Why Shipping Incoterms Matter : FOB, EXW, CIFAugust 23, 2018 in Blog
In international trade there is something referred to as Incoterms. These are three letter terms which essentially outline who’s bearing certain transportation costs and other risks. The most common ones you are going to come across are EXW, FOB, and CIF.
These terms have certain legalities attached with them but for most importers the important thing to know is that these terms can significantly alter how much you will pay for your shipment. Generally, EXW is the cheapest and CIF is the most expensive. If two suppliers give you nearly identical prices but one quotes EXW shipping terms and the other quotes FOB or CIF, the second quote will cost you significantly less. Not being aware of the cost implications of different shipment and Incoterms is where a lot of new importers get burned.
EXW (Ex Works: Place of supplier): This basically means that you are responsible for arranging to have your goods picked up at your supplier’s factory and delivering them to your destination (and all of the other costs in between). Your supplier’s factory may be hundreds of miles away from the sea port where they will be loaded onto a ship. This means you will be responsible for this overland freight. If your supplier lacks certain export documentation you will be responsible for this as well. You will also, of course, pay for all sea freight and other import/transportation fees in your destination country.
Generally, EXW shipment terms compared to FOB shipment terms will cost you hundreds of dollars more.
FOB (Free on Board: Chinese Port of Shipment): This is the most common shipment term. Your supplier pays to have your goods loaded onto a ship in China including the local transport costs in China as well as the cost to clear the goods for export. You pay for the cost of sea freight and importing your goods into your country (i.e. customs, taxes, domestic transport, etc.). This is likely to be the most common shipment term you will see.
CFR (Cost and Freight: Your home port) and CIF (Cost Insurance and Freight: Your home port): CIF and CFR are essentially the same thing except CIF includes the cost of insurance and CFR does not. For CIF and CFR freight, your supplier will pay all of the costs to get your shipment from their destination to the desired port in your destination country. You will stay pay for any import fees and overland transportation in your destination country.
A Real World Example
Here is an example of a quote I received for EXW shipping terms for a couple of pallets of goods from Fujian province in China to Vancouver.
The total cost of sea freight is just $98.However, look at all the miscellaneous fees totaling $300. The bulk of this is for the truck freight to get the goods from my supplier’s factory to the port. Just like in Canada or any other country, overland freight is expensive in China.
Most of the other fees are associated with preparing various documents such as the Bill of Lading. Adding to the cost, I can expect to be hit with about another $150 in fees when the goods arrive in Canada from either the Freight Forwarder and/or the receiving warehouse. Ultimately the total cost of freight will be around $631 with only $98 of that cost being for sea freight. Read more about international sea freight in our step by step guide.
Be Aware (or beware) of EXW Freight
A big reason why the costs above are so high is that the shipping terms were EXW Fuzhou. As mentioned above, what this means is basically that the factory will manufacture all of the goods and I have to come to their place to pick it up. They’ll handle almost nothing in terms of freight. It’s akin to buying a bed on craigslist with the stipulation “Must pick up”.
Now contrast the term people are more familiar with, FOB xyz Port. For an FOB shipment, say FOB Ningbo (a major port in China) the supplier will drive the goods from their factory to the local port, load it on the ship, and pay all of the document fees. I’ll pay for the sea freight and all of the fees associated with the shipment once it arrives in my port. Following the same craigslist example, it would be like buying a bed on craigslist with the stipulation “Will drop off at your house, but I won’t help move it up your stairs and into your bedroom”.
More Suppliers are Quoting EXW Shipment Terms
As profit margins in China are being driven down, more and more suppliers are quoting prices with EXW shipment terms. If you are quoted EXW shipment terms, asking for FOB shipment terms should be your first negotiation point. If you are comparing prices from suppliers, ensure that you are always comparing similar shipment terms. If a supplier quotes you EXW you can simply ask for their FOB price.
Freight Forwarders Don’t Care What the Shipment Terms Are
No matter what your shipment terms are, nearly any freight forwarder will be able to easily handle the delivery of your shipment (including the pickup of your shipment from your supplier’s factory if you have EXW shipment terms). However, they will charge you more or less money depending on what your shipment terms are.
What has your experience been with shipment terms: are you mostly quoted in FOB or EXW shipment terms? Do you have any questions regarding incoterms? If so, feel free to share and comment below.