What is the Difference Between EXW vs FOB?

Dec 13, 2021 Chapter 1. Sourcing

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. 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. 

EXW vs FOB

EXW vs FOB

 

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. On the other hand, an EXW 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 these terms 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 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. Obtain export licenses at your own risk and expense, and 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. at your own expense.

 

 

 

Trade Terms (Incoterms)

 

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 premium is also slightly different. The insurance company determines the insurance company’s amount, and there are several types of insurance, but we usually use all risks: no matter what happens, the insurance company will carry it for you. The insurance premium is not high. Buy it for safety first. In CIF terms, chartering and booking space and insurance are recognized.

 

 

 

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 Alibaba 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 Alibaba trade terms, we have prepared the following flow chart:

 

 

If you know exactly what you are doing, you can certainly define your own Alibaba 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.

 

Note: You do not need to be strictly restricted by any international trade term.

Please remember that the general rules for interpreting Alibaba 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.

 

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). My point is to avoid thinking, “So, which international trade term should I choose?” without looking at alternatives.

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