ROCKY PATEL DISCUSSES THE HONDURAN CIGAR INDUSTRY

UNCLAS TEGUCIGALPA 001266

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: BBSR ECON EIND ETRD KIPR HO
SUBJECT: ROCKY PATEL DISCUSSES THE HONDURAN CIGAR INDUSTRY

REF: A. STATE 54356

B. TEGUCIGALPA 206


1. (SBU) SUMMARY: American cigar manufacturer Rocky Patel
discussed the Honduran business environment for cigar
manufacturers at his El Paraiso factory on December 1.
According to Patel, sales of his cigars are up about 15% this
year despite an industry-wide drop in sales of about 22% for
the year due to the global economic crisis. Patel expects to
export a total of 19 million hand-rolled cigars in 2009,
primarily to the U.S. He chose El Paraiso because of its
existing experienced labor force and lower labor costs, but
became worried in January when Zelaya initially proposed a
60% increase to the minimum wage. If Honduran cigar
manufacturers had not been successful at obtaining an
exemption, they would have raised the retail price of cigars,
leading to decreased sales. Eventually they would have had
to scale back their workforces, leading to a significant
increase in unemployment and possibly wiping out the industry
in Honduras. Patel said that weak intellectual property laws
were a drawback to doing business in Honduras, adding that he
had not patented his production process out of fear that
competitors would steal it without consequences. Tobacco and
manufactured tobacco products account for 4.1% of Honduras'
total exports, making it the country's sixth largest export.
As long as Patel and other international cigar manufacturers
continue to feel that the Honduran government is creating a
business climate in which they can succeed, Danli will remain
a capital in the cigar world. END SUMMARY.


2. (U) Rocky Patel, President and CEO of Rocky Patel Premium
Cigars, discussed the business environment facing his
business in Honduras and provided EconOff and other Embassy
officers with a tour of his El Paraiso factory on December 1.
(Note: All activities were compliant with guidance provided
in ref A regarding engagement with producers of tobacco
products.).

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Honduran Factory Keeps 'em Rolling
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3. (U) Rocky Patel Premium Cigars, headquartered in Naples,
Florida, began manufacturing its cigars in Honduras in 1996.
Patel said he chose the Danli, El Paraiso region because of
its existing experienced labor force and low labor costs.
Rocky Patel employs approximately 1200 people in the factory,
70% of whom are single mothers, and about another 800 people
in the warehouses. The 100,000 square foot facility was
built ten years ago by another U.S. firm, Swisher, in
accordance with U.S. building codes. Patel leases it from
Nestor Plasencia, the largest tobacco grower in Central
America. Patel said that the facility produces on average
65,000 hand-rolled cigars a day and is slated to export 19
million cigars in 2009, primarily to the U.S.


4. (U) According to Patel, worldwide sales in the cigar
industry are down about 22% for the year due to the global
economic crisis. However, sales of Rocky Patel Premium
Cigars are up about 15% for the year, following steady growth
from 2003 to 2008. In response, Patel expanded his Honduran
workforce when others were scaling back. He believes that
that this mitigated severe increases in unemployment in the
Danli region.


5. (U) The Rocky Patel factory was not impacted by any of
the curfews imposed by the de facto regime following the June
28 coup. The factory only employs one daytime shift and the
majority of the curfews applied only during the evening and
overnight hours. On the few days when there were daytime
curfews, the factory obtained special permission from the
local military authorities to continue operations and used a
company bus to shuttle employees to and from work.

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Minimum wage increase could have snuffed out industry
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6. (SBU) Patel said that he was very pleased overall with
his decision to manufacture his cigars in Honduras. However,
he worried when Zelaya initially proposed a 60% increase to
the minimum wage in January. Patel explained that the
export-oriented cigar factories, unlike the apparel maquilas,
were not initially exempt from the wage hike. Patel and
other producers in the region banded together and lobbied
for, and were later granted, exemption status similar to that
obtained by the maquilas. Patel added that if they had not
been successful, he would have passed the production cost
increase to consumers and raised the retail price of his
cigars by 30% to 40%. He believes that this would have
significantly decreased sales and that he would have had to
scale back his workforce as a result. Patel stated that the
other producers in the region would have been equally
impacted and that the wage hike would have been devastating
to employment in the region. He postulated that it could
even have wiped out the industry if producers had shifted
production to another country with lower labor costs. Patel
said he hoped that the newly elected Lobo administration
would be pro-business.

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Weak IPR laws a burning issue
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7. (SBU) Weak protection of intellectual property rights
(IPR) was the one shortcoming Patel mentioned with regard to
doing business in Honduras. Patel specifically did not
patent his production process because by doing so he would
have had to divulge his trade secrets. He expressed concern
that competitors would steal without consequences because of
insufficient and ineffective Honduran IPR laws.


8. (SBU) Patel provided an example of an employee who was in
charge of production (and thus had knowledge of the firm's
recipes) but later left the company to break out on his own.
Patel said that the first two cigars produced by this
ex-employee's newly established firm were exact replicas of
cigars produced by Rocky Patel. However, Patel said that he
was unable to prosecute this individual in the local judicial
system. (Note: Prior to becoming a cigar manufacturer, Patel
worked as an attorney).

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Patel seeks to light up young minds
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9. (U) Patel recently started a foundation that has begun
building a school for 100 homeless children from the Danli
area. The school will not only educate these at-risk youth
but also provide them with lodging, clothing, and food.
Patel expressed hope that this would be the first of many
projects that his foundation would sponsor to help the
local community.

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Planting new seeds
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10. (SBU) Patel said that he plans to expand his company
beyond cigars into a "lifestyle" company. The first products
would include scotch, humidors, and Tommy Bahamas-style
shirts. He told EconOff that he was considering
manufacturing the shirts and humidors in China. Asked
whether he had considered locating the manufacturing
operation in Honduras, given his frequent visits here, he
said that he did not know how to make local contacts in those
industries. EconOff explained that the Foreign Commercial
Service (FCS) may be able to help via its Gold Key Program.
Patel was enthusiastic about meeting with FCS during his next
trip to Honduras.

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Comment
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11. (SBU) Danli is considered to be the cigar capital of
Honduras. According to the UN COMTRADE Database, tobacco and
manufactured tobacco products account for 4.1% of Honduras'
total exports, ranking it the country's sixth largest export.
Rocky Patel is one of the biggest players in the Honduran
tobacco industry, directly employing 2% of the Danli area
population in his factory and warehouses and indirectly
employing numerous more who work in the tobacco fields to
replenish his warehouse stocks. As long as Patel and other
international cigar manufacturers continue to feel that the
Honduran government is creating a business climate in which
they can succeed, Danli will remain a capital in the cigar
world.
LLORENS