How To Choose A Competitive And Safe Incoterm For Your International Sales
The Best Incoterms For International Transport
Any international sales process always has two involved parties: buyer and seller, each with their own interests. Contract negotiations often include conditions for international shipping of the goods transaction. That includes the Incoterm which carries out the operation.
In our previous posts, we explained the different types of Incoterms and their specific rights and obligations. In this post, we’ll have useful advice on how to choose a competitive and safe Incoterm, depending on whether you are the buyer or the seller.
The following will give you a more detailed overview of Incoterms conditions from best to worst for various situations.
Incoterms For Exporters And Sellers
CFR-CIF: Cost and Freight – Cost, Insurance and Freight
As a seller, you must be aware of the shipper’s liability for delivering the goods to the destination. These Incoterms are the recommended options because they are very competitive but relatively risk-free for the following reasons:
They allow you, as a seller, to control international shipping costs to the destination port and ship cost-effectively. If you are in control of this fundamental cost, you evaluate and compare different shipping companies, get better rates from your freight forwarder if you are reaching a certain volume, or decide on transit times that suit you the most without committing to as many obligations as you would with the DDP or DAP Incoterms.
DDP-DAP: Delivered Duty Paid – Delivered at Place
You are delivering the goods to the warehouse or storage of your client in the country of destination. You have to be absolutely in control of everything happening in that country as you are fully responsible. It is necessary to be aware of and able to manage the possible complexities of that task.
You may have to deliver to a country that does not receive many imports, has many restrictions, or is simply not properly equipped for transport. Developing countries can cause transportation complications, delays at customs or similar situations, and additional costs will ensue.
If you choose this option, it should be because you are delivering to a country that is prepared for it. Or, it should be because your freight forwarder has a presence there. This provides you with greater control over the process with more flexibility. Therefore:
- If you are dealing with a country with known complications and are selling or exporting via DDP, it is important that your freight forwarder has offices there.
- If your freight forwarder has no offices in the country of destination and you are opting for DDP, at least make sure that the country is reliable and has extensive experience with imports, such as the United States.
The more you are in control of the cost of transportation, the more competitive you can be. DAP may seem to allow for greater competitiveness because all costs until delivery to your client’s warehouse are under your control. But keep in mind that with greater influence over these things comes greater commitment. That exposes you to more risk in the country of destination.
FOB: Freight on Board
A FOB Incoterm means your responsibility as a seller is to leave the goods at the port of origin. With no control over shipping times and costs, you lose influence and therefore competitiveness.
The shipping costs can affect your sale price by 100 Euros or even 300 Euros. The change can be significant, so take this into account when choosing this Incoterm.
EXW: Ex Works
As a seller/exporter, you prepare the goods for transport. Theoretically, your responsibility ends as soon as they leave your warehouse, storage or factory. Although it is the buyer or importer who contracts transportation with this Incoterm, loading at the source requires your oversights and this, therefore, becomes your responsibility. In principle, this Incoterm puts the recipient in charge of loading. But in practice, this proves to be more ambiguous as it is practically the seller who is forced to coordinate the loading, for convenience and logic.
Because of this ambiguity, it is very important to clearly define who is responsible for any incidents that might occur during loading.
Another downside for you as a seller/exporter is the loss of competitiveness. To a potential client, an EXW Incoterm can look or sound like minimum service, especially when your competitor offers FOB, for example, where your client might think they’re getting more value.
Incoterms For Importers And Buyers
If you are buying goods internationally or are importing, your best choices for Incoterms are reversed. You will need to pick the Incoterm that gives you the greatest control over shipping costs from the perspective of the recipient. If you’re thinking, “isn’t that what the other party is going to do,” you’re absolutely right. In international sales negotiations, both parties will be pulling from opposite sides at the issue, trying to exert control over expenses. It’s a classic conflict of interest, and the outcome will largely depend on your bargaining power and negotiation skill, and how much power and pressure the other side will exert over you.
For importers and buyers, the best Incoterms are the following:
FOB: Freight on Board
From the buyer’s perspective, the FOB Incoterm means that the vendor leaves your goods at the port of origin, ready for international transport with all formalities taken care of. You are in charge of contracting the international shipping, which gives you absolute control of all related expenses and coordination of delivery to your storage, the warehouse of final destination. You stay competitive because of this, just like a seller does with the CFR Incoterm, as you choose shipping routes and times and are able to negotiate prices with your freight forwarder. In summary, this is the recommended Incoterm for importers and buyers.
EXW: Ex Works
This Incoterm is acceptable. But as we outlined above, only choose this when dealing with countries you know well and feel comfortable with. Your freight forwarder should have a dependency in the country. EXW is advisable when you see it as feasible. However, as soon as you foresee even minimal complications, it is best not to risk it. This is especially so in a country with which you are not familiar. The better and easier option would be to have the goods delivered at the port, from where you can work with an agent of your provider.
CFR-CIF: Cost and Freight – Cost, Insurance, and Freight
This Incoterm is not recommended for importers and buyers because you will have no control over costs and there is another factor which introduces further complexities: the Bill of Lading, or BL.
This shipping document for international shipments confirms that the goods have shipped with the designated shipper. The BL is made out to the contracted transport agent, which will likely happen in the country of origin. As an importer under this Incoterm, you could be left waiting for the BL. What could also happen in the country of origin (which is often the case in China) is that the BL is written over to a transport agent at the destination. They will offer you a competitive rate, but only for port delivery. In order to receive the BL, which is made out in their name and practically gives them ownership of the goods, they might charge you an exorbitant amount.
For this reason, the CFR-CIF Incoterm is not recommended for buyers and importers. Compared to a FOB Incoterm, it might seem like you’re saving money. But in the end, it could turn out to be more costly.
Remember that whenever the Bill of Lading is not made out to you directly and you go through an agent, you have to be careful as you might be in for a nasty surprise when you receive the BL.
DDP-DAP: Delivered Duty Paid – Delivered at Place
This Incoterm gives you no influence at all over costs. As a buyer, you want to stay competitive, save costs and remain in control of everything. But the DDP-DAP Incoterms provides the exact opposite.
If you want to buy/import goods as cheaply as possible, DAP could sometimes be the better option. But even then, it’s not the most recommended Incoterm.
Whether you’re a buyer or seller, assuming costs for international transport also means more responsibilities. This means choosing a freight forwarder, shipping routes and times, and other details. These will allow you to fine-tune all costs so you can stay competitive. At the end of the day, cost and control are key factors to picking the best Incoterm for your shipment.
With excellent negotiation skills, you can secure the most favorable Incoterm for you and remain in control of costs. That brings you greater competitiveness, efficiency, and savings. Your bargaining power, the type and value of your goods will ultimately also affect your Incoterm.
— iContainersUS (@icontainers_usa) July 26, 2016