U.S. Companies Lag in Latin America’s Largest Free Trade Zone

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(panamasol.com) The Colon Free Zone on Panama’s northern coast has been around for 60 years, but businesspeople there say the global players in the U.S. like Georgia’s 12 Fortune 500 companies still haven’t tapped its full benefits.

The wholesale hub sits on prime real estate for international trade, where Panama’s three Atlantic container ports, busy railroad line and storied canal intersect.

This location has helped the free zone become the world’s second largest behind Hong Kong and a sort of “grocery store” for distributors in Latin America, allowing them consolidate inventory and protect distribution patterns from downturns in regional markets.

About $16 billion in commercial transactions occurred within the nearly 1,000-acre economic area last year, up from about $12 billion in 2005 and $14 billion in 2006. The zone directly employs 20,000 Panamanians and accounted for 12.6 percent of the country’s $19 billion gross domestic product in 2007.

Even with this steady growth, the Panama Canal’s coming $5.25 billion expansion and ever-increasing global trade flows are creating the need for even more capacity and infrastructure improvements.

A new intermodal center and other projects are under construction, and companies around the world are joining the more than 1,800 that already have a presence there.

When completed next year, a four-lane highway will cut traffic congestion between Colon and Panama City, and the zone is set to double its storage capacity in a few more years, said David Cohen Solis, president of the Colon Free Zone User’s Association, a business group representing companies there.

But even as it builds for the future, U.S. officials and business veterans like Mr. Cohen told GlobalAtlanta that American companies have been slow to take advantage of the bustling zone as a transshipment hub.

“U.S. companies have to start looking at the free zone as an opportunity much like you would look at Rotterdam or Singapore,” said Surse Pierpoint, second vice president in the user’s association.

Colon’s free zone, unlike those popular ports, faces an awareness problem in the world’s largest economy despite six decades near the U.S.-built canal, said Mr. Pierpoint, who is also general manager for Colon Import & Export S.A.

This could be a result of Colon’s unique niche. Nearly half the goods imported into the zone come from China (including Hong Kong), and most go to the Caribbean or to Latin American countries like Colombia, Ecuador and Venezuela. Only 3.6 percent are exported to the U.S.

As a result, Mr. Pierpoint said the Colon Free Zone is a sort of “grocery store” for distributors in Latin America, giving them a “safe harbor” of sorts against unfavorable market conditions in surrounding countries.

This means that only certain types of companies would benefit from the free zone’s duty-free environment.

“There’s no reason for U.S. companies to be in a zone in Panama unless they’re manufacturing or distributing (in the region),” said Greg Andrews, who manages an international logistics degree program at the Georgia Institute of Technology.

The U.S. system of free trade zones is sufficient for companies selling here, he said.

But companies like Wal-Mart Stores Inc. and Atlanta-based Home Depot Inc., which source from China and are looking for international retail markets, strike Mr. Pierpoint as prime candidates.

All goods imported and stored in the free zone are exempt from Panamanian taxes because they never technically enter Panama’s borders. Land and warehousing costs are relatively low, and companies don’t have to be incorporated in Panama to begin operations.
 

J. Cain & Co., a third-party logistics outfit, has used this system since 1951, the year the zone became operational, and the company is still growing.

The Panama government granted J. Cain one of the first 50-year land concessions in an area slated for redevelopment.

On a recent trip to Panama, GlobalAtlanta toured one of J. Cain’s three new warehouses and office facility.

Pallets brimming with Panasonic boomboxes, home theater systems and hair dryers filled towering blue steel racks. Employees in a pharmaceutical clean room placed labels on Nicorette gum and other products. Yamaha guitars and keyboards awaited reshipment.

Built to international standards, the buildings sparkled compared to the gritty ones in some of the zone’s older parts. As per J. Cain’s original plans, land next door has been cleared for three more identical warehouses.

Their sloped roofs cut stacking capacity but help shed rain during the wet season, a necessary adaptation in Panama’s tropical climate, said Luis Carlos Motta, the company’s general manager.
 

That’s a reflection of how J. Cain is adapting to the global economy while maintaining longstanding business ties like a 41-year relationship with Panasonic and an even longer one with Pfizer pharmaceuticals, J. Cain’s first customer.

The company now employs more than 400 people, serving customers through offices in Colombia, Uruguay and Venezuela. J. Cain also serves as the regional distribution center for logistics and package delivery company DHL.

In view of J. Cain’s success, Mr. Motta said that U.S. companies should consider Panama or Latin America, which are not always seen as profitable markets.

U.S. brands are popular, but “there’s very poor visibility of American companies in Latin America,” Mr. Motta told GlobalAtlanta. “There’s a stereotype that these are poor markets and it’s not worth it, but once you get here, you see the tremendous buying power.”

Atlanta-based United Parcel Service Inc., for example, hasn’t had the foresight of DHL in the region, he said.
 

“It’s a shame because they have the name, and they could be something big,” said Mr. Motta, jokingly ribbing rival UPS by comparing its facility in the free zone to a “mom and pop” operation.

Mr. Cohen, the president of the user’s association, agreed that the zone is underutilized by U.S. companies.

He also acknowledged criticisms about corruption and the exchange of counterfeit and illicit goods there.

But that comes with the territory, said Mr. Cohen, whose company, International Hardware Corp., operates a 250,000-square-foot distribution center there.

“Every merchandise hub suffers from delinquents who come here and do their movements, so we’re just trying to keep an eye open for that. There are definitely bad people around, but they’re the minority,” he told GlobalAtlanta by phone.

Mr. Pierpoint said that companies should come see the free zone firsthand before making judgments.

With the right advice and good people on the ground, they can avoid common pitfalls, he said.

Nicholas Kuchova, the U.S. Embassy’s senior commercial officer in Panama, is working to organize an Internet seminar to show U.S. companies how to get involved.

“We just aren’t doing enough,” said Mr. Kuchova, who was stationed in Savannah for about 18 months before moving to Panama.

Source: http://stories.globalatlanta.com/2008stories/016170.html