Do you find international trading hard? Understand Free On Board or FOB Shipping, what it means, related incoterms, and the prices in 2021.
The concept of international trade business can be a little complicated. Even though the two countries have similar fundamental laws, there is always some difference in perception of the global standardized trade law when it comes to freight.
So, you are likely to experience the same trade regulations everywhere, irrespective of where you ship your goods from. International Commercial Term or Incoterm one of the best examples of global standardization in the international trade market.
What does the Incoterm say?
The concept of Incoterm is simple. It can be described as a conventional contract that defines the liability and responsibility a trader has towards goods’ shipment. It states the rules to which extent your supplier takes the responsibility of safe movement of your goods when a buyer should take charge of the shipment, etc. The Incoterm also states the charges applicable on total freight movement.
FOB Shipping: What does it mean?
Free on Board or FOB shipping is one of the most encountered incoterms of the 11 incoterms prevailing in international trading about freight handling. A thorough understanding of FOB can make trading easier for you. But, before we go deep into all the legal jargon, let’s first understand what FOB means.
To define FOB, let’s first break it down and explain word-by-word. Here, “F” stands for “free.” It means that the supplier will be free of the obligation of delivering the export goods to the specified location for the carrier to transfer them later. The letters “OB” stand for “On Board,” which means that the export goods are already on the ship for transfer. So, FOB shipping in total refers to the term where the responsibility and ownership of goods remain with the supplier until they load the items on board the cargo or shipping vessel. Once they are on board, the goods’ liability is then passed on to the buyer.
Note: It is worth noting here that the FOB incoterms are only applicable for shipments sent to buyers in waterways or by sea.
The FOB shipping process:
Before we get deep into the detailed FOB shipping, let’s first understand the step-by-step process followed by the international trade market.
- A buyer purchases goods from some Chinese supplier or seller and agrees to the incoterms of FOB shipping.
- The seller packs your goods and loads them on a truck or similar vehicle to transport the item from their warehouse at their expense.
- The transporter’s truck then brings the packages to the port.
- These packages are then loaded on the vessel for shipping.
- Until now, all the expenses related to packaging, transporting and loading, had been taken care of by the supplier or seller. Once onboard, it becomes the buyer’s responsibility to take it forward.
- The buyer takes responsibility for the shipping of goods from China to their country. Any damage or customs fees, or similar things now become the liability of the buyer.
The shipping process happens in a slightly different manner. When you have a loose consignment on a cargo (a consignment that is not a full container), international shipping laws need you to pass the goods through a Container Freight Station or CFS. All loose goods are then consolidated here into a single container. The supplier or seller needs to bear the consolidation cost in this case.
FOB Shipping and related pricing:
Do you want to get an estimate on the charges applicable for your FOB shipping? You can check the price by using online tools like the International Freight Rate Calculator. To get an estimate, you need to provide the online tool with this information-
- Weight and dimensions of the goods you wish to export
- Shipment port
When you use the online calculators with all the information, you get the FOB price estimate instantly. If you are shipping a Full Container Load or FCL instead of loose cargo, you need to enter your container details in the specified area as well.
FOB Destination and FOB Shipping Point: How are they different?
Information about FOB destination and FOB shipping is mentioned in the shipping agreement at times to extend or reduce the supplier’s responsibility during the process.
The FOB shipping point ensures that the buyer gets ownership of the exported goods once the supplier leaves them at the shipping point.
From the shipping point, the responsibility of all the export goods gets transferred to the buyer instantly. It becomes the buyer’s responsibility from this point to ensure that the goods are taken care of until the end of the journey.
On the other hand, the FOB destination transfers the goods’ ownership to the buyer when the goods arrive at the buyer’s loading dock. So, in this case, actually, the title of the goods gets transferred to the buyer from the seller only when the package arrives at the destination port. In short, the supplier remains responsible for the goods’ condition until the package reaches the buyer at the end of the journey.
Understanding FOB Shipping Point
As discussed above, when we see the term FOB Shipping point, we understand that the supplier renounces his complete responsibility towards the export goods when the package arrives at the shipping point. From the shipping point, the buyer assumes all the liabilities towards the package. This means that the buyer is now obligated to pay for the costs related to freight to ship the consignment to the destined location.
To understand the situation better, let us consider an example. Suppose an “XYZ” company from the USA purchases one container of Kid’s toys from any supplier based out of China. They sign an agreement regarding the FOB shipping point, and the container is transferred to the freight carrier at that point. If the freight charges applicable to ship the container to the USA is roughly $1000, the “XYZ” Company becomes responsible for bearing the full sum of the amount to receive the goods.
Costs related to FOB Shipping: How is FOB different from other incoterms of maritime shipping?
Before we proceed to the cost of FOB and its difference from other sea shipping incoterms, it is best to understand that there are four incoterms that are exclusively applicable on sea shipments
- FOB
- CIF
- FAS
- CFR
All the incoterms differ from each other regarding the responsibility the supplier and buyer share under their trade agreement.
How is FAS different from FOB?
FAS stands for Free Alongside Ship. FAS is the fundamental option for ocean freight shipment. As per this agreement, the supplier pays for the goods’ delivery until the consignment reaches the given port of shipment. However, the supplier is not responsible for the onboarding of the consignment. The buyer is responsible for the consignment shipment once the transporter places it alongside the shipping vessel.
In the case of a FOB, the supplier is responsible for the safe movement of the consignment to the ship from the shipping port.
How does CIF differs from FOB?
CIF stands for Cost, Insurance, and Freight. CIF in international trading is the agreement of payment for the cost, insurance, and freight by the supplier. So, when you sign a CIF contract, the shipment goes to the supplier. The supplier ensures the transportation of the consignment to the port and takes charges for loading it on board the ship. The supplier is also responsible for bearing the cost of insurance related to the shipping. The buyer, however, pays any additional fees like the customs clearance charges, etc.
Based on what kind of agreement you sign with your supplier, your goods can be assumed delivered at any location between the destination port and the final address given for delivery.
CIF is a costlier shipping contract as compared to FOB. It requires more expense and effort on the supplier’s end.
How do CFR and FOB differ?
CFR means Cost and Freight. This agreement clearly defines the transportation cost that a supplier must pay to ship the goods to the agreed destination port. As per the agreement, the supplier is liable to bear every export-related fee apart from the cost involved in shipping the freight to the destination port. The buyer assumes the responsibility for the freight once the freight gets unloaded at the receiving country.
CFR doesn’t include insurance or the charges associated with delivering the package to the final destination. Even the custom duties are excluded.
Final thoughts on FOB shipping
FOB shipping is only a part of the incoterms related to international goods trade. However, FOB, being the contract every supplier signs with the buyer for a freight shipment, is one of the essential terms to focus upon. One needs to have a thorough understanding of the process and who takes responsibility for the good, at which point to ensure the shipment happens smoothly.