Manufacturing industry at a crossroads
In some 50 years, Puerto Rico has gone from agriculture to industrialization to high tech and now into a knowledge economy. The rapid change in a relatively short period of time has indeed transformed Puerto Rico from a once-poor agricultural economy into a high-tech industrial powerhouse. Today it continues to be a major force in Puerto Rico’s economy, responsible for 42.3% of the island’s Gross Domestic Product (GDP) in 2006, or close to $40 billion, although those figures are projected to decrease in 2007. The manufacturing industry in Puerto Rico is responsible for approximately 120,000 jobs.
Although the industry remains a very important one for Puerto Rico, in reality it has gone through some significant challenges in 2006. Increasing operating costs, anti-business labor legislation, the uncertainty created by the expiration of the tax incentives law at the end of 2007 and a tortuous permitting process are just some of the challenges the local manufacturing industry has faced.
Operational costs high
The local manufacturing industry continues to be plagued by rising operational costs such as electricity and water. With the industrial cost per kilowatt hour (kWh) at approximately 16 cents, it is not unusual for manufacturers on the island to have energy costs that are 17%-to-20% of their entire operating budget. The high operational costs have forced manufacturers to implement six sigma and lean manufacturing cost reduction and efficiency systems. However, there comes a point where a company reaches its limit in terms of cost reduction and efficiency. As a result, many plants have been forced to close shop and leave the island.
Pharmaceutical Industry
The pharmaceutical industry continues to lead the local manufacturing environment. Approximately 32% of Puerto Rico’s GDP comes from the pharmaceutical, biotechnology, medical device and healthcare sectors. Puerto Rico is the fifth largest areas in the world in pharmaceutical manufacturing with more than 85 plants, the third- largest biotechnology manufacturer with more than two million square feet, and the seventh-largest medical device exporter with more than 50 plants. The pharmaceutical companies originally came to Puerto Rico in the late ‘60s and ‘70s to take advantage of a now-expired federal tax incentive known as Section 936. Over the years, and because of 936, Puerto Rico turned into a worldwide pharmaceutical hub which currently produces 16 of the top 20 selling drugs in the mainland U.S.
However, the future of the pharmaceutical manufacturing industry in Puerto Rico faces many challenges as many companies have patents on their products that already have or will soon expire, and the number of new drugs in the pipeline are not enough to replace those products with expired patents. One dynamic that has been occurring in the industry is that of consolidation and purchasing of companies with promising medicines and patents that will help to strengthen a company’s overall product pipeline. In addition, local pharmaceutical companies are increasingly turning toward outsourcing of certain products to India and China to help reduce costs.
According to the Puerto Rico Pharmaceutical Industry Association (PIA), the island’s pharmaceutical sector generates more than 30,000 direct jobs and 90,000 indirect jobs, which equates to about 25% of all the direct jobs in the manufacturing industry.
It is that top-notch labor force--hard working, dedicated and intelligent--which is Puerto Rico’s number-one asset in the manufacturing sector and continues to be one of the main reasons companies continue operating locally and are drawn to the island. Compared with the U.S. mainland, the average cost of a Puerto Rican worker in manufacturing is about 65%-to-70% of what a company would have to pay there. The U.S. Department of Labor (USDL) indicates the manufacturing worker in the U.S. mainland earns an average of $16.14 per hour compared with an average cost in Puerto Rico of about $11 per hour, or roughly 68%. For the quality you get in the Puerto Rican workforce, the price is considered one of the best deals in this hemisphere.
Tax incentives law extended, new law in the making
Tax incentives have been the main draw for corporations to Puerto Rico for more than 30 years. The local government was unable to find additional federal tax benefits to substitute for sections 936/30A of the Internal Revenue Code and instead has focused on improving local tax incentives to try to offset the lack of federal tax breaks. The main tax instrument the government and the Puerto Rico Industrial Development Co. (Pridco) use is the industrial tax incentives law of 1998, which historically has been amended every 10 years since the 1950s. The 1998 law is set to expire at the end of 2007 but was expected to be extended for six months until June 2008 while a new law is drafted.
However, the way the government handled the impending tax incentives law expiration and eventual decision to extend it was not without controversy and created a period of uncertainty and potential loss of new manufacturing investment. Although tax incentives do serve a purpose, companies have become less concerned with tax incentives because of high operating costs which have eroded profits, in many cases resulting in bottom-line losses that have rendered tax exemption useless. The fact that Puerto Rico has been in a self inflicted recession for almost two years has also increased the challenge and outlook for manufacturers.
Moving toward a knowledge economy
The local government and Pridco have decided to focus primarily on developing a knowledge economy, spearheaded by the life sciences (biotech, pharmaceutical and medical devices) and computers and informatics. Although biotechnology is not a new industry, it has become the buzzword lately and Pridco is betting this strategy will pay off by leveraging a solid local pharmaceutical industry base and highly trained and educated talent available on the island. Pridco has also been proactive in sponsoring educational initiatives to foster and develop Puerto Ricans to study advanced degrees in the sciences.
Aerospace manufacturing niche opportunity
One niche area that looks bright for the local manufacturing industry is the aerospace industry. Although there are just a handful of aerospace companies that have established on the island, this is an area which until recently was virtually non existent on the island. Aerospace companies have found the high talent base combined with relatively lower labor costs and the fact that Puerto Rico is a territory of the U.S., a key element in defense-and-aerospace-related manufacturing requirements, makes the island an ideal manufacturing solution.
San Juan Knowledge Corridor
As part of the development of a knowledge economy which should help increase manufacturing capacity on the island, the government of Puerto Rico is embarking on transforming the landscape into one of world-class science laboratories and facilities. In October 2007, the government of Puerto Rico transferred more than 70 acres of prime land in metropolitan San Juan to the Puerto Rico Science and Technology Research Trust. The Trust was created in 2004 with the intention of implementing public policy and helping to facilitate the creation of infrastructure favorable to the development of a knowledge-based economy in Puerto Rico. Within this structure there will be a collaborative effort among government, academia and the private sector in which the Trust functions as a supervisory entity looking to stimulate each entity but not substitute any one of them.
At an estimated investment of $1.7 billion and development over a 20-year period the San Juan knowledge corridor will extend from the area around Centro Médico to the University of Puerto Rico in Rio Piedras. During the first five years of the project, the investment could be approximately $620 million which includes 250,000 square feet of laboratory space.
