What are Incoterms?
Incoterms are a set of rules used in the sales of goods that describe where the cost and risks change hands between buyers and sellers during the delivery of goods.
The most commonly used Incoterms for ocean freight from China are FOB and CIF. However, we would add that we are starting to see EXW (exworks) used on a more regular basis (traditionally the main term for ocean freight from the USA).
Why choose FOB instead of CIF?
It gives you more control over what happens to your goods in terms of transit time and cost. If left to your Chinese supplier they will invariably choose the “cheap and cheerful” option with the longest transit time .
CIF can cost you more than FOB – It’s sounds crazy but it’s true. We were recently asked to help an importer with a shipment of 12 pieces, 5493 kilos, 10.24 cbm from Xingang and it cost them 37% more than it would have on FOB terms with us! It’s common practice to offer the buyer a low price under CIF terms, inflate the charges at destination port and then split the profit with the supplier (sometimes referred to as a “kickback”).
On CIF terms the ownership of the goods transfers at the destination port. This process is usually subject to a third party receiving agent shown on the Bill of Lading who has a right to claim the goods. This agent will request payment of charges at destination prior to releasing the goods to the buyer. This can be a “licence to print money” as highlighted in point 2) above.
Chinese sourcing agents prefer CIF because it makes it more difficult to find out the details of the factory where the goods were manufactured; thus making it harder for the buyer to approach the factory direct.
To help avoid these unpleasant surprises we would recommend using FOB terms.