Significance of choosing a CIF
Under CIF, the buyer takes ownership of the goods only at the port of destination. The seller is responsible for cost and shipping, and the transfer of title takes place at the port of destination. This is usually subject to a third person, usually a customs agent whose consignee is listed on the bill of lading.
This means that the agent, not the buyer, has the legal right to claim against the goods. The agent will then ask the buyer to pay for the destination, including customs clearance, taxes, etc.
Many novice buyers find this option particularly advantageous because they are relatively not responsible for the goods - logistically and financially. Also, Chinese suppliers often offer lower prices if buyers agree to CIF Incoterms.
Why are you so obsessed with CIF?
As you can imagine, there is a problem with choosing a CIF. This is a pretty bad practice for imports from China. Here are some features of CIF incoterm:
- Prices for purchasing items under CIF are very low and competitive - often much lower than under FOB incoterms.
- You usually don't know about item management as this is handled by the seller.
- You are also often unaware that the consignee on the bill of lading is listed as the clearing agent (at destination), not yourself. (This applies to MBL or Carrier B/L)
- After the goods arrive at the port of destination, certain decisions made by the agent may result in you having to pay five times the actual required fee. In addition to the arrival fee that every importer should pay above, you run the risk of ending up having to pay more. These include handling fees, exit fees, entry fees, etc. - basically the agent's concept of "own" to drive up prices, or unexpected surcharges on standard fees such as terminal fees.
- Plus, having control over merchandise means they have better control over time. This means they may be in their favor - waiting for your item to arrive before notifying you. This will incur additional charges because you do not have enough time to schedule the delivery. This results in delays and additional charges that you must pay and settle before picking up your shipment.
FOB or CIF: Investigate Before Choosing
Common practices include an agreement between the destination agent and the seller to set a low price for the item being sold. This is to lure you before the destination inflates the cost, and then divide that profit among them. This has happened quite a bit with products imported from China, and such cases have been on the rise in recent years, especially in Latin America.
FOB works well for LCL as profit margins tend to be lower. As a result, this gives sellers and agents more power to drive up prices. If you're considering choosing a CIF Incoterm, you should ask yourself if it's really worth exposing yourself to such a risk at a low cost.
Advantages of choosing FOB over CIF
Unless you are dealing with a seller or agent you can trust, or have an agreement to list yourself as the consignee on the bill of lading, it is best to choose FOB Incoterm to avoid risk. FOB Incoterm provides features that CIF Incoterm does not. The responsibility for paying, contracting and managing the goods rests with you, the buyer.
Although it requires some extra effort on your part compared to a CIF, it is much less risky as you get immediate clarity on the costs involved. That said, problems like delays and unexpected extra costs can be avoided with good planning.
FOB also has the following advantages:
- By controlling the agents involved, the buyer is able to exert pressure to lower the commercial price.
- By minimising costs, it enables buyers to obtain tax benefits, such as a reduced VAT burden.
- FOB also allows buyers to get better insurance prices, as you'll be looking for deals that cover most of your logistics. Unlike CIF, CIF only covers the movement of goods from the port of destination to the buyer's facility.
FOB or CIF: Considerations
One thing to keep in mind when choosing FOB is that complications can arise if the supplier refuses to work with the shipping company of your choice. Suppliers sometimes receive certain rebates for using specific freight forwarders and may therefore be reluctant to work with other consignees. This is a fairly common question. Therefore, the consignee should be prepared to put pressure on the shipper to help the freight forwarder smooth the process.
In short, new importers should not commit to CIF Incoterm unless you are familiar with seller practices. This is especially true when dealing with products imported from China. It is always recommended to use the services of a freight forwarder and choose FOB Incoterm when the situation allows. This is to avoid unpleasant surprises when the goods arrive. If you have any questions about choosing FOB or CIF, please feel free to contact our sales experts at TJ chinafreight!
