If you’re making your way into the world of export, chances are you have heard a reference to Incoterms. If that one has slipped past you, we bet you know one or two of the following acronyms:
EXW
FOB
CIF
What about FCA, CIP and DDU?
Today’s blog is a discussion on why incoterms are so important in your export operations and how they support you to manage risk and ensure your buyer is clear on the process.
The word “Incoterms” is itself an acronym. It stands for international commercial terms and the rules feature abbreviations for terms like free on board (FOB), delivered at place (DAP) ex works (EXW).
These terms have very precise meanings for buyers and sellers around the world and attached to these meanings are the associated costs, responsibilities and risks of each of the parties.
Incoterms & establishing your export price
Who is going to be responsible for the expense of making the goods ready for export, transporting the goods to their interim or final destination and/or insuring the cargo?
If you quote an overseas buyer a price and you haven’t used an incoterm, the immediate question is: at what point in the supply chain of moving goods to my overseas warehouse is this price relevant?
Are you offering your goods at A$10 from your factory (EXW), A$10 at the freight forwarder’s warehouse (FCA) or $10 loaded in a container and on the assigned vessel (FOB).
Each of these points have different cost structures (sometimes significantly different), therefore you need to be very clear on what costs you are going to accept for your quoted A$10.
Always quote a price with an incoterm & a named place (i.e FOB SYDNEY)
Incoterms & clarifying responsibilities
Incoterms also help to confirm exactly who is going to be responsible for what in the transport of goods from your place to your buyers. Who will select the carrier and freight forwarder, who must hold insurance (and therefore the risk) over the cargo and who is responsible for which parts of the documentation.
As an example, terms such as EXW or FCA transfer much of the responsibility to the buyer. FOB, CIF and DDU terms make you more responsible but conversely, give you more control over the transit of the goods.
As a Seller, your responsibility ends when:
EXW – you make the goods ready at your factory with an invoice or,
FCA – you deliver the goods to the Buyer’s nominated freight forwarder
In contrast to:
CIF – you book the transport vessel and pay all cost to pack the container. You pay Origin prot fees and costs to load the container on the vessel. You also pay for the sea freight costs and the insurance to the destination port.
DDP – here you do all the above plus, it’s your responsibility to pay and arrange for the unloading of the goods at the destination port, pay any import duties & taxes, pay all destination clearance charges and the destination local transport to the nominated place (DDP Kolkata, India for example).
The documentation demands, responsibilities and risk at each stage should also be well considered. But remember it’s not a one size fits all. The terms we would quote would vary depending on who we are selling to and what we are shipping.
Incoterms and your competitiveness
Incoterms award both you and your buyer a very clear understanding of the roles and responsibilities in the transaction. They can also be used to help ensure your goods remain competitive at the final destination. But how does this work?
Remember, trade is cooperation. Cooperation between your company and the Buyer’s company so while it seems all too easy to leave your buyer to arrange everything, (pick up, packing and export) in our experience, you’re more likely to secure better rates for trucking and container services here in your home country than your buyer can negotiate being based in, say Kolkata, India.
Any additional costs born by your buyer will be added to the cost of goods, potentially making your product less competitive in the destination market and that’s not a win win.
An example we see time and time again is when buyers spend days negotiating a contract and pushing for discounts, only to see the price advantages you offered wasted because they made bad decisions with the logistics. Front foot people. Rather than give the discount and sell FCA Melbourne, get yourself some strategy in this discipline and offer them great prices CIF their destination country.
Incoterms and your risk
Ensuring you and your commercial team are aware of the roles and responsibilities in an export transaction is crucial in protecting your margins and also your risk exposure.
Using an incoterm like FOB just because your neighbour uses it is not good risk management and all too often leads to: “I really didn’t think the FOB charges would be that high. Those costs are a big part of my margin.” FOB charges can be as high as A$2500 or more for general cargo. Even more for specialised products.
Agreeing to CIF terms in your negotiations without considering the additional costs is also fraught with danger for the same reason above. Consider different order volumes for different incoterms and be very clear on the terms your business will offer buyers internationally.
While you’re learning about incoterms, why not take a look at our post about proforma and commercial invoices?
WHO IS CVEN ?
CVEN is an export advisory with a difference. Our team are hands on and engage internationally with buyers, compliance agencies and logistic specialist on a daily basis. This means the information we provide and the pathways we use are the result of the international business we undertake, everyday.
CVEN is different – we export.
Read our services pack to find out how we can help you achieve your export goals.
