FOB or EXW? For many new importers incoterms can be quite overwhelming and confusing, How does it work, who can I trust, what are they, and which is the best solution for me? With this article we ‘re going to read about the most common incoterms, FOB and EXW, which are essential to be familiar with when you are importing from overseas because it helps you to avoid unexpected charges.
International trading terms
The international Chamber of Commerce has developed some trading conditions to help importers and exporters all around the world with international terms. These terms are also recognized as incoterms.
These incoterms determine the shifting of the products from the supplier to the buyer, and when the ownership shifts, responsibility of loss and damages and transportation costs comes with it. Perhaps in everyday trades the importance of these terms is not noticeable, but when people buy their products from the supplier across the globe, with several weeks of transportation between you, the importance of this shift can’t be ignored.
Taking notice of the picture below, it can be illustrated as follows: the supplier holds the responsibility and costs of the blue part of the transport process, and likewise the buyer is responsible for the red part. Based on which trading term the supplier and the buyer agreed upon the ownership and responsibility shifts.
What’s the incoterm “FOB”?
The incoterm FOB is the abbreviation of “Free On Board”; this is a port to door shipment which means when buyers trade on FOB terms, their supplier is responsible for all the local charges, such as transportation to airport, cargo handling and customs clearance at origin.
FOB also means that importers have to find a freight forwarder, shipping company like DDPCH, to take over the shipment and carry out the goods after they’ve been boarded. As soon as the goods are aboard the ship or airplane, the transport responsibility and cost shifts from the supplier to the buyer as importer.
Even though the buyer is responsible for finding a forwarder to carry out the transportation of the goods, all local charges in the origin country will be billed directly to the supplier/manufacturer. The supplier might try to influence the forwarder’s choice in order to lower local costs, but the decision is on the buyer alone.
Ex Works
EXW is short for ‘Ex Works’ and it refers to a door to door (DDP) shipment. If the buyer trades on EXW terms, the buyer becomes responsible for the entire transport process, meaning it is the buyer’s responsibility to arrange transportation from the supplier’s door to your address. Therefore, when you select a forwarder to handle the transport for you, make sure that the transport solution includes customs clearance in both the origin country and the destination.
Both of these terms are only used for imports and have a lot of similarities; However, the difference between them is clear: by using EXW, The byer is responsible for all costs of transportation to the destination, whereas, with FOB, the buyer is only responsible for the costs that come after the goods have been boarded the ship ( or aircraft), and the supplier is responsible for the local costs in the origin country.
Which trading option is the best for importers – FOB or EXW?
There is no definitive answer to this question ,both incoterms have their pros and cons depending on the shipment. Below there’s a list of the most remarkable advantages and disadvantages for the shipping terms FOB and EXW
FOB advantages:
- The buyer saves more moneyby trading on FOB terms, the supplier can usually get the goods delivered to the port and clear customs at a lower price than your forwarder, so the total price will be lower than EXW for the buyer and the supplier.
- The buyer does not have to worry about documentation in the origin country (export clearance) as this is the supplier’s responsibility.
FOB disadvantages
- Sometimes the buyers end up in a situation where the supplier refuses to pay the local fees even though this has been agreed upon.
- The supplier might charge the buyer a ‘buffer’ related to the local fees, which will increase the total cost of the shipment.
EXW advantages
- Goods bought on EXW terms are often slightly cheaper than products bought on FOB terms, because the supplier includes the costs of transport to the port, handling of the goods, and customs clearance to a FOB trade.
- The buyer has full control over the cargo and the transportation cost from start to end.
EXW disadvantages
- The buyer will often get a cheaper product when buying EXW, but the transportation costs will increase, because the buyer alone is responsible for the entire transport from the supplier’s door to your door.
- The buyer is in charge of export clearance, and therefore the buyer must ensure that the supplier is licensed to export.
- When searching for a freight forwarder, you have to find someone who offers both a door-to-door service (EXW) and offers to handle the process of customs clearance.
In DDPCH, we can offer transportation for both terms with amazing prices that will benefit the importers and make things easier for them