FOB, CIF, or EXW? The Incoterm you choose for your import from China can greatly affect your overall cost. But strangely, it’s seldom the focus of your import campaign.
Most importers tend to place higher priority on obtaining the lowest sale price possible while overlooking other details. This may end up being a very costly mistake. Given their direct impact on import costs, it’s time we start giving Incoterms a closer look.
The price of the merchandise you’re purchasing differs depending on whether you’re importing with the FOB Incoterm, CIF Incoterm, or EXW Incoterm. Many Chinese suppliers apply the cost of the maritime transport directly to the product price, which is why they often have a list of prices that vary according to the Incoterm used.
Be very careful here when you negotiate with your Chinese supplier because the price difference does not always correspond to the price of the ocean freight rate. Suppliers are known to use this to manipulate the buyer into choosing a certain Incoterm that benefits the supplier more. This will be further explained when we discuss the CIF Incoterm.
The Incoterm you choose will define the control you have over the shipment at each stage of the shipping process. Whoever has control over the ocean freight will have control over costs and higher bargaining power.
If you let your supplier manage the ocean freight, you’ll have to accept the price and conditions that he has agreed upon with his freight forwarder.
Always think about whether these conditions are in your favor or if they can be improved. You may want to consider negotiating directly with the freight forwarder to try and obtain a lower freight rate and schedules that better suit your needs. Another alternative, supply chain-permitting, would be to hold the shipment off until you accumulate a larger amount of shipment to obtain more leverage with freight forwarders and carriers.
Besides cost, the Incoterm you choose may also affect other crucial aspects such as supply chain efficiency, transit times, conditions of the goods, etc. These are factors that can make or break your import campaign.
Here’s a breakdown of the Incoterms you can use for your import from China and the advantages and disadvantages of each one of them.
The FOB Incoterm is probably the favorite - and in some cases the only - Incoterm among more seasoned importers. We’re talking about countless imports with different characteristics and each with its own unique needs.
In my opinion, if you had to choose just one Incoterm for your import from China, the FOB Incoterm would be the way to go. Why? The FOB Incoterm gives you greater control over the importing ocean freight shipment without the responsibilities that come with it.
Buyer’s responsibilities: Pay for the cargo, ocean freight, insurance, arrival fees, customs clearance at destination, inland transportation fees at destination from port to warehouse, and all corresponding tariffs and taxes.
Seller’s responsibilities: Deliver the goods according to the conditions agreed with the buyer, provide the necessary certificates for the merchandise at origin, manage inland transportation in China from the warehouse to port chosen by the buyer, manage customs clearance and pay the corresponding customs fees in China, as well as port expenses at origin.
In short, under the FOB Incoterm, the importer’s responsibilities are paying, hiring, and managing the ocean freight shipment. That’s, however, not a disadvantage. Since he who pays also controls, buy choosing the FOB Incoterm, you, as the buyer, can:
As mentioned, the greatest advantage of importing from China with FOB is the control you have. Compared with EXW, you also have fewer responsibilities.
With FOB, your responsibilities as an importer are the freight rate, arrival costs, and delivery. This means that any hiccups at origin will fall under the responsibility of your supplier in China. For EXW, however, you’re responsible for any problems and unanticipated fees - be it at origin or destination.
In a nutshell, even though both the FOB and EXW Incoterms are considered safe options for the importer, there’s a considerable difference in the way responsibilities are distributed.
My recommendation: Always import from China with the FOB Incoterm. Besides being more cost-competitive, there’re limited responsibilities, unlike the EXW.
Buyer’s responsibilities: Pay for the cargo, arrival fees, customs clearance at destination, inland transportation fees at destination from port to warehouse, and the corresponding import taxes.
Seller’s responsibilities: Deliver the goods according to the conditions agreed with the buyer, obtain the documents needed for the export, manage inland transportation in China, manage customs clearance and pay corresponding customs fees in China, hire and pay for the ocean freight, insurance, as well as port charges at origin.
For a novice importer, the CIF Incoterm may look extremely alluring: no freight payment to fork out for, no responsibilities in choosing a freight forwarder or negotiate with them, no having to organize the freight shipment, and above all, the merchandise is actually cheaper than if you were to buy them under another Incoterm.
But that’s really all a facade. The CIF Incoterm is not recommended for any import, reason being it limits your control over costs, especially arrival costs. That translates to loss of competitiveness. When importing from China, the CIF Incoterm is advised against as it could end up greatly increasing your overall costs.
When importing under the CIF Incoterm, you’re required to hire an agent at destination to manage customs clearance. What we generally see happening is the supplier and destination agent colluding to consign the load to the agent and then impose an additional expense that’s beyond the buyer’s control. Since the destination agent is now listed as the consignee on the Bill of Lading, the cargo release is now in his hands and will require full payment of his fees before he releases the cargo.
This means that you, as the buyer, are now faced with additional destination expenses while facing pressure to get your cargo out or face delay fees, both of which can really increase your overall costs.
My recommendation: If you’re working with a supplier that you’re not entirely familiar with or trust, always choose FOB over CIF for your import from China.
Buyer’s responsibilities: Pay for the cargo, manage the inland transportation at origin and destination, pay for departure and arrival fees, the ocean freight, insurance, manage customs clearance at origin and destination and pay their corresponding fees, and pay the corresponding duties.
Seller’s responsibilities: Deliver the goods according to the conditions agreed with the buyer, provide all documents and certificates required.
The main advantage of importing from China under the EXW Incoterm is the control of managing the shipment from start to end. But as much as it is an advantage, it may also end up being a disadvantage because you’re subject to more responsibilities. With EXW, you’re responsible for everything and anything that happens at origin.
Keep in mind that unanticipated problems may occur at any time during the shipping process. And though they may be beyond your control, they won’t be beyond your responsibilities.
From the factory or pick up point to the cargo being loaded on the vessel, here’s what can happen: problems with inland transportation, container loading, customs clearance, etc. In the event a customs inspection is required at origin, inspection costs and delay-related costs must be borne by the importer.
Another important aspect to consider when importing from China with the EXW Incoterm is the physical distance and cultural differences. Hiring services such as inland transportation in a country where you have no physical presence always poses a risk. But when said country is China, the language and cultural barriers and time difference pose additional obstacles, the latter of which can result in added expenses as you may not always be available to respond to unforeseen events.
FOB, CIF, and EXW are, theoretically speaking, viable options for your import from China. Each involves a different amount of risk, responsibility, cost, and security.
My recommendation: Go for the safest Incoterm that offers you the most control over the ocean freight shipment.
Remember: Whoever controls the freight controls the price.
"Customs duties play an important role in your international shipment. How they're determined and calculated varies from country to country"
Klaus Lydsal, vice president of operations at iContainers