Regarding FOB vs CIF incoterms, I found an interesting article in the latest edition of the ChaINA magazine (published by the Global Supply Chain Council).
It warns importers against accepting CIF (Cost-Insurance-Freight) shipping terms rather than the more conventional FOB (Freight On Board) terms. There are two reasons for that.
First, importers often end up paying the freight twice (once to their supplier, and then again in abnormal port & terminal charges):
International freight forwarding companies are quick to offer suppliers extremely low or zero dollar freight rates, or even refunds or kickbacks for making bookings. It is not uncommon for suppliers to receive a payment of US$30 per cubic meter or tonne of cargo they book with a freight forwarder as an incentive. And how do the international freight forwarding companies recover these losses on freight? They charge exorbitant fees to the final importer of the cargo.
Second, it often favors less-than-optimal shipping arrangements:
The other downside to this situation is the inefficiencies it creates in the supply chain. Imagine you are a supplier with 25 cubic meters of cargo to send to your buyer. The terms are CIF and there is no instruction as to the shipping mode to be used. The most economical and efficient method of shipping would be a 20′ Full Container Load (FCL). Shipping as an FCL offers better protection for the cargo by reducing double handling, and would also enable the buyer to take earlier delivery at destination by avoiding the need to wait for a consolidated container to be unpacked. But with the supplier being offered an incentive to ship as LCL (loose cargo) it’s not hard to see why the more profitable option is usually chosen.
Author: Chris Chalmers, CEO of Tomax Logistics.
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Do you have any thoughts or experiences about FOB vs CIF? Let me know in the comments.
PS: if you have an interest in supply chain and sourcing topics, you should consider attending the CHaINA ’11 Live conference.
PPS: You can read even more incoterms here: Types of Incoterms [Guide]
Being completely green to the whole import game, I had assumed that CIF was the safest and easiest way to go. Apparently I’ve got some learning to do! Would you happen to know where I might go to get some good information on the basics of FOB shipping?
Thanks for the post, it’s been insightful to say the least!
Mark,
It is better for you to buy under FOB terms. It means you control the shipment, and you appoint the freight forwarder of your choice.
More info on https://en.wikipedia.org/wiki/FOB_(shipping).
Hi Renaud,
Thats an interesting take on the subject. When you say “abnormal port & terminal charges” what sort of charges are you exactly referring to? Are you talking about the “delivery order” charges, or other minor charges payable during customs clearance in China? If former, I believe these can be negotiated with the supplier/shipping agent before the deal is finalized and if latter, these are actually so nominal – do they make a difference at all? Also, if latter, aren’t these part of the CIF quotation?
Very interested in your thoughts.
Ashish,
The author of the article I quote refers to the importer’s local charges (in his country, since he won’t pay anything in the exporting country under CIF terms). And no, they are not negotiable, since they have to be paid to the freight forwarder that was chosen by the supplier rather than by the importer himself.
Well, all of our shipping is FOB the Chinese seaport; and about 90% is full container.
We have had repeated situations where our supplier factories ask to use their freight forwarder rather than ours. They complain about excessive charges for services such as (empty) container delivery, transport of the container to the port, etc.
When I discuss this with our forwarder, they have suggested that (a) there are *many* small forwarders, often with little experience or staff depth; (b) the forwarders may be offering low-ball prices to win business; and (c) forwarders may be relatives, or offering kickbacks/commissions of some kind.
We also have found it helpful to concentrate our business with one forwarder – although we use dual sourcing for our factories, so we’re not totally consistent on that point.
Based on these comments (and the fact that our forwarder has served us well for 6 years now), we have avoided changing. I would be interested, though, in others’ experience on this point.
Brad Pritts
importer – auto/truck parts
Brad,
I remember, a few years back, a supplier complained that my customer’s forwarder’s local charges were too high. The supplier actually told us there was a limit above which local charges were not acceptable, and this limit had been set by some sort of association. I’ll let you know if I find some more info.
Renaud,
My understanding is after getting a CIF quote, the buyer needs to deal with two more parties
a. The co. that would issue the delivery order charges in the port of destination
b. The clearing agent
In most cases the problem happens with LCL where the DO Charges can be ridiculously high relative to the freight charges, whereas with FCL this problem hardly ever happens as the charges are fixed and well defined.
The clearing agent will usually give a pretty good idea of clearing the goods, before they are shipped out, once you tell him the details of the goods.
So, I believe the problem you are referring to usually happens only with LCL Consignments. However, this can be taken care of, (both in the case of LCL and FCL) if you ask your supplier in advance what these DO Charges will be and get it in writing or at least via an email.
In this case the supplier will check with his shipping agent, the shipping agent will check with the local company responsible for issuing DO Charges in the destination country and give you an idea of what these charges would be. The problem is most people when getting a freight quote do not ask for these charges and that’s where they get a surprise.
Ashish,
This is very good advice, thanks. That’s exactly what buyers should do in this case.
I have a query. Under FOB sea port terms, empty containers have to be delivere to the premises of the manufacturer( seller ), so that goods can be stuffed in them. Now the seller has refused to pay for getting empty containers in their premises at their cost. Does FOB terms say that cost of delivering empty containers at the premises of seller shall be borne by buyer ?
Sandeep,
If the sale term is FOB, the exporter must pay for the local charges on his side. It means they must pay for carrying the container to their warehouse and back to the forwarder’s warehouse.
Renaud Anjoran.
Thank you.
Actyally, In the above case I had placed PO with FOB terms,and had also specifically agreed to place empty containers at the premises of the seller in foreign country. Thats the reason seller is not willing to bear the cost of freight of empty containers to their factory.
My question is – whether agreeing to provide empty containers at sellers premises even though FOB terms are agreed, violates FOB clause ?
Sandeep,
If the term is FOB, you should not specify anything about the handling of containers in the exporter’s country. It might create some confusion.
Yes, the clause about the empty container can be understood as over-riding the FOB set of terms. Bad move.
Dear Sir/Madam
I want to import compressor scrap. Its my first international trading deal. What would you guys prefer me to go for CIF or FOB. I want to get exactly same goods that I have mention in contract and pay after checking the goods at port. Please guide me urgently.
Ahsan,
Go for FOB terms, to make sure you control the shipment. And make sure you trust the people who check the goods before shipment.
I am shipping LCL from India CIF,per my clients, clients request. They insist on clearing the goods. What doc’s will I need to provide the client to have them clear the goods? Will it need to include any costs relative to the value of the goods or the price paid to the factory?
Is the person clearing the goods responsible for paying duty?
Jerry,
Ask your customer! I guess they need the invoice + packing list + certificate of origin + a few other documents (they can ask the customs office in their country).
Yes, of course they will need your commercial invoice.
I don’t know if it is possible for one party to pay duties and for another one to clear customs in the importing country.
Hi how r u?I am going to import a 20 feet container full of porcelain from Foshan ,china to Sokhna ,Egypt.I am going to use FOB so I want to know all other chargers that I will pay in china
Thanks
Ahmed Shaaban
Amhed,
I suggest you read this article: https://www.sofeast.com/blog/bid/46169/How-to-calculate-the-total-landed-cost-of-imported-products
Hi Renaud,
If the terms of a sale are FOB Port, who should pay for the rent of the containers. The seller or the buyer?
Ale,
I am not sure I understand. The rent of the containers from when to when?
Basically, if it’s before the container is on the ship, it’s all on the exporter’s expense.
-quote-
Sandeep September 29, 2011 at 12:46 AM
Renaud Anjoran.
Thank you.
Actyally, In the above case I had placed PO with FOB terms,and had also specifically agreed to place empty containers at the premises of the seller in foreign country. Thats the reason seller is not willing to bear the cost of freight of empty containers to their factory.
My question is – whether agreeing to provide empty containers at sellers premises even though FOB terms are agreed, violates FOB clause ?
Renaud Anjoran September 29, 2011 at 10:42 AM
Sandeep,
If the term is FOB, you should not specify anything about the handling of containers in the exporter’s country. It might create some confusion.
Yes, the clause about the empty container can be understood as over-riding the FOB set of terms. Bad move.
-end quote
correct me if i am wrong. Base on my understanding, Incoterms is not a rule/law, its just a framework. The details of your deal will still depend on mutual agreement with another party.
Hope this helps
Ng Hoi Yew,
The incoterms are legal terms. If you refer to 1 incoterm in a contract, this incoterm becomes part of the contract. If the contract also includes other terms that are in contradiction with the incoterm that was chosen, it creates a contradiction. It is then necessary to stipulate what term overrides the other one… That’s my understanding, but I am not a lawyer.
can you tell me how to reduce costs such as CIF and FOB and how to bring efficiency in shipping
Wow that’s a large question… maybe you can be more specific?
working on a full corporate offer and procedures to sell an art collection. I need detail to put in procedures regarding air freight. bank to bank transfer of monies, once a bonded reputable shipper says cargo is loaded, so buyer knows he will get art collection once he wires two million.
For a shipment from where to where?
working on writing a full corporate offer and procedures to sell art collection. i need detail to put in the procedures, ie: seller contracts bonded packer shipper and then shows bill of lading? and then buyer wires 2 million. (Springfield Missouri shipping to Dubai Saudi Arabia.
It seems like you are trying to do something very specific. Not sure I can help you.
This article is pretty accurate. I have experience in LCL sea transports. The exporters just take advantage of the client’s lack of information and charge O/F under prepaid incoterms like CIF or C&F. But this doesn’t end here. The client must pay huge destination charges compared to FOB and he is not even announced by shipper about them. Also i had many clients that complained that their shipments came as LCL (17 cbm , 40 cbm etc) instead of FCL.
My strong advice especially for the new importers is; stay away from prepaid delivery terms. Shipper will try to convince you to send CIF, C&F etc, because it’s in their advantage. Like the others said, they pay at very low rates in their countries. Opt for FOB, FCA, EXW because you can choose the freight forwarder that will handle the transport, you will receive a price offer with no hidden costs that won’t change over time.
If you still use CIF, take a good look at the commercial invoice. If you find positions like sea freight, ocean freight etc, your shipper is trying to fool you and you must take immediate action. Always ask for a proforma invoice before you place the booking. Another important aspect is to ask for the destination charges, so you can have hard evidence should you receive higher costs when cargo arrives at POD.
Hope this helped in making your further decisions in your sea transports.
Very interesting. Thanks!
I just cleared one LCL shipment and found that the DO fee is very high. There is Gereral rate increase charges + container clearing charges + transit declaration + regional cost recovery + container seal fee + do fee+lcl charges + dest thc + documentation processing fee + devanning charges. in BL it is mentioned that freight prepaid-devanning charges in the account of cosigness. Am i really accountable for all these charges. PO terms is CIF.
PS – accidently our clearing agent and the frieght agent they arranged in our country is same. and the payment is still not done.Does that help?
I am afraid it will be hard for you now to dispute these charges. Make sure you control transportation next time.
But, I am really accountable for these charges?
if not, who will doing this? the agent here or the frwarder or the shipping line?
Dear Shif,
Unfortunately, i am facing problems like yours on a weekly basis. It’s hard to waive these charges if cargo already discharged and cleared.
I’ll try to help but i need a few answers:
Were you announced about the taxes before the vessel arrived in port or you just received the invoice with the mentioned taxes after custom clearance?
In your case did they force you to do custom clearance with them? As far as i know the client can chose any customs agent he wants.
Please note that transit document and custom clearance are usually optional, they can’t be forced to you.
Many of the taxes will return to the freight agent from POL, that your shipper collaborates with.
This is how unreliable the CIF transports are. If the cargo is already cleared, the services have been already provided, and it’s almost impossible to cancel the charges now.
Here is an example of FOB offer, so you can make a comparison between the 2 completely different types of delivery. It’s true that you’ll pay ocean freight, but you know the price from the start and the local charges are way lower.
Let’s consider POL: Shanghai, POD: Piraeus, Greece., and 15 CBM. 5000 kg. Prices may vary,depending on the country, type of cargo and legislation. This is just informative.
Ocean Freight: 70USD/cbm
Lcl charge: 8 Eur/cbm
Handling fee: 0,02 Eur/kg = 100
DO: 25 Eur
Customs / transit doc 40 Eur
Total: USD; 1050
Total Eur: 285
ohh…Thank you so much for the details.
Since this is Irrecoverable, I am stopping going after that.
Next time , I will remember to go with FOB or check the DO charges in advance.