FOB or EXW :Which Shipping Incoterm Is Better?

Release time:2024-03-20 10:00

FOB or EXW?

Choosing between FOB or EXW can be daunting for new importers, given the complexity and variety of international commercial terms (incoterms) involved. These terms, which include FOB (Free On Board) and EXW (Ex Works), play crucial roles in global trade, affecting everything from trust to transaction specifics. This article is designed to demystify these two common incoterms, providing you with a clearer understanding of each and how they can impact your overseas importing ventures. By familiarizing yourself with FOB and EXW, you can navigate potential charges more effectively and make informed decisions that best suit your business needs.

 

International trading terms

To mitigate misunderstandings, the International Chamber of Commerce has established a series of globally recognized trading conditions, known as incoterms. These terms specify the point at which ownership of products transitions from the supplier to the buyer. This transition also encompasses the shift in responsibility for any loss, damages, and transportation costs. While the change in ownership might seem trivial in local purchases, it becomes critically important in international transactions involving weeks of transportation.

 

Visualize it this way: Your supplier covers the responsibility and costs for the transportation process's 'blue' part, whereas you take on the 'red' part. The precise moment this shift in ownership and responsibility occurs hinges on the specific trading terms agreed upon between you and your supplier.

International trading terms

FOB

"Free On Board" (FOB) signifies a port-to-door shipment term where the supplier is accountable for all local charges, encompassing transport to the port, cargo handling, and customs clearance at the origin. Trading under FOB terms means your supplier bears the costs up to the point where goods are loaded onto the ship or aircraft destined for the UK. From that moment, the responsibility and cost for transportation transfer to you, the importer.

 

It falls upon you to appoint a freight forwarder to oversee the onward journey of your goods. While all origin country local charges are your supplier’s responsibility, be aware that they may suggest a forwarder to reduce these expenses. However, the choice of forwarder ultimately rests with you. Suppliers typically factor in these local charges (occasionally adding a buffer) into your cost to safeguard against financial loss.

the shipping process

For more information about incoterms, have a look here.

 

FOB Exemplified

In the FOB scenario, let's say your supplier is based in Lonavala, India, near Mumbai. If they propose handling all local costs and you agree to an 'FOB Mumbai' arrangement, your supplier will cover all expenses from their Lonavala location to Mumbai's port. This includes cargo handling and customs clearance. Once the goods are on board in Mumbai, your designated freight forwarder assumes control, including ownership, costs, and responsibility, managing the remaining journey to your UK destination.

 

EXW Exemplified

Under the EXW (Ex Works) term, if your supplier in Lonavala is unwilling to cover the local transportation costs, you might agree to purchase your goods 'EXW Lonavala'. This places the onus on you for all related transportation costs, starting from collecting the goods at your suppliers premises and handling export clearance. Your selected freight forwarder is tasked with managing the entire import process from India to the UK, encompassing all logistics, costs, and responsibilities.

Which trading option is the most beneficial for me FOB or EXW?

Choosing between FOB (Free On Board) and EXW (Ex Works) terms can significantly impact your shipping costs and responsibilities. Heres a breakdown to help you decide which is best for you:

 

FOB Advantages:

Cost Savings: Suppliers often have lower rates for delivering goods to the port and handling customs clearance, potentially reducing overall transport costs, especially for LCL (Less than Container Load).

Less Hassle: Export documentation is handled by the supplier.

Quick Quotes: UK forwarders can provide rapid estimates for FOB shipments.

FOB Disadvantages:

Supplier Reliability: Suppliers may not honor commitments to pay local costs.

Potential Overcharge: Suppliers may include a buffer for local charges, raising total shipment costs.

 

EXW Advantages:

Lower Product Costs: Suppliers may offer lower prices for EXW goods as they exclude transport to the port and other local charges.

Complete Control: You manage the entire transportation from the supplier to your UK address.

 

EXW Disadvantages:

Higher Transport Costs: As youre responsible for the whole journey, transportation costs are generally higher.

Export Clearance: You need to ensure export compliance, which may require your supplier to have an export license.

Forwarder Requirements: Finding a freight forwarder who handles door-to-door service and customs clearance is necessary.

 

Ultimately, FOB can be more cost-effective and less administrative, while EXW may offer lower product costs but with increased transport expenses and responsibilities. Weighing these factors against your specific needs will guide you to the most advantageous option.

Know your total landed cost

To determine the most advantageous incoterm for your needs, it's essential to analyze the advantages and disadvantages of FOB (Free On Board) and EXW (Ex Works) before making a decision. Your choice should be informed by a clear understanding of your total landed cost, which is the sum of all expenses incurred once the product arrives at your doorstep. This includes the initial cost of the product, all transportation fees, insurance, and applicable taxes and duties.

 

Not every shipment will include all these cost components; factors such as the country of origin and agreed-upon incoterms will influence the presence and significance of each element. Nevertheless, every cost that does apply must be factored into your total landed cost calculations to ensure a comprehensive understanding of your financial obligations when importing goods.

 

 

Calculating the total landed cost is crucial to determine the most profitable incoterm for your business, as it offers a comprehensive view of all related expenses. By carefully assessing the costs associated with both FOB and EXW shipments, you can discern which will yield the highest return. It's worthwhile to take the time to perform these calculations for both scenarios. Once you've ascertained the total landed costs for each option, the more advantageous incoterm in terms of profitability will become clear.

 

The total landed cost will give you a true overview of all expenditures and this way you can easily calculate which incoterm will be the better option for you in regards to producing the most revenue. Therefore, take some time to do the math for both a FOB and an EXW shipment and once you know the total landed cost for them both, you will know which option is most beneficial for you.

 

Example of landed cost

Below we have listed two examples of total landed cost – one for FOB and one for EXW:

 

Cargo details:

3.2 cbm / 285 kg of garments

Delivery in London

 

FOB Mumbai costs:

Cost of product: GBP 8.640

Cost of transportation: GBP 733

Cost of duties (12%): GBP 1.125

Total landed cost: GBP 10.498

 

EXW Lonavala cost:

Cost of product: GBP: 8.450

Cost of transportation: GBP 1.034

Cost of duties (12%): GBP 1.138

Total landed cost: GBP 10.622

Based on the above example, for a scenario like this, it would probably be a better solution for you to import your goods on FOB terms.

 

 

Ready to take on your forthcoming shipments?

We hope the posts has offered some clarification in regards to the two incoterms, FOB and EXW. As a last advice, do not forget to clarify the terms and conditions right away when you start your negotiation, and to get everything in writing, so there is never any doubt on what has been agreed upon.

 

FBABOX provides comprehensive FOB and EXW solutions for both sea and air freight, catering to diverse global destinations. Should you need guidance on the most suitable incoterm for your business or have any additional inquiries, our team is ready to assist. Reach out to us at support@fbabox.com or connect via our support line for personalized assistance.