Paradise, pills and paper: tax incentives encourage manufacturing operations in Puerto Rico and the converting ventures follow

Paperboard Packaging, August, 2004 by Peter Fretty

Puerto Rico has long been known as a tourist attraction with its tropical atmosphere and pristine beaches, but it has also made quite a stir in manufacturing circles in recent years. This is especially true with its production of exported goods, 87 percent of which are headed to the United States, including electronics, medical devices, computer supplies, and pharmaceutical drugs.

While most of its businesses continue to grow despite the world's economic woes, pharmaceutical drug production remains Puerto Rico's strongest industry with powerhouses such as Pfizer, Bristol Myers Squibb, Eli Lilly and Abbot Pharmaceutical each calling the island home to key manufacturing facilities. In fact, 16 out of 20 of the world's blockbuster drugs are produced, packaged and shipped from the island.

As a direct result of this steadily growing manufacturing base, Puerto Rico is also quietly becoming a hotbed for box companies as well. To date, roughly 15 corrugated and folding carton firms currently operate on the island.

Island Motivations

Extremely low labor rates and a lack of governmental oversight may draw scrupulous manufacturers to locations either south of the boarder or the Pacific Rim. However, the distinct advantages to setting up shop in Puerto Rico rest with the attractive tax rates which range from 2 to 7 percent for foreign corporations and fiscal incentives such as reinvestment enticements capable of essentially eliminating corporate taxes. Also, there are the same intellectual property or patent-based protections afforded firms within the U.S. mainland--a key attractor for any technology-based industry considering offshore production.

Fernando Lugo, Puerto Rico industrial development company deputy executive director of economic analysis and strategic planning, says tax incentives for manufacturing industries typically encourage continental firms to establish operations on the island, which is approximately the size of Vermont.

"The relatively low cost to transport paperboard to the states, and lower labor costs on the island also adds motivation to operate in Puerto Rico," he says. "High support from the government sector, transparency in our business activities, our political stability and our extremely close relationship with the United States, allows companies to freely ship products to the states, while giving the same federal protections as in the mainland."

As a bilingual territory using U.S. currency, Puerto Rico is approximately 100 by 35 miles long and is home to approximately 3.8 million people, 1.2 million of whom are currently in the work force. While a majority of this skilled work force is employed by the 65 pharmaceutical plants located on the island, the work ethic is solid and there are still various opportunities from within the island's boundaries without overextending the labor pool.

According to a recent Ernst and Young study, the lower wage, which is approximately $14.44 per hour, coupled with numerous tax benefits and innovation enticements, allow the average firm to save roughly 30 percent by manufacturing product on the island in comparison to producing the same product on the U.S. mainland.

Box Making Activity

Each of the following converters has undoubtedly taken its own distinctive approach to the marketplace and uses diverse equipment, but one commonality remains. Each firm has located its facility on the island to directly serve the current nucleus of pharmaceutical manufacturers. As a direct result of the island's incentives, many of these pharmaceutical facilities are considered the most advanced production plants in the world and use the latest in best practices. They demand a level of just-in-time product delivery that would not be possible or economical without close proximity to their respective Puerto Rico production facilities.

What differentiates most Puerto Rican facilities from mainland counterparts also is a direct result of the benefits the commonwealth provides by financially motivating firms to reinvest and continuously update equipment to incur substantial tax benefits. As a result, Puerto Rico packaging firms do not simply have to invest in new technology to survive. Instead firms invest because they have financial incentive to do so.

Cardinal Health--PCI Services

As one of the world's largest fully-integrated packaging service organizations, Cardinal Health packaging operations are completely health care industry dedicated--providing services in contract packaging, printed components, analytical services, and clinical services. Its Guaynabo plant, which opened in 1979, is part of the firm's printed components division and provides folding cartons, inserts, outserts, labels, and other commercial printing needs including pharmaceutical brochures and booklets.

Cardinal is a prime example of a converter that has continually reinvested in state of the art equipment including UV capable presses; a Bobst Cartonpack II within its folding and gluing department, which is designed to efficiently and automatically pack folding cartons with four or six corners at high speeds; computerized quality control systems; SAP manufacturing software systems capable of remotely controlling production operations through the use of automatically generated data; and its recently installed Agfa computer-to-plate system.