How to choose contract terms while importing from China

  Lots of customers often facing dilemma how to sign contract once importing goods from Far East countries – especially from China. Even though variety of terms is significant reality of life shows that main percent of contracts are signed either on FOB either on CFR/CIF terms (others like EXW ,FCA, FAS terms in container shipments contracts are rather rare and not considered as optimal/widespread solution for reality of China export market nowadays). It is pointless to mention that there is no rigid solution to advise since each seller and each kind of goods has its most advantageous decision– even though below is our vision based on our knowledge and experience:

CIF / CFR terms

  Advantages:

• No need for buyer to be involved a lot in logistic process – it is seller’s responsibility to arrange shipment – thus byer do not have to worry about logistics issues. Seller arranges shipment of cargo at origin port and pays ocean freight up till destination port;
• No risks for buyer on changes at logistics market – in case ocean freight cost rapidly went higher then once contract been fixed it is still sellers responsibility to absorb difference in cost of ocean freight thus buyer doesn’t have risk of sea delivery cost.

Disadvantages:

• Buyer still faces risk for cargo the same way as it would be FOB contract – even though seller pays ocean freight all the risks for cargo (in case any accident while sea) are still not sellers BUT buyers head ache to obtain from insurance company;
• Delays while delivery by sea – since cost of delivery on CIIF/CFR terms included into cargo price seller will try to find cheapest option among container lines without talking care what transit time will be as fact  (for example cheapest option will have abt 45 days transit time once optimal option will have about only 32 days transit time) ;
• Risk for buyer to have “short free time period for containers (free of demurrage detention) at destination port – while looking for lowest ocean freight levels sellers often fix shipments with shortest possible free times at destination (for example 7 while 21 could be fixed as fact);
• Delays in shipment by seller – sometimes when seller understands that ocean freight cost will become lower soon (for example shipment been planned at beginning of the month but seller expects that cost of ocean delivery will become slower in week or two seller on purpose delays arranging shipments which leads more delay for final delivery to buyer;
• Lack of information for cargo tracing – after container is shipped seller doesn’t take care much about tracing container arrival to destination port and in case containers are discharges in transshipment port and stuck there (for example some services which are transshipped via Piraeus might face delays in transshipment ports for abt 2-3 weeks) consignee will not even be informed about delay – useless to say that sellers will not fight with transshipment port regarding soonest connection
• Seller would make added value on top for CFR/CIF contract in compare other terms.

FOB terms

  Advantages:

• Buyer doesn’t depend on seller’s choice of ocean carrier – as fact route /transit time of delivery your goods to destination is only your choice;
• Reliable cargo price since seller will not make high added value for cost while adding logistiscs charges in price for inland delivery while Ukraine;
• Full control of cargo right after loading on board of the vessel;
• No risks for “underwater stones” from container line – buyer will receive cargo via agreed before shipment by forwarder terms such as expected transit time, free time (free of demurrage detention) at destination port etc.

  Disadvantages:

• Buyer needs to be involved a lot in logistic process or at least to find reliable forwarder which will take care of that part of contract;
• Risks of delays in shipment by seller – sometimes when seller understands that ocean freight cost will go up soon seller would prefer to close first his other CIF/CFR contracts (to avoid risk of additional expences) and FOB shipments to remain last to be closed. Especially it is also often happening before long holiday periods in China.

  Summarizing above said – our suggestion as an advise to buyer to use FOB terms as optimal solution with shipment via trusted forwarders and stick to CFR/CIF as last alternative option. Our group is offering both services trading/sourcing agency and logistics.