In international import-export-trading activities, Incoterms are standardized international trade terms widely recognized and used by many countries and territories around the world, including the two most commonly used terms FOB and CIF in Incoterms 2020.
So what is FOB? What is CIF? What are the similarities and differences between them?
Let’s, with King Elong, learn about them in the following article.
[Concept]
👉 CIF – Cost, Insurance and Freight - is the abbreviation of the nouns Cost + Insurance + Freight, which means that the delivered packages include the cost of goods + insurance + ocean freight. The seller will take the goods from the warehouse to the port, all costs for customs procedures, shipping costs, cargo insurance, etc. have been calculated in CIF.
👉 FOB – Free On Board (or Freight on Board) is a delivery condition that exempts the seller from responsibility when the goods are on board. For simply understanding, FOB means that when not yet on board, the goods are still under the management and responsibility of the seller. After the goods are transported onto the vessel, all responsibility for the goods or risks will be transferred to the buyer.
[Comparison between CIF and FOB]
👉 Similarities: Location of responsibility and risk is transferred at loading port (port of departure). The seller is responsible for carrying out export customs procedures, and the buyer has the responsibilities to complete import procedures to pick up goods. The conditions are shown on the contract with the location name, and the location can be the destination port, for example, CIF Ho Chi Minh Port, or FOB Ho Chi Minh Port.
👉 Differences:
| Content | FOB | CIF |
| Insurance | The seller is not required to purchase insurance | The seller is responsible for signing an insurance contract for the export shipment, usually stipulating a minimum insurance contract of 110% of the value of the goods. |
| Responsibility for chartering a ship | The seller does not need to rent a ship, the buyer is responsible for booking the vessel | The seller must find a ship to transport, the buyer is not responsible for it. |
| Final location to end service | The goods are loaded to the board of the ship | The seller has “final” responsibility once the goods have arrived at the port of discharge (port of destination). |
[So should we choose FOB or CIF to import goods? Let’s find the perspective that King Elong evaluates as a buyer when choosing 2 conditions as below]
👉 In terms of FOB: This condition will be suitable for businesses with extensive import-export experience or large-scale import businesses. In this term, businesses can control freight and shipping costs because they book vessels themselves and save a significant amount of costs. In addition, the business also hires and uses a freight forwarder, so it will know all information about the goods.
👉 Regarding CIF: If the company does import process for the first time, not have much experience importing goods, or only purchases small volumes, CIF will be a more suitable choice. Businesses do not need to waste time finding ships and cargo insurance companies, all responsibilities will be taken care of by the supplier. However, the CIF prices of importing goods are surely higher than ones of FOB, because the buyer must bear an additional service cost for the seller to find a forwarder, insure goods, book shipping, etc.). Compared to struggling to find shipping and insurance companies without experience, which can be very time-consuming for businesses, choosing the CIF condition will be the better and more appropriate decision.
Above is the basic knowledge about FOB and CIF conditions and King Elong’s experiences in selection. Hopefully, through this article, readers can choose the most suitable terms for their business!
