Importing? Buy FOB and not CIF!

Don’t be buried in the CIF conundrum. See what’s really behind your seller’s terms of sale.

I understand that the temptation to buy on a Cost, Insurance & Freight (CIF) basis is very hard to resist. After all, isn’t it so much easier? When you don’t have to coordinate with a freight forwarder and don’t have to negotiate freight rates, all you have to do is to wait for the vessel or airplane to arrive, right? It’s almost too good to be true! Well, actually, it is absolutely too good to be true.

Why?

a. Commercial Invoices will understandably show the agreed upon CIF costs. Unfortunately, that means the ocean transportation and insurance costs have been included in the sales price and are subject to duties and fees. For example, if your product is subject to a 3% tariff and the ocean freight cost included in the CIF price is $4,000 then you will pay an additional $120. In years past, many suppliers showed the cost of ocean transport on the invoice in order to avoid this situation, but Customs now expects rated Ocean/Air Bills of Lading as proof to substantiate any deductions to dutiable merchandise value.

b. VERY frequently, CIF pricing includes hidden supplier profits on transportation. These profits inflate your overall cost of goods unnecessarily. Prowince conducted a survey on this particular point and observed an average profit of 50–100% being added on transportation by the supplier.

P.S: One of our clients observed the following difference when he switched over to FOB

c. You will have a nearly complete lack of control of your precious cargo. If your supplier is arranging the freight, they will understandably select the carrier whose vessel/plane will meet the contractual requirements but at the cheapest possible rate. In a situation where you need to select a faster or unique routing, your hands are tied.

d. Often times your contracts are based on departure dates from the port of origin. While this fact seems inconsequential, the transit time between carriers can be significant — especially if the supplier-selected carrier is using a transshipment ocean service. When you are expecting a 24-day transit to your designated port and it takes 36 days, for example, the impact to your operation and cash flow are more than significant. To make matters worse, you usually learn of the delayed arrival after the vessel has departed and it is too late to arrange for a premium service.

e. CIF shipments are frequently quoted without Destination Terminal Handling Charge (DTHC) noted in the quotation. While this meets the requirements of the terms of sale, it does not give the importer the full picture of total cost. Many CIF importers are unpleasantly surprised by substantial charges upon freight arrival. When you control your cargo through FOB terms, you can readily accumulate the TOTAL cost of freight for your goods.

f. There is a “dirty little secret” in the shipping business. Frequently, the “invisible” DTHC charges noted in item 5 above are also charged well above market rates to transfer freight cost obligations from shipper to consignee (from supplier to buyer). If you were the freight forwarder being paid by the shipper, who would you be more eager to please when shipping CIF goods? The supplier, correct.

g. Are you actually well protected by the cargo insurance provided by your supplier? First of all, who is listed as the beneficiary on the insurance? Under most situations, the company, which arranges the insurance, is also the beneficiary; therefore, your supplier will receive the payment if your product is damaged. And, since damage is usually discovered when the freight is unloaded at your warehouse, you probably have already made the final payment on the shipment and now have to hope your supplier will reimburse you from the insurance payment they receive.

h. Unfortunately, the problems with insurance do not end with item 7 above. Even if you require that the supplier list your company as the beneficiary, what costs does their insurance cover? It might only cover the CIF price and now you are left “holding the bag” for Customs Entry, Duties, and the inland transportation from the CIF seaport/airport. And, who pays for the office time, opportunity costs, and therapy sessions? Nobody.

About now, I suspect that if you are buying on a CIF basis, you have a sick feeling in your stomach. Don’t worry; this won’t require a doctor’s visit…we’ve got the prescription. Contact us