What is the Difference Between EXW vs FOB (Free Inquiry)?
Ex works vs fob(EXW vs FOB) these two terms are related to Freight service. Both Exw vs Fob are Incoterms to refer to international shipments. It is a key factor for these clients who needs this service for better and reliable transportation of goods.
Before you choose between exw vs fob, you will first need to understand the difference between the EXW vs FOB to fully understand the appropriate usage of these terms and what they encompass.
Table of Contents
EXW vs FOB
FOB Meaning
Free on Board (FOB) is FOB is a shipping term that stands for “free on board.” A shipment term that defines the point in the supply chain when a buyer or seller becomes liable for the goods being shipped.
In FOB, the responsibility of loading the package on your desired ship falls on the seller, and only after that does the responsibility of goods passes on to you.
Ex Works (EXW) Meaning
Incoterm EXW meaning the shipping arrangement in which a seller makes a product available at a specific location, and the buyer has to pick up by themselves.
In EXW, the arrangement means that the responsibility of collecting, loading, and transporting falls on you. The seller only has to let you the pick-up location.
EXW Shipping Analysis | Pros and Cons
EXW is a vastly used method of shipping around the world. However, like almost everything we come across, it has its benefits and downsides.
Pros of EXW
Under these terms, the responsibility and risks, and costs associated with shipping the packages are on the buyer. Thus, with the supplier’s help, the EXW terms are very helpful if the buyer needs to know their total costs.
Another advantage is the control that comes with these terms. The buyer can choose everything on his own. This means they are sure that any chances of fraud have been reduced and the chances of the supplier adding a margin on the transportation fee are eliminated.
Cons of EXW
The downside of EXW is related to the customs clearance of the goods in the origin country. The customs department contacts the supplier to collect information regarding the packages.
However, if the information turns out to be misleading or misstated, the costs of extra inspections and any possible additional costs will have to be borne by the buyer.
Additionally, if the customs department chooses the goods or package for random extra inspection, any resulting costs will also have to be borne by the buyer.
Moreover, it is highly possible that a supplier who is not offering FOB terms might not have a license to export. In that case, if you get into an EXW terms contract with such a supplier, you will be charged for the export license fee, which is usually very high.
Thus, a small tip: do remember to ask if the supplier has the license if you are being refused FOB terms.
It is also necessary to mention that if you are accustomed to traveling overseas to place orders with multiple vendors, you might be at the risk of bearing very high costs. This is because the vendors might not let you know this, but you will most likely be signing an EXW contract with each of them. Meaning the transport costs will be on you.
FOB Shipping Analysis | Pros and Cons
Pros of FOB
FOB conditions have many benefits to the buyer. For example, the buyer buys insurance and has the initiative in the choice of insurance types\rates\claims;
The buyer can specify transportation and can obtain transportation cost control\get bulk shipping discounts\require shipping credits\batch Import customs clearance and other conveniences;
FOB prices allow buyers to evaluate the import costs of various countries intuitively.
Cons of FOB
If you are a new buyer, FOB may have some risks. You may find unprofessional freight forwarders and you will suffer a lot of losses at your own expense:
Obtain export licenses at your own risk and expense, go through export procedures, be responsible for all costs and risks of loss or damage to the goods before the goods pass the ship’s rail at the designated port of shipment, provide commercial invoices, clean shipment documents, etc.
Exwork vs Fob:
| Incoterm | EXW (Ex Works) | FOB (Free on Board) |
|---|---|---|
Seller’s responsibility |
Delivers goods to a named place at the buyer’s disposal. | Loads goods on board the vessel named by the buyer. |
Buyer’s responsibility |
Arranges and pays for all costs and risks from the named place onwards. | Arranges and pays for all costs and risks from the vessel onwards. |
Cost |
Usually lower for the buyer. | Usually higher for the buyer. |
Risk |
Buyer bears all risk once goods are made available at the named place. | Seller bears risk until goods are loaded on board the vessel. |
Suitability |
Suitable for buyers who want more control over the shipping process and are comfortable with taking on more risk. | Suitable for buyers who want less hassle and prefer the seller to handle the shipping process. |
- EXW is the most basic Incoterm and places the most responsibility on the buyer.
- FOB is a more common Incoterm and provides a balance of responsibility between the buyer and seller.
- The choice of Incoterm should be based on the specific needs of the buyer and seller.
Basic Trade Terms (Incoterms) Explained
Incoterms, also known as Trade Terms, are essentially international contractual terms applied when making sales. The most common incoterms are EXW and FOB. Let us look at the above recognizable terms as outlined in the incoterms newest.
- 1. FOB. That is delivery at the terminal in China.
FOB=Value of goods + Domestic freight.
If it is agreed to deliver at Shanghai port, it is called FOB SHANGHAI. Under these conditions, except for the value of goods themselves, the freight, customs declaration, export procedures for transporting the goods to the Shanghai terminal are also added to the FOB. This is also part of the cost.
- 2. C&F. That is delivery at a buyer terminal.
C&F = FOB + ocean freight.
If it is agreed to deliver at New York port, it is called CNF NEW YORK. This condition is the FOB price plus the ocean freight charges for shipping the goods to New York, USA.
- 3. CIF. It is agreed to deliver at a buyer terminal.
CIF = FOB + Ocean Freight + Insurance.
or,
CIF = CNF + Insurance Premium.
Because the type of goods and the place of delivery are different, the insurance fee is also slightly different.
The insurance company determines the insurance’s amount, and there are several types of insurance, but we usually choose all risks.
How to Determine What Incoterms to Use(EXW vs Fob)
When it comes to shipping from China, customers often ask us what international trade term options should they choose: EXW vs Fob. Our typical answer is, “Most buyers choose FOB, so this may be what you want.” But this is a bit short.
Let us understand in more detail how to choose the right trade terms option that meets your needs from the list of the 2020 International Trade Term Interpretation General Rules.
To have a deeper understanding of the general principles of interpretation of major trade terms, we have prepared the following flow chart:
If you know exactly what you are doing, you can certainly define your own trade incoterms. The General Principles of Interpretation of International Trade Terms in 2020 are just termed “pre-packaged” to simplify people’s lives, but in fact, there are countless variants of them.
So, You do not need to be strictly restricted by any international trade term.
Please know that the general rules for interpreting trade terms listed on this page are all pre-packaged transport terms. They are advisory and not mandatory. If you are buying a large number of goods, these terms should not limit your creativity.
Below is an example:
Customers want to receive the goods in their own warehouses and let the seller pay import duties, but the customers want to control the transportation (because they know they are more efficient than the supplier in terms of transportation). So they want DDU, which should be similar to FOB except for transportation.
It is not complicated to write these into the contract. A professional logistics agent can help you see the opportunities and ensure that your contract contains all the essential terms.
If you buy in small quantities from Chinese or Indian suppliers, they may not accept customized shipping conditions. But if you represent a certain size of your business, they will usually listen to you and show a certain degree of flexibility.
If you are absolutely new buyer, DDP may be a good choice.
Exworks vs fob Conclusion
To sum up Exw vs Fob, the freight costs under EXW terms might be high, but you get a very clear idea of all of your costs and control most of them (except for the customs inspections).
The difference between fob and exw is the shipment location arrangement. Usually, goods shipped by EXW will generally be cheaper FOB, as Free on Board will make the supplier cover shipping, handling and customs clearance costs in the country of origin. However, EXW terms are generally riskier because the supplier is only responsible for the goods until they reach their destination.
My point is to avoid thinking, “So, which international trade term should I choose?” without looking at alternatives. Choosing the right trade terms all depends your import experience levels.
