What does FOB mean in Alibaba
FOB vs. CIF - Incoterms explained using the example of imports from China
The so-called Incoterms are almost always used in international trade in goods. These are rules for interpreting customary contract formulations for import and export transactions. The Incoterms were developed by the International Chamber of Commerce (ICC). They indicate the obligations of the seller and the buyer in each case in cross-border transactions. Almost more importantly, they also determine the point in time of the transfer of risk from the seller to the buyer and who has to bear which costs. This includes, for example, freight costs, insurance premiums or customs duties.
FOB vs. CIF - the subtle difference
Two very frequently used Incoterms are FOB and CIF. FOB stands for “Free On Board” (= free on board). CIF is the abbreviation for “Cost Insurance Freight”. Both Incoterms are commonly used in connection with ocean freight:
- If FOB is agreed as a contractual clause, the seller - roughly speaking - bears all risks and costs up to loading on the ship and is also responsible for the export formalities. The buyer, on the other hand, bears the transport costs, the risks of transport and is responsible for the import modalities. He concludes the contract of carriage. There are various variants of this basic rule.
- With CIF as a contractual clause, the transfer of risk from the seller to the buyer also takes place when the goods are on board the ship. The seller is also responsible for export. Here, however, the seller also bears the costs of the transport including the insurance premiums to the port of destination. Accordingly, he is responsible for the contract of carriage.
Chinese exporters are happy to offer CIF
CIF is often the preferred contractual term for imports. This applies, for example, to imports from China. First-time importers in particular like to choose the clause. Chinese exporters offer them as standard. Often the prices for CIF transports are even cheaper than for FOB agreements. At first glance, the CIF preference is understandable from the buyer's point of view, since with CIF the exporter has to bear the costs and insurance of the transport, so the importer is superficially in the better position. In addition, in many cases it is supposedly cheaper to buy - the buyer only pays the CIF price when importing - and you don't have to worry about the transport yourself. But what looks good doesn't have to actually be good. From the buyer's point of view, there are good reasons to still agree to FOB for imports from China.
Why FOB is still often more advantageous
Basically, from the point of view of an importer, there are several arguments in favor of choosing Incoterms where he has the greatest possible and earliest possible control over the sea freight. Anyone who takes responsibility for the transport, in principle, also has more degrees of freedom with regard to the choice of the freight forwarder, the type of transport and specifications for the transport. This allows, among other things, to reduce the transport risk - both qualitatively and in terms of time. It goes without saying that with an FOB agreement the importer has more influence in this regard than with CIF. With Cost, Insurance, Freight, he has to accept what the exporter instigates and “puts in front of” him.
The solution chosen by the exporter does not have to be the best, in any case not the most cost-effective for the importer. The low CIF prices are often a lure to attract inexperienced importers as customers. In many cases, the Chinese exporter uses a customs broker in the port of destination to hand over the goods to the seller. He is listed as the recipient on the consignment note. This means that de facto the buyer has no claim to the goods before handover. It is not uncommon for the customs agent to charge fees in the course of the handover process that are well above the usual. These are then added to the CIF price. In many cases the “profit margin” is shared between the agent and the exporter. The seller has then factored in his share of the profit at the low CIF prices from the outset. Cheap does not automatically mean cheap. FOB would often be cheaper.
The bottom line is that FOB pays off
The Chinese example has since found imitators - especially in Latin America. FOB agreements avoid the disadvantages of such bad practices. This may take a little more effort in terms of transport organization, but with a good forwarder with experience in international sea freight at your side, it shouldn't be a problem. And the bottom line is that the extra effort pays off.
Our guide to importing goods from China
When it comes to transporting and importing goods from China, there is more to consider than the CIF and FOB issues. It is a complex with many aspects. You can find out more about this in the practical guide “Importing goods from China”. It gives a good overview of what to look out for when importing from China.
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