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Are you an exporter or importer looking to better understand the complexities of Incoterms?
Today, we’ll break down the differences between the two most commonly used terms in global trade: Ex Works (EXW) and Free on Board (FOB).
Let's break it down and explore the key features of each term, the main differences between them, as well as when to use FOB vs EXW.
What is Free on Board (FOB)?
Free on Board (FOB) is a shipping term that indicates the point at which the buyer assumes responsibility for the goods being transported.
FOB can be broken down into two arrangements: origin and destination.
Under FOB origin, the seller is responsible for the goods' transportation until they reach the designated shipping point and then ownership passes to the buyer. On the other hand, with FOB destination, the seller assumes responsibility from start to finish, paying all necessary transportation costs until delivery is made and ownership is transferred to the buyer.
What is Ex Works (EXW)?
Ex Works (EXW) is a commonly used trade term that signifies the seller's minimum obligation. When a contract specifies EXW, it means that the seller's responsibility for the goods ends when they make them available at their own premises or another agreed-upon location.
The buyer is responsible for everything from there onward, including the cost and arrangement of transportation, loading, and insurance.
And if you're looking to create a quote, EXW is the perfect Incoterm since it doesn't include any costs beyond the product and packaging. Then, the EXW rate can be used as a basis to calculate costs with other Incoterms.
Key Differences Between FOB vs EXW
Now that we understand the basics of FOB (Free On Board) and EXW (Ex Works), let's explore their key differences in greater detail:
Under FOB terms, the seller is responsible for delivering the goods all the way to the port of shipment and loading them onto the vessel. The risk and cost shift to the buyer once the goods are on board the ship.
On the other hand, with EXW, the seller's obligation ends once they make the goods available for pick up at their premises (factory, warehouse, etc.). From there, the buyer takes full responsibility for the transport and cost of the goods.
Goods bought under EXW terms often tend to be cheaper than products bought under FOB terms.
This is because, under EXW, the supplier does not include the costs of transport to the port, loading charges, or any export duties applicable.
Under FOB, the seller bears all the risks involved in getting the goods to the port and loaded onto the ship.
But under EXW, the buyer assumes the risk as soon as the goods are ready for pickup at the seller's premises.
Control Over Freight
FOB grants the buyer more control over the entire shipping process. With FOB, the buyer has the freedom to choose the shipping line, negotiate rates, and determine the most efficient route for transporting the goods. This level of control allows the buyer to optimize the shipping process according to their specific needs and preferences.
On the other hand, EXW gives the buyer full control and responsibility for all aspects of transportation and logistics. This means that the buyer is solely responsible for arranging and managing the entire shipping process, from selecting the carrier to coordinating the delivery.
When to Use FOB vs EXW
Now that we have examined the differences between FOB (Free On Board) and EXW (Ex Works), it's essential to understand when it is appropriate to use each term.
FOB (Free On Board) is ideal when the buyer wants control over shipping, has relationships with shippers, or wants to consolidate shipments from various suppliers. It allows for flexibility in selecting the shipping method, carrier, and route, offering greater control over logistics. Additionally, FOB can be beneficial when the buyer wants to consolidate multiple shipments from different suppliers into one container, reducing transportation costs.
EXW (Ex Works), on the other hand, is fitting for buyers with strong logistics capabilities wanting full control over the supply chain. The buyer handles all transport arrangements and costs, providing complete control over the shipping process. However, it comes with higher risk as the buyer is responsible for any potential transportation issues.
Ultimately, the decision between FOB and EXW depends on the specific needs and circumstances of each trade transaction. It's crucial to carefully consider the risks, costs, and level of control desired before making a choice.
Is FOB or EWX the Right Choice?
Ex Works (EXW) and Free on Board (FOB) are two essential trade terms that buyers and sellers need to understand when engaging in international trade.
FOB grants the buyer more control and responsibility for the goods once they are on board the vessel, while EXW places the burden of transportation and logistics entirely on the buyer.
Each term has its advantages and suitable use cases, so it is essential to analyze the specific requirements of each transaction and choose the appropriate trade term accordingly.
By understanding the distinctions between FOB and EXW, traders can make informed decisions, optimize costs, and ensure smooth and successful international trade operations.
Whether it's opting for FOB to have more control over logistics or choosing EXW to have greater flexibility in managing transportation, you can leverage these terms to their advantage in the global marketplace.