Import from China: Free on Board (FOB) VS Ex-Works (EXW)
What is the difference between Ex Works and Free on Board?
Ex-works (EXW) indicates a contractual clause widely used in international sales. It is one of the commercial conditions, developed by the International Chamber of Commerce (ICC), recognized worldwide and known as “incoterms”.
‘Incoterms’ (International commercial terms) are used in imports and exports to define unequivocally, without gray areas, the rights and duties of the subjects involved in the transfer of goods from one country to another.
The following are also defined between seller and buyer:
- the breakdown of transportation costs;
- insurance coverage for the products;
- custom duties.
The definition of these terms is very important because it establishes when the ownership of the products passes from one subject to the other, the liabilities for any losses, damages and costs.
Ex-works: what does it mean?
Specifically, the term Ex Works (named place of delivery), abbreviated as EXW, in the context of incoterms belongs to Group E which originates from “ex”, meaning “departure”. The abbreviation EXW, which must include the specific address of a location, refers to a “door to door” shipment.
On the basis of this agreement, the seller organizes the shipping of the goods from his premises to a named place of delivery, in particular:
- the seller must make the goods available within his factory or warehouse available on an agreed date, accompanying the goods with all the necessary documentation for exportation from the country of origin;
- the purchaser must deal with customs both in the country of origin and in the destination country, organize the transport and pay all costs. Therefore he takes up all the liabilities and transportation risks up to the destination.
The EXW in the European regulation
Ex works was the subject to discussion after the approval of Article 1 of the EU Regulation 2446/2015, which integrates the provisions of the Union Customs Code.
According to this code, the exporter is defined as “the person established in the customs territory of the Union who, at the time when the declaration is accepted, holds the contract with the consignee in the third country and has the power for determining that the goods are to be brought to a destination outside the customs territory of the Union”.
Based on this regulation, it is clear that the seller, in the event of an EXW return, cannot be considered the exporter in relation to the customs declaration. This means that if the buyer does not reside in the EU, he must appoint a customs representative who is, instead, established in the territory of the Union.
FOB, short for Free On Board, is a type of “port to port” shipment, from the shipping port to the delivery port.
FOB conditions establish that the supplier bears responsibility for all local expenses, the transport of the goods, the management of the cargo and customs in the country of origin.
If you choose this type of shipment, you must therefore find a freight forwarder who will take responsibility for the products and transportation after the disembarkment from the ship or the plane. When they are in transit, in flight or at sea, the responsibility of the goods is passed from the supplier to you. If you purchase goods with FOB conditions, the supplier will add in the price of the products the local charges and may also include additional costs to avoid the risk of loss of money.
Differences and advantages between Ex Works and FOB
The goods purchased with EXW terms, generally have a cheaper cost, therefore, sometimes, it can be an advantage for those who decide to buy wholesale from China. The situation changes, however, if the transport costs increase, thus nullifying any savings on the products’ costs. If you choose this type of shipping, indeed you could pay less and save up on the total cost, however you will take all the responsibility for shipping and customs clearance. You must make sure that the supplier has the necessary authorizations for the exportation and you must find a forwarder who can offer Ex Works service.
On the other hand, while the FOB shipment may appear less advantageous than the EXW one, the reality may be quite different. The price estimated by the supplier to deliver the goods to the port of departure could, in fact, be lower than the one quoted by the forwarder; customs clearance and the documents for export are then borne by the supplier making the process easier. However, things could go wrong if the supplier refuses to pay local costs as agreed, or if he includes additional expenses that increase the previously agreed cost.
Which one is better? EX Works or Free On Board ?
In order to decide which incoterm to choose, you should consider the advantages and disadvantages for your specific case, namely:
- Calculate the total cost of shipping, the cost of the goods when they arrive at your door;
- consider the costs of transport, insurance and custom clearance costs;
- assess whether all these expenses can to be calculated in reference to your shipment or if some items may not be calculated because of other agreed incoterms;
- Compare how much the same shipment would cost under Ex Works or Free On Board conditions and choose the one that is most convenient to you.
Here is an example of the expenses to consider:
- The cost of transporting a fully loaded container can vary greatly depending on the distance between the warehouse and the port. Most of Chinese producers that export have warehouses located on the east coast, 3 to 4 hours away from ports.
- In the event that Hai Guan, i.e. the Chinese customs authorities find goods without the necessary documentation for export, they could issue a fine to the supplier for thousands of RMB. If you buy with Ex Works, you arrange to get custom clearance documents from authorized forwarders or from the exporters for a fee that varies between $80 and $160 USD.
- Transport costs from the port of embarkment to destination, can be high, with reduced local costs or vice versa, but with high local costs. A full load container generally has high transportation costs, but the distance it has to travel must also be considered. If the container is partly loaded, rates vary between $30 USD and $40 USD per cubic meter, however local charges can still be very high.
- Goods insurance must also be arranged because many suppliers use cheap and poor packaging. The cost of insurance is approximately 0.02% of the total free on board cost.
- Those who buy must pay additional costs such as the delivery of the bill of lading, the list of goods, the commercial invoice, forms and various certificates. Typically the costs for such documentation vary between $40 and $50 USD.
- Local rates in the destination port can be very high. Costs are calculated on the individual container, when speaking of fully loaded containers. While for partly loaded ones, tariffs are calculated on the basis of volume and determined in cubic meters. Based on these calculations, the price can rise considerably, therefore, sometimes shipping with partly loaded containers can be as expensive as that with fully loaded containers, which offers a total volume of 29 cubic meters.
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