FOB or CIF?

FOB and CIF are two of the most commonly-used Incoterms. Many first-timers importing from China often favor CIF. But the CIF incoterm encompasses a series of risks and complications. As such, FOB is usually a much more secure and competitive Incoterm. In this post, we’ll explain why inexperienced buyers should choose FOB instead of CIF when facing their first import from China.

What are Incoterms?

To understand whether to choose FOB or CIF, we first need to understand Incoterms. Incoterms are a set of predefined international rules, published by the International Chamber of Commerce, which determine the contractual clauses to be used in international commercial sales contracts. Negotiating an Incoterm is crucial as it forms a key aspect of any import or export. For companies, it affects costs, trade margins, supply chain efficiencies, time limits, etc. To better benefit from your international sale, it is important to know how to choose a safe and competitive Incoterm.

In general, it’s advisable to choose the Incoterm which offers us the most control over the ocean freight. Paying and taking responsibility for international shipping gives you more time and cost flexibility. That means reducing the chances of delays and other common problems shippers face. Without further ado, let’s delve into the differences between the two most common import Incoterms: FOB or CIF?

Implications of choosing CIF

Under CIF, the buyer takes over ownership of the merchandise only at the port of destination. The seller is responsible for the cost and freight and ownership handover takes place at the destination port. This is usually subject to a third person, usually a customs agent who is listed on the consignee on the Bill of Lading.

This means that the agent, not the buyer, has the legal right to claim the goods. This agent will then request the buyer to pay the expenses at destination, including customs clearance, taxes, etc.

Many novice buyers find this option particularly advantageous because they’re relatively free of responsibility for the cargo – logistically and financially speaking. Plus, suppliers in China often offer lower prices if buyers agree to the CIF Incoterm.

Why the obsession with CIF?

As you can imagine, there’s a catch with choosing the CIF. This is a rather bad practice with regards to importing from China. Here are some characteristics of the CIF incoterm:

Buying merchandise under CIF result in very low and competitive prices – often much lower than prices under the FOB incoterm. You’re often unaware of the merchandise management, since this is handled by the seller. You’re also often unaware that the consignee on the Bill of Lading is listed as a clearing agent (at destination), instead of yourself. (This applies to the MBL or Carrier B/L) Upon cargo arrival at the port of destination, certain decisions taken by the agent could result in you having to pay five times of what’s really necessary. Besides the above-mentioned arrival expenses that every importer should pay, there’s a risk that you’ll end up having to pay for much more. These include handling fees, exit fees, entry fees, etc – basically the agent’s ‘own’ concepts to inflate the price, or unanticipated additional surcharges for standard fees such as Terminal Handling Charges. Additionally, having control over the merchandise mean they have better control over time. This means they may play it in their favor – waiting for your merchandise to arrive before informing you. This generates additional expenses as you’re not given sufficient time to make arrangements to collect your merchandise. This causes delays and additional fees that you’ll have to pay and settle before being able to pick up your cargo.

FOB or CIF: Investigate before choosing

Common practices involve an agreement between the agent at destination and the seller establishing a low price at which to sell the merchandise. This is to lure you in before inflating expenses at destination and then splitting this profit between them. This happens quite a fair bit in imports from China and such cases have been on the rise in recent years – especially in Latin America.

FOB works well for LCL, since the profit margins tend to be lower. As a result, this gives the sellers and agents more power to inflate prices. If you’re considering choosing the CIF Incoterm, you should ask yourself if it’s really worth it to expose yourself to such a risk for a low cost price.

The advantages of choosing FOB over CIF

Unless dealing with a seller or agent you’re able to trust, or have an agreement to list yourself as the consignee on the Bill of Lading, it’s best to avoid the risks by choosing the FOB Incoterm. The FOB Incoterm offers what the CIF Incoterm does not. The responsibility of paying, contracting and managing the shipment falls on you – the buyer.

Although it requires some extra effort on your part in comparison with the CIF, it results in a much lower risk as you’ll have a clear picture of the expenses involved right off the bat. That said, problems such as delays and unanticipated additional fees can be avoided with good planning.

The FOB also offers advantages such as:

By controlling the agents involved, the buyer is able to assert pressure to lower the commercial price.

By minimizing costs, it allows the buyer to obtain tax advantages, such as lower VAT burdens.

The FOB also allows the buyer to obtain better insurance prices, since you’ll be looking for a deal covering a larger part of the logistical transportation. Unlike the CIF, which only covers the cargo transport from the destination port to the buyer’s facilities.

FOB or CIF: Things to note

One thing to keep in mind when choosing FOB is the potential complication if the supplier refuses to cooperate with your shipping company of your choice. Suppliers sometimes get a certain kickback for using a specific freight forwarder and may therefore not be willing to work with another consignee. This is a rather common issue. So the consignee should be prepared to put pressure on the shipper in order to help the freight forwarder smoothen the process.

In short, new importers should not commit themselves to the CIF Incoterm unless you’re familiar with the seller’s practices. This is especially so when dealing with imports from China. It is always advisable to use the services of a freight forwarder, and to choose FOB Incoterm if the situation permits. This is to avoid unpleasant surprises upon cargo arrival. Should you have any doubts on whether to choose FOB or CIF, do not hesitate to contact our sales experts!

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