Ever heard of the word Incoterm being used in the freight and shipping industry and wondered what it meant? You're not alone. Many people and businesses that import or export goods often times are unsure too. International trade and shipping throws a lot of acronyms your way, and Incoterms can be particularly confusing. In this article we will simply explain what they are, when to use them and outline the differences between all the incoterms.
Think of Incoterms as a pre-nup for your international shipment. They clearly define the responsibilities of both buyer and seller in the shipping process. This includes where the goods are delivered to and who pays for what along the way. This eliminates confusion and prevents costly surprises down the line.
Incoterms aren't one-size-fits-all. There are eleven different options that each have its own specific obligations.
Choosing the right Incoterm for your shipments can depend on several factors, including:
The mode of transport (Sea Freight, Air Freight, Road Freight)
Who wants control over the transportation process (buyer or seller)
How much risk each party is comfortable taking on (costs, customs clearance, transport etc)
Let's break it down using an example of a buyer in Johannesburg importing a steel pipes from China:
Incoterms for Any Mode of Transport:
EXW (Ex Works - China):
This minimizes the responsibility of the buyer. The seller simply hands over the steel pipes at their warehouse or factory in China to the buyer's chosen carrier.
However, the buyer would be responsible for everything from that point onwards, including loading, transport costs, insurance, and import clearance in South Africa. The buyer has to take care of everything from the moment the pipes leave the chinese warehouse.
FCA (Free Carrier - China):
Here, the buyer will take on more responsibility. They need to arrange for the seller to deliver the steel pipes to a specific location in China chosen by the buyer which is typically a freight forwarder's depot.
The seller would handle export clearance from China. Once they arrive at the depot, the buyer would be responsible for transport costs, insurance, and import clearance in South Africa.
CPT (Carriage Paid To - Johannesburg):
With CPT, the seller arranges air freight to get the steel pipes all the way to Johannesburg’s OR Tambo airport. This Incoterm is a good option if the buyer wants the seller to handle transportation but doesn't want to pay for insurance.
The buyer would then be responsible for customs clearance, arranging and paying for the transport of the pipes from the airport to your warehouse and any insurance wanted.
CIP (Carriage and Insurance Paid To - Johannesburg):
Similar to CPT, the seller arranges air freight, but CIP offers more protection. They'd cover the cost of insurance for the steel pipes during their journey to OR Tambo airport.
The buyer would still be responsible for customs clearance and arranging and paying for the transport of the pipes from the airport to the warehouse just like with CPT, but would have peace of mind knowing the pipes are insured.
DAP (Delivered At Place - Johannesburg):
This Incoterm offers convenience for the buyer. The seller takes care of everything up to delivery of the steel pipes to the buyers designated location in Johannesburg. This includes loading charges, transport, destination terminal charges, insurance etc.
However, the buyer is responsible for unloading the steel pipes once they arrive at the warehouse or designated location and handling the import duties, customs clearance and taxes.
DPU (Delivered at Place Unloaded - Johannesburg):
With DPU, the seller handles everything from DAP with the addition of also unloading the goods steel pipes at the buyers destination. The buyer is only responsible for handling import duties, taxes, and customs clearance procedures in South Africa.
DDP (Delivered Duty Paid - Johannesburg):
This incoterm is similar to DPU as the seller delivers the steel pipes to the buyers designated location in Johannesburg, unloads them, and handles all import duties, taxes, and customs clearance procedures.
The seller takes care of everything related to import formalities, ensuring the pipes are cleared through customs and ready for use. The only thing the buyer would be responsible for in DDP is unloading the goods at the destination.
Incoterms for Sea and Inland Waterway Transport:
There are also four Incoterms specifically for sea and inland waterway transport (e.g., rivers, canals):
FAS (Free Alongside Ship - China):
In this incoterm, the seller delivers the steel pipes alongside the ship at the designated loading port in China. They're also responsible for export clearance from China. As the buyer, you take over all costs and responsibility once the pipes are alongside the ship.
This includes arranging for loading them onto the ship, transportation to Johannesburg, insurance (if desired), import clearance in South Africa, and unloading at the destination port.
FOB (Free On Board - China):
There is more involvement from the seller in FOB. Here, the seller takes on more responsibility compared to FAS. They deliver the steel pipes alongside the ship and load them onto the ship at the designated port in China.
They'd also handle export clearance from China. Once the pipes are loaded onto the ship, your responsibility as the buyer starts. This includes the cost of transport to Johannesburg, insurance (if desired), import clearance in South Africa, and unloading at the destination port.
FOB is having the seller load the pipes onto the ship in China. You take care of everything else, from transport and insurance to getting them cleared through customs and unloaded in Johannesburg.
CFR (Cost and Freight - Johannesburg):
This Incoterm allows the seller to arrange and pay for the sea freight to get the steel pipes to Johannesburg port. However, insurance is not included. As the buyer, you'll be responsible for unloading the pipes from the ship, import clearance in South Africa, and any insurance you might want.
Think of CFR as the seller covering the sea voyage. The pipes will arrive in Johannesburg, but you'll need to handle offloading them, customs procedures, and any insurance you deem necessary.
CIF (Cost, Insurance and Freight - Johannesburg):
This Incoterm offers the most comprehensive coverage. The seller arranges and pays for the sea freight to Johannesburg port, including insurance for the steel pipes during transport.
Once the pipes arrive in Johannesburg, you'll only be responsible for unloading them from the ship and import clearance. The seller takes care of everything related to transport and insurance, ensuring the pipes arrive in Johannesburg covered and ready for you to collect from the port after clearing customs
Choosing the Right Incoterm:
As you can see, Incoterms offer a range of options depending on how much risk and responsibility you're comfortable with as a buyer or a seller, and how much control you want over the shipping process.
Here are some general guidelines:
For cost-conscious sellers who are comfortable with the buyer taking on more responsibility, EXW, FCA, or FAS might be suitable.
For a balance between cost and control, CPT, CIP, DAP, or CFR could be good options.
If you want maximum control and peace of mind, and are willing to pay more, DDP or CIF might be the best choices.
Incoterms can be overwhelming and scary, especially when having to use them for the first time. Don't be afraid to ask questions and explore your Incoterm options with our team of experts and we will guide you on which options would be the best and most cost effective based on the needs of your shipment.
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