This year the International Chamber of Commerce in Paris will revise the International Commercial Terms (Inco Terms) reducing the number of terms from thirteen to ten. Inco Terms address the responsibilities of exporters and importers when shipping internationally.
Exporters in the United States love the term F.O.B. Misuse of this term creates unnecessary conflicts for both importers and U.S. exporters. United States exporters use terms such as: FOB my factory, FOB your factory, FOB truck, FOB dock or simply FOB. Inco Terms defines FOB only in terms of ocean shipment. The term means Free On Board an Ocean Vessel. That is the only instance when it is appropriate to use this term when shipping internationally. Quoting FOB indicates to the importer that the exporter will pay all charges necessary to get the goods loaded aboard an ocean vessel. Imagine the confusion of a Chinese buyer receiving a quote, FOB my factory. The poor fellow would envision a steamship port just outside the exporter’s factory. Imagine the exporter’s surprise to receive an unanticipated invoice for freight from Buffalo, New York to the port of Los Angeles plus port charges. While FOB my factory might be understood clearly in Rome, Georgia, it is understood quite differently in Rome, Italy.
How can an exporter prevent such unpleasant surprises? By understanding and using Inco Terms properly and through clear communication to the importer.
The most commonly used Inco Terms for ocean shipments are summarized below from the perspective of the exporter.
Ex Works –Ex Works indicates the exporter’s intention to prepare the goods and leave them at the exporter’s location for buyer pick up. This presents challenges to the importer making arrangements with local trucking companies. This term is, in my opinion, very risky for exporters. The exporter surrenders complete control of the goods at his loading dock.
Ex Works does not save the exporter money or offer protection in the event of illegal activity. Goods diverted to a location not permitted by U.S. law without the exporter’s knowledge are still chargeable offenses. The exporter remains a party to the transaction and responsible for compliance of U.S. export regulations and laws. Relinquishing control at the loading dock exposes the exporter to possible fines or even jail time in the event of illegal activity.
So why do U.S. exporters ship Ex Works? Some exporters perceive Ex Works to be the easiest way to ship when in fact it is very risky.
F.O.B. - FOB means shipment on board an ocean vessel. FOB does not mean factory, truck, or other location when shipping internationally. Under FOB terms the exporter manufactures and prepares the goods for ocean shipment including loading goods into an appropriate seaworthy apparatus. Goods may require special preparation to protect against damage at sea. These additional expenses should be passed along to the importer. The exporter is also responsible for arranging movement of the goods by truck and/or rail to the designated shipping port, as well as port charges necessary to load goods onboard the ocean vessel. All expenses are simply prepaid by the exporter and added to the importer's invoice.
The exporter loses control of the movement once the freight is loaded onboard the vessel. The importer “hires” the vessel and the freight forwarder. They work for the importer. This is very risky when using Letters of Credit. Bills of Lading, required for payment under most letters of credit, are prepared or arranged by the freight forwarder. One mistake can result in nonpayment. Exporters surrender control of payment under letters of credit when freight forwarders work for the importer.
Another risk in shipping FOB occurs when the freight arrives damaged. Under FOB terms, the importer is responsible for obtaining cargo insurance. Imagine being notified that the lumber arrived as toothpicks. Your buyer bought no insurance. Whose problem is this? The lumber is gone and the importer is not paying. The exporter left himself exposed by not insuring the merchandise.
Word of advice: Always insure your own cargo. Even though exporters are not required to insure under FOB according to Inco Terms, insure anyway. Inco Terms are not laws, they are recommendations. Exporters quoting FOB may quote Insurance by Seller. The key is to communicate this to the buyer in the quotation. Your buyer might appreciate the lower rate and you will have confidence that damaged freight will not prevent you from being paid.
CIF - Shipments quoted with CIF terms require exporters to arrange and pay for all charges to the port of import. Previously I suggested that shipping Ex Works was risky. Shipping CIF is, in my opinion, the most secure shipping method.
Exporters who ship under CIF terms maintain complete control of the movement of the goods until they arrive at the port of import. Exporters manufacture the goods and prepare them for export. They arrange for the truck to take the cargo to port and they load the container. Exporters pay all port charges to ensure the freight is loaded onboard the vessel. Freight forwarders and steamship lines work for the exporter. If a situation occurs that causes the exporter to need to divert the shipment or bring it back to the U.S. this can be done. Under CIF the exporter insures the freight from the exporter’s door to the door of the importer. If the freight is damaged, the exporter reports the claim and receives payment regardless of where the damage occurred. No waiting for investigation by a foreign insurance provider and risk of nonpayment due to disputed coverage. Shipping CIF is the dog wagging the tail, not the tail wagging the dog.
Exporting is exciting, profitable, and fun. Exporters must, however, understand risks and act appropriately to protect themselves from unnecessary losses that could prove catastrophic. Understanding shipping terms, areas of risk, and mitigating those risks is worth the effort.
A few words of wisdom to remember: Whose problem is it? If it affects your payment it’s your problem, regardless of any publications or guidelines.
Kathy Edwards is the founder and President of Global Business Solutions and a 35-year veteran in the export arena. Her corporate career commenced on the ground floor of First Union National Bank’s newly created International Division where she was one of three employees. Kathy expanded her international career to shipping as Export Transportation Manager for Crompton and Knowles Corporation. She further developed international business specialization as Export Director for Intech Corporation, a textile machinery manufacturer located in Charlotte, N.C. In this capacity, Kathy conducted international market research and appointed international agents and distributors, thus establishing export markets in more than 20 countries.
In 1986 a Japanese competitor purchased Intech, becoming Takatori Intech Corporation. Recognizing Kathy’s knowledge of export, products, and international clientele, the new owners promoted Kathy to International Sales Manager. Subsequently, she traveled abroad extensively calling on buyers and conducting international trade shows. When Takatori Intech Corporation relocated to Japan in 1991, Kathy started her own export trading company which she sold in 1995.
Prior to founding Global Business Solutions in January 2004, Kathy worked closely with N.C. firms in her role as International Business Development Counselor for the state of North Carolina, preparing firms to successfully compete in World markets. With the founding of Global Business Solutions, she expanded these services beyond the boundaries of North Carolina.
Kathy is widely recognized as a true professional and well qualified to assist corporate America in all matters involving International Commerce. Her formal education includes a B.S. in Business Administration from The University of Alabama and an M.B.A. with an International Concentration from Pfeiffer University, Charlotte, N.C. She has written two text books “Export Transportation Management” and “Export Documentation.”
Global Business Solutions (GBS) GBS specializes in risk mitigation for U.S. exporters. They are a full-service firm providing products, services, and expertise enabling their clients to compete successfully in export markets with minimum risk. GBS is a business brokerage service offering specialized export insurance products including credit, transportation, and kidnap insurance along with customized export training.