Many beginner entrepreneurs who start importing from China do not know which Incoterms option to choose when importing goods. Is FOB or CIF better for importing? Almost all Chinese companies will deliver our goods using the shipping method specified in our order. This is why it is good to know the differences between Incoterms FOB and Incoterms CIF.
In our last entry on Incoterms 2010 we covered all Incoterms types. Today, we would like to focus on differences between FOB and CIF terms using the example of importing from China.
FOB – free on Board
As you can see in the infographics, Incoterms FOB ensure that all obligations relating to costs, risk and insurance of the goods are split between the buyer and the seller in a fair way.
The entire process of importing from China is divided into the most important stages.
- Manufacturing and preparing goods for shipping.
- Transportation from the factory to the port.
- Loading the goods onto the vessel (to the ship’s rail).
All the above obligations are the seller’s responsibility: by agreeing to sell goods on FOB terms, the Chinese company is obligated to carry out and pay for all these actions as well as bear the associated risks. Unfortunately, in order to swindle extra money, many Chinese companies and employees ask the buyer to finance or split the costs of transporting the goods from the factory to the port or the alleged customs duty. However, as the buyer you are not obligated to pay such charges!
These stages of importing from China are the responsibility of the seller. The buyer must organize, finance and bear the risk associated with the following stages, i.e.:
- Sea fright from the Chinese port of loading to the port of destination (e.g. Gdynia, Gdańsk or Hamburg) and insurance of goods.
- Unloading and warehousing of goods (THC, warehousing costs, etc.)
- The customs import procedure (customs duty, VAT, submitting import documentation).
- Transportation of the goods from the port to the point of destination (e.g. our warehouse or the company’s office).
Thanks to this division of responsibilities between the buyer and the seller, we know what additional costs to expect and which stages of the process are our responsibility when we opt for importing on FOB terms. When planing to import from China, we need to calculate the costs of transportation very carefully, because the price provided by a Chinese manufacturer includes only the product itself.
CIF – Cost, Insurance and Freight
In contrast to FOB terms, Incoterms CIF (Cost, Insurance and Freight) shifts the obligation to cover the costs of sea fright to the seller, i.e. in our example – to the Chinese manufacturer
This solution may seem very tempting. However, we need to remember that we do not order only the product; we place an order for the product and sea fright. What is more, many hidden costs relating to CIF shipping are shifted to the buyer in the port of discharge.
As importers, we want to have control over the entire importing process as well as the price of the product. This is why we recommend importing with Incoterms FOB.