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Puerto Rico Manufacturing Sector Strong As It Faces 2001 Challenges


December 27, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Puerto Rico’s manufacturing sector has shown resiliency in the face of several difficult factors that affected the economy during 2001. The year’s economic slowdown, the Sept.11 attacks, and the start of the 21st century’s first war had a dismal effect on the U.S. and, subsequently Puerto Rico.

During 2001, Puerto Rico’s manufacturing industry lost about 8,000 jobs, primarily with the closing or announced closing of apparel industries such as Playtex, Olympic Group, Hanes, Dexter Shoe, Pan Am Shoe, Unifirst, and Mindy Lee. Other non-apparel sector companies that announced closings were Intel, Viasystems, Signal Carrie, Starkest, Chevron Phillips, Allergen, and Sunoco.

The Puerto Rico Industrial Development Co.’s (Pridco) October statistics (the latest available) showed that 1,774 new jobs have been created since January, still a 25% decrease compared to 2,348 jobs created during the same period in 2000. Pridco also promoted 112 local and non-local projects, which in the future could generate 10,229 jobs and a $358.2 million investment.

The Puerto Rico Pharmaceutical Industry Association, whose membership is composed of 24 corporations with 41 manufacturing operations on the island, is also convinced that the acceleration of the government’s permit approval process, the role of academia in research & development, and labor reform laws will encourage the development of manufacturing clusters around which supply companies can establish themselves and create an economically-sound environment.

The value of pharmaceutical exports continued increasing during 2001, with $25.1 billion exported in fiscal year 2001, a 35.7% increase compared to $18.5 billion in FY 2000. Industry analysts estimate that the pharmaceutical industry contributes 25% of the island’s gross domestic product (an estimated $63.8 billion in FY 2001).

During 2001, pharmaceutical manufacturers announced major expansions, among them Abbott Laboratories, Lilly del Caribe, Amgen, Bristol-Myers Squibb, Allergan, IPR Pharmaceuticals, and Baxter Healthcare. Other manufacturing companies revealing expansions were RD Medical, Nypro, American Home Products, and Wyeth-Ayerst, among others.

In August, Aguadilla’s Hewlett-Packard Co.’s (HP) workforce reduction program hit Puerto Rico. The company’s two local plants had to lay off 50 employees of 1,800 to comply with a restructuring plan in the face of continuous sales and revenue losses. But the company proceeded to inaugurate, with Pridco’s assistance, Aguadilla’s San Antonio Industrial Park, with the initial participation of HP contract manufacturers Nypro and Manufacturers’ Services Ltd.

HP CEO Carly Fiorina’s September announcement of the company’s intent to buy Compaq Computer Co.’s for $22.8 billion, the third quarter 14% revenue decrease to $10.1 billion, and 89% decrease in net earnings to $111 million has sent the price of the company’s stocks tumbling down. The company founder’s family has also expressed their vehement opposition to the Compaq acquisition, blaming the company’s financial problems on Fiorina.

Two high-technology projects made public their achievements during the year as they developed manufacturing centers called clusters (a major corporation surrounded by suppliers and other service providers). The non-profit private organizations are the western region’s Puerto Rico TechnoEconomic Corridor (PRTEC) and Caguas’ East Central Technological Initiative (Intec by its Spanish acronym).

Each organization is made up of representatives from the private sector, government, and academia, working together to create high technology economic development opportunities in Puerto Rico. So far, their efforts have collected more than $1 million in public and private sector pledges, which will provide start-up funds for each entity.

After a weak first quarter 2001, Gov. Sila Calderon began the implementation of a four-point economic development plan featuring new laws that would stimulate the island’s economy, streamline the government’s permit process, lower business costs such as electricity, and lobby for an amendment to Internal Revenue Code Section 956.

Gov. Calderon’s economic development strategy took form with the approval of 17 laws. While most of the new laws are geared towards providing tax incentives or tax breaks to manufacturing companies that create more jobs or expand production lines in the island, other laws serve to attract pioneer high technology companies to the island.

Since mid-year, Gov. Calderon’s administration has been fast-tracking the permit process which controls the pace of construction projects. She recently announced the approval of $952 million in construction bids for projects that will start early next year. By the end of this year, that number may have surpassed $1 billion, adding to the rapid economic recovery that is being predicted.

During 2001, the government announced it was spending more than $3 million to hedge, or insure, the price of fuel bought from Venezuela with a cap, which would protect the cost from price fluctuations. So far, more than 3,000 barrels of oil have been included in this plan to stabilize between 25% and 28% of the island’s energy costs for manufacturing purposes.

The amendment to Section 956 would constitute a new federal tax incentive to help manufacturing companies in Puerto Rico. Sections 936 provided similar incentives to U.S. corporations operating on the island but it is ending in 2005.

Under Section 956, a controlled foreign corporation (CFCs) could exclude 90% of taxable investments from current U.S. tax on its income, or elect an 85% dividend-received deduction for dividends paid out by the CFC to U.S. shareholders. In addition, a limited transition rule would be provided for companies operating in Puerto Rico, such as Sections 936 or 30-A corporations.

House and Senate versions of the bill were introduced in Congress and are now being revised by the U.S. Congress Joint Committee on Taxation. No action is expected until next year.

Pridco’s Executive Director William Riefkohl, former executive vice president of the Puerto Rico Manufacturers Association (PRMA), has also been a proponent of local manufacturing companies.

Riefkohl has encouraged mega retailers to purchase local production for national and/or worldwide distribution through their retail chains. Last month, Wal-Mart’s Pan American Grain rice venture and Home Depot’s Lanco paint venture were announced and other agreements are expected to follow in the manufacturing industry.

"These measures create a new mechanism to stimulate marketing and the export of products manufactured in Puerto Rico by local companies," said Riefkohl. "They also increase our competitiveness with foreign countries such as Singapore and Ireland who have already established similar laws to attract foreign investment in high technology industries."

End to economic recession in sight by 2002

As to the economic recession, Economic Development & Commerce Dept. (EDCD) Secretary Ramon Cantero Frau feels confident enough to say that the worst may be behind us.

"The U.S. economic recession will improve by first quarter of 2002, simultaneously impacting the island’s economy positively. We are on the verge of an economic recuperation," he said.

According to Cantero, wealthy private venture capital groups cannot find projects in which to invest in, as there is more capital than projects to invest in at this time. But he feels confident that the recently created and approved economic development laws will encourage local investment.

"When projects are ready for approval and the economy accelerates, you will see a rapid increment in Puerto Rican investors. What is wrong now is that there are no projects. But there are a lot of investment trusts and investment capital in Puerto Rico. In the past, estimates have ranged from $10 to $12 billion to $20 billion, and the larger figure would not surprise me," said Cantero.

PRMA Executive Vice President Jorge Berlingeri’s economic outlook remains guarded, based on Estudios Tecnicos’ economic forecast. Prior to Sept. 11, the loss of jobs in the apparel manufacturing industry was described as an adjustment to changes that were occurring in the global economy, conjectures after Sept. 11 place the U.S. economy at a critical juncture.

While some industries were spared in the pre-attack economic slowdown, others such as construction, apparel, and electric/electronic industries were immediately affected by the post-war recession. The PRMA’s economic outlook calls for the start of Puerto Rico’s recovery by the end of fiscal year 2002 (which ends on June 30, 2002). While economic growth is expected to be less than 1% (estimates are that it will be less), the island should recover by the end of fiscal year 2003.

Meanwhile, Puerto Rico’s manufacturing sector remains globally competitive in selected industries such as pharmaceutical drugs and medical devices. Lilly del Caribe and Amgen’s Puerto Rico biotechnology plants are go-aheads for next. In fact, Lilly’s plant underwent an almost 50% expansion after Sept. 11, when plans for a sister biotechnology plant in Europe were scrapped.

The anthrax epidemic brought up a major concern due to its availability in a case of a major terrorist epidemic. Companies such as Abbott Laboratories and Bristol-Myers Squibb reactivated FAA-approval plans to manufacture brand drugs that compete with Bayer’s Cipro. Abbott’s Biaxin is already produced in the company’s Barceloneta complex.

This year, Puerto Rico’s medical devices made an important advance, fueled in part by the attention Villalba’s Medtronic Inc. received after manufacturing U.S. Vice President Dick Cheney’s state-of-the-art pacemaker. The company has more than 25 additional products in its production pipeline, most for local manufacturing, as it expands to provide treatment of major medical problems such as heart failure, diabetes, atrial fibrillation, excruciating back pain, and Parkinson’s disease.

Medical devices companies’ St. Jude Medical in Caguas and Guidant Corp. in Dorado also experienced earnings growth with their production of heart valves and coronary stents for global distribution. In April, St. Jude Medical inaugurated a new plant and a new division to produce a new catheters line, which would add 100 employees by the end of the year.

This Caribbean Business article appears courtesy of Casiano Communications.
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