Edition: February 19, 2009 | Volume: 37 | No: 7

From: Caribbean Business

Puerto Rico’s manufacturing industry will continue to face many challenges. By now everyone knows the rippling impact that the local recession has had on manufacturing, and now with a full-blown global economic crisis, those challenges have only become more daunting.

At the same time, however, it can be a time of opportunity, a time for Puero Rico to really take the bull by the horns and do whatever it takes to position itself, by implementing all measures necessary to make it the very best manufacturing destination in the world. It will take a lot of concentrated and coordinated work, but it can be done.

Notwithstanding, the projected challenges that the local industry will face this year will include ongoing high operational costs—among the most painful, energy costs. It has not been unusual for manufacturers on the island to have energy costs that are 17% to 20% of their entire operating budget. Add to this mix excessive labor laws, permitting obstacles, as well as fierce global competition, and one can quickly get a sense of what the local industry is up against.

Overall, Puerto Rico’s manufacturing industry has taken a beating during the last three years of the local recession, losing thousands of jobs through plant closures and reductions. However, the 2009 outlook for manufacturers on the island will vary depending on their market, mix of products and the company’s regional or global diversification.

Nevertheless, huge opportunities await on the horizon for Puerto Rico. Pharmaceuticals, life sciences, aerospace, and information technology all continue to have promising value propositions. There also exists a window of opportunity over the next few years to proliferate the growth of generic pharmaceutical manufacturing on the island, a market segment that is projected to grow exponentially. Puerto Rico must continue to look aggressively for niche opportunities to maximize its value proposition. Manufacturing is responsible for slightly more than 40 percent of the island’s gross domestic product (GDP) and approximately 99 percent of all products exported.

“Clearly the outlook is a very challenging environment. From a macro standpoint, it’s inevitable; we see consumer spending slowing down, businesses are having difficulty getting credit, so they are suspending investment, etc. It’s not a local or national thing; it’s a global situation,” said Paul Hargen, general manager of Hewlett-Packard in Puerto Rico.

“In our industry (medical devices), it’s not that sales are dropping in a major way or anything like that, but you see a slowdown. We’re used to being in a mode where we have double-digit growth every year; we’re feeling a slowdown of the growth rate. And it varies depending on the market. In some markets, it has gone pretty flat; in other markets it may still be growing but at a slower rate. But it is a global thing,” said Fernando Torre, executive vice president of Coopervision, overseeing plants in Puerto Rico, Virginia, and England.

Torre added, “We are seeing the result of a truly global economy; everything is interconnected, and that’s what we’re seeing. Normally, we may get a slowdown in Europe, but the United States is unaffected, or you get a slowdown in the United States, but Japan is unaffected. This (economic situation) is pretty much across the board.”

“I think that this year will be a rough one for the manufacturing industry, particularly the pharmaceutical industry, which is having a really rough time. The loss of patents has been and will continue to be a major factor affecting them. However, I see things getting better for the industry later in 2009 and into 2010,” said Luis David Soto, president of Mentor Technical Group.

The pharmaceutical industry has long been Puerto Rico’s most significant sector both in terms of employment, wages, and economic impact and in terms of investments and supply-chain multiplier effect to the local economy.

“The period that we are passing through now is a period of transformation which is not easy. The adjustments that we have had to make have been significant, and we will continue to make adjustments, but we will make it through,” said Carlos Del Río, Pfizer’s vice president of operations and manufacturing.

“The industry is certainly changing. It is responding to significant pressures that the manufacturing sector especially is feeling. We have recognized that the R & D pipeline is a little drier, and we have very strong generic competition. There are issues with fraud for some of the key products that are in the market, and other issues as well,” said Sigfrido García, director of new processes and technology at Pfizer, who also leads the technical committee at the Pharmaceutical Industry Association (PIA) and is president of the board of directors of the Industry University Consortium (Induniv).

Del Río indicated that generic manufacturing could effectively help to fill the excess capacity of manufacturing space that currently exists on the island, but only if it can be done in such a way in which costs are kept within certain limits to justify and permit competition in that segment.

“The best intelligence that we have today is that when we look at the pipeline of the future, approximately 50 percent of the products will be oral solids; they are not going away. So in my mind, what that means for Puerto Rico is that we do have a strong solid manufacturing platform on the island. I mean we have been doing that for over 30 years. So we should certainly sustain that strength, not give it away, and then diversify and build upon that. That is what I think biotechnology is, a way to diversify our value proposition as a manufacturing sector in Puerto Rico. Certainly we shouldn’t be thinking of replacing one with the other,” said García.

“The governor has to work on integrating Puerto Rico back into the United States, and he should focus on revitalizing Pridco and getting it to do more (promotional) outreach. They need people to go out there and talk eye-to-eye with the manufacturing companies, and reach out directly to the general managers. I mean they need people going all over the mainland U.S. and globally— weekly,” said Ed Agrait, former Puerto Rico Industrial Development Company (Pridco) promoter, adviser to the Small Business & Technology Development Center (SBTDC) and president of Dorado Asset Growth, Inc.