The Common Misunderstanding of Shipment Terms
Updated: Mar 15, 2019
If I ship DDP, it'll cost me less than FOB because I don't pay shipping or Import Duty/VAT....
That's the ongoing misconception we've heard so many times, and it's not surprising if you're just getting in to importing. It is one of those things that's a minefield until you understand it, then it's easy and you’ll wonder how you ever got confused!
We're going to try explain shipment terms in the simplest of forms for clarity.
Shipment terms, determine who pays for what in the logistics process. This is true, but think of it as a paper agreement only.
The fact of the matter is, YOU as the importer will always pay both the product price, the shipping, the insurance, and the import VAT/DUTY no matter who actually pay's out for it to a) The Shipping Company or b) HMRC/US Tax Office.
Your shipment terms basically decide WHERE you pay for all of the above.
Will you pay the supplier for the shipping which gets built in to your 'Per SKU' price?
Will you pay the freight forwarder for the shipping and get a lower 'Per SKU' price?
Will you pay the supplier for DDP terms meaning your 'Per SKU' price has a margin added on for shipping and your countries local Duty Fees.
Or, will you pay exactly the most accurate price for your item (SKU) as if you were buying it locally in China, without any added on margins whether it's declared or hidden in to the price, then obtain the exact shipping price from your OWN choice of forwarder, then the exact import Duty/VAT from your chosen forwarder who is acting on your best interests as YOU are the customer (not a Chinese supplier they've never heard of)?
Shipment terms do not make it cheaper or more expensive in theory. You pay for the entire process of buying your goods and getting them to you in one way or another.
We advise FOB
Strictly speaking, if you're buying something small and it goes by courier, or an Airfreight order where the local charges and handling costs are more than Seafreight, then yes - the terms are 99% going to be EXW (Ex-Works) which means you will pay for the goods, and shipping from the factories door. You may even opt for DDU or DDP which means you pay the extra to your supplier for freight charges, and they arrange everything. This is purely because, there isn't much hidden margins you can add on to a small courier shipment so it's personal choice who you want to be chasing/asking for your goods. The supplier or your own courier contract or forwarder.
If you buy enough to ship by Airfreight (larger than 60kgs perhaps) then it'll still be EXW terms, but appoint your own Freight Forwarder. You'll get a MUCH better airfreight rate and more importantly control of your valuable investment. Once it's in the hands of your forwarder, you are their customer not the factory - that's so valuable to you as a business (risk point of view).
If moving larger than courier orders by sea, whether its LCL (Less than Container Loads) or FCL (Full Container Loads) then let us inform you that 99% of our 'Westbound Logistics' clients all agree FOB terms with suppliers. It's the absolute norm for China, so don't accept anything less otherwise you'll find it very hard to get out of that later. Your supplier will make money, adding a margin on and costing you much more than needs to be, plus with the above fact you'll not be in control of the goods you've paid for which is very risky.
So, to summarise;
Buy FOB when ordering shipments to travel by Sea Freight.
Accept EXW for courier or Air although you'll be a legend if you manage FOB for that too!
No matter what the terms, Westbound Logistics (or your chosen Forwarder) will still likely collect the shipment from the factory's door or at least offer that service to the supplier. Terms simply state who's paying for which part. It doesn't mean a Forwarder is incapable of collecting or won't collect.
Any questions? Feel free to email our quotes/help team on firstname.lastname@example.org