(Re) Made in Brazil.

New Brazilian law allows bonded warehouses to double as manufacturing plants.

THANKS TO A NEW LAW, BRAZIL'S QUALIFIED BONDED warehouses--where cargo goes while awaiting customs clearance-could soon do double duty as light manufacturing and assembly plants. That has multinationals, especially global high-tech companies, rushing to come up with strategies that take full advantage of the coming change. Passed in May, the law is expected to be in force by the fall.

Since the early 1990s, when Brazil first opened up to trade, multinational companies have been trying to position the country as an anchor for their operations, thanks to its large consumer and manufacturing base. But the country's ancient duty tariffs and dusty trade laws have frustrated those goals. The new legislation will be a breath of fresh air for the industry, supporters say, since it allows companies to import parts and partially assembled goods, finish them off with Brazilian-made pieces, then distribute the finished products throughout the region.

"Nortel, Lucent, Ericsson...a lot of companies around here, many of the high-tech ones, have expressed huge interest," says Omar Passos, deputy director of Columbia Armazens Gerais, a Brazilian logistics company operating several customs bonded warehouses, including one at the busy Viracopos cargo airport at Campinas, in Sao Paulo state. Passos' clients are already showing him how to turn a simple warehouse into mini-manufacturing plants, he says.

Once a plant is in place, a multinational usually assigns a couple of its own employees to the facility to oversee the manufacturing, or it outsources the assembling and packaging job. Outsourcing allows the multinational to free up valuable space on its own premises and concentrate on its core business. "Foreign trade operations will be quicker and import costs will be reduced. It's a great competitive advantage for companies that are based in Brazil:' Passos says.

The new law changes the rules, warehouse operators say. Photography giant Kodak, for example, operates a redistribution center in the Sao Paulo area. The venue allows the company to consolidate shipments and resend them throughout South America while legally skirting some import duties. The government's restrictions for such operations are so tight, though, that no other company can obtain the proper clearance, managers say.

Under the new law, however, a bonded warehouse operator- not just an importer or exporter-can win a concession to run manufacturing, assembly and distribution centers. And the centers can do much more than just consolidate cargo.

Here's how it works: Warehouse centers, or "dry ports," let shippers leave goods in storage for up to three years without paying import taxes. The shippers pay duties only when the goods are physically moved from the customs-bonded warehouse; until that time, they have not officially entered Brazilian territory, in terms of the law.

Thanks to repackaging and labeling or some level of manufacturing, many goods will have value added when they leave the warehouse plants and go on to other regional destinations--but at cheaper duty.

Eduardo Cruz is president of bonded warehouse Dry Port Sao Paulo, an operation that sits strategically near the international airport of Sao Paulo in the Guarulhos suburb. Cruz predicts a mini-manufacturing boom at bonded warehouses around the country. He says the trend will be most notable in industrialized places like Sao Paulo, which offer key air freight connections that make it easier to re-export the finished goods.

Dry Port already has one customer in mind--Visteon, one of the world's leading automobile parts suppliers, which has just completed its spinoff from Ford Motor Co. Visteon's Sao Paulo plant produces about 400 different items and sits just opposite Cruz's warehouse.

"First, we'll be able to reduce their local inventory from 10 to five days here," explains Cruz. "Then they will be able to have some of their items assembled, labeled and shipped directly from here. We can add value and re-export at lower costs."

The new operations are not perfect. They lack the incentives of free trade zones, which offer even greater tax breaks and more freedom for importing and re-exporting. Still, shippers and warehouse operators like Dry Port Sao Paulo say Brazil is heading in that direction. "Argentina and Uruguay already have free trade zones," Cruz says. "This new regulation could allow Brazil to become No. 1 in terms of trade."

Despite imperfections, the bonded warehouse law and other changes show that Brazil is making an effort to make trade easier. "Brazil is committed to become a global player," said Dal Molin, the vice president of supply chain operations for Nabisco Brazo, speaking at a recent conference on Latin American logistics. "International trade will become simpler."