire United States.

Were it not for its manufacturing base, one can only wonder how much poorer this island would be.  Even its most ardent supporters will concede that the island has been operating below its potential.

The challenge in a nutshell is jobs. Even in good times, the unemployment rate has been persistently above the U.S. mainland, and especially high for the young and less educated. Puerto Rico’s current unemployment rate is an alarming 13.5 percent while its median household income in 2011 was $18,660, far below Mississippi, which had the lowest average of all states at $36,919.

Although the island’s workforce overall is among the world’s most educated (with 18,000 degrees awarded annually in science, engineering and technology), Puerto Rico’s labor force participation rate is among the lowest in the world, with less than half of eligible workers participating in the formal economy.  (The labor force participation rate was 65.4 percent in the mainland US in 2010, compared to 47.5 percent in PR)

Victor said many people subsist on a cash-only underground economy simply because the job opportunities are so limited. (The underground economy refers to both legal activities, such as often found in construction and services industries where taxes are not withheld and paid, and illegal activities, such as drug dealing and prostitution.)

In its June 29, 2012 report, the Federal Reserve Bank of New York cited the business environment in Puerto Rico as being costly and cumbersome to establish and grow new businesses and expand existing ones.

“In particular, regulations, the elevated cost of electricity, and an underdeveloped and costly transportation infrastructure are barriers to a more dynamic environment.”

Well, that can be said of a lot of places in this world. There will always be “barriers to a more dynamic environment,” because we, as people, can always do better. Governments can always do better. Tell me a place where that is not true.

What I learned from my trip to Puerto Rico, where I cannot confirm or deny that I toured a plant where 83 percent of its employees had a college degree, is that this place has the capability of making some very, very sophisticated products. And that is precisely because of the people, the human resources, that exist here. And that is why a real cluster, rather than a wannabe cluster, exists here.

The people of Puerto Rico take great pride in their island, as they should. They are a warm people and a good people capable of doing great things.

That is what the industry executive was telling me. And that is what I came to understand after taking another sip of Don Q Gran Añejo.

Yes, it all makes sense now.

Dean Barber is the principal of Barber Business Advisors, LLC., a site selection and economic development consulting firm based in Plano, Texas. He can be reached at 972-767-9518 or at dbarber@barberadvisors.com Please visit our website at www.barberadvisors.com

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  1. Great story, Dean. I didn’t realize the big pharma companies were so entrenched there. And I’m jealous of the high-end Rum tasting.

    Puerto Rico is in a unique position to ascend the economic ladder. In addition to your list Eaton has a large manufacturing facility in Arecibo.

    The availability of skilled labor seems to a large issue in manufacturing there (just as it is here). I have asked people from the Arecibo plant and the usual reply is ‘lots of people, none with the necesarry skills’.

    There is huge potential in Puerto Rico.

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