Procurement guide
Incoterm choices that change your landed cost from China
Two suppliers quoting the same unit price under different Incoterms are effectively quoting different products. Understanding the boundaries of each term is the difference between an accurate landed-cost calculation and a budget surprise.
The same unit price can produce very different landed costs
An Incoterm defines precisely where the supplier’s cost responsibility ends and the buyer’s begins. It allocates export packaging, domestic trucking from the factory to the port, export customs clearance, terminal handling at the origin port, ocean freight, marine insurance, import customs clearance, import duties, and final delivery to the buyer’s warehouse. Each of these cost items sits on one side of the Incoterm boundary or the other.
A supplier quoting $4.25 per unit under EXW and another quoting $4.60 under FOB may appear to have a $0.35 price gap. But the EXW buyer must also pay for export packaging (the supplier’s standard packaging may not be suitable for ocean container shipping), trucking from the factory to the port (which can be 200 kilometers or more if the factory is inland), export documentation and customs filing, and port terminal handling. These costs can easily exceed $0.35 per unit, making the higher FOB price the better deal once all costs are counted. The unit price alone does not tell you which supplier is cheaper; the Incoterm defines what you still need to add.
EXW looks cheapest but rarely is
Under EXW (Ex Works), the supplier’s only obligation is to make the goods available at their premises. The buyer handles everything from the factory gate forward. This includes arranging a truck to collect the goods, ensuring the packaging is suitable for ocean freight (standard domestic packaging is often insufficient and may need to be replaced or reinforced), clearing the goods for export, delivering them to the port, paying terminal handling charges, and then arranging ocean freight, insurance, and import clearance.
Buyers who have never shipped from China underestimate the cumulative cost of these steps. Export packaging for machined metal parts may require VCI (volatile corrosion inhibitor) wrapping, wooden crating that meets ISPM 15 heat-treatment standards, and palletizing to container dimensions. Domestic trucking from an inland factory in, say, Hubei or Sichuan to the port of Shanghai can take three days and cost hundreds of dollars per container. Export customs clearance involves a declaration fee, a customs inspection fee (if the shipment is selected for inspection, which is random and occurs in roughly 5–10% of shipments), and documentation charges.
The EXW unit price typically looks 8–12% lower than the FOB price from the same supplier, but the buyer’s unreimbursed logistics costs often consume that gap entirely and sometimes exceed it. EXW can make sense for buyers with established logistics relationships in China who can arrange trucking and export handling at competitive rates, but for most first-time buyers, the convenience of an FOB quotation is worth the premium.
FOB is the most common starting point
Under FOB (Free On Board) with a named port — typically FOB Shanghai, FOB Ningbo, or FOB Shenzhen — the supplier delivers the goods on board the vessel at the designated port. The supplier pays for export packaging, domestic trucking to the port, export customs clearance, and origin terminal handling charges. The buyer pays for ocean freight, marine insurance, import customs clearance, import duties, and inland delivery from the destination port to the final warehouse.
FOB is the standard comparison term for good reason. It separates two sets of costs that are controlled by different parties: the supplier controls everything on the China side up to the vessel, and the buyer controls everything from the vessel onward. This makes cross-supplier price comparison straightforward because each supplier’s FOB price represents their fully loaded cost to deliver goods to the same point.
When comparing FOB quotations, confirm that the named port is the same. A supplier in Guangdong quoting FOB Shenzhen and a supplier in Jiangsu quoting FOB Shanghai are delivering to different ports, and the ocean freight from Shenzhen to Los Angeles may differ from the rate from Shanghai to Los Angeles by $200–400 per container depending on the shipping line and the season. The difference is usually small relative to the unit price, but it is real and should be included in a total landed cost comparison.
CIF and DAP shift responsibility but not always cost
Under CIF (Cost, Insurance, and Freight), the supplier arranges and pays for ocean freight and marine insurance to the named destination port. The buyer handles import clearance, duties, and delivery from the port to the final warehouse. Under DAP (Delivered at Place), the supplier delivers the goods to a named location — the buyer’s warehouse or a designated distribution center — and handles everything except import clearance and duties, which remain the buyer’s responsibility.
These terms are convenient, especially for buyers who do not want to manage freight logistics, but the convenience is rarely free. The supplier builds a margin into the freight and insurance costs they quote. They may consolidate your shipment with other customers’ shipments on the same vessel, reducing their per-container cost while charging you a rate closer to the spot market rate for a full container. The margin on freight is typically 5–15% above what a freight forwarder would charge directly, and it is rarely disclosed in the quotation.
To evaluate whether a CIF or DAP quote is reasonable, obtain a separate freight quote from a freight forwarder for the same route and container type. Compare the forwarder’s all-in rate (freight, insurance, documentation) against the difference between the supplier’s FOB and CIF prices. If the gap is larger than what the forwarder charges, the supplier is marking up the freight. This does not make the CIF quote unreasonable — the supplier is providing a service and deserves compensation — but it does tell you what the convenience is costing you, and you can decide whether it is worth it.
Confirm the named place and the cost boundaries
An Incoterm without a named place is legally ambiguous. “FOB Shanghai” is clear; “FOB” written alone on a quotation tells you nothing about which port, which terminal, or whether the supplier has included all the costs up to that point. The named place should be specified in every quotation and confirmed in the purchase contract.
Several small cost items frequently fall through the cracks in Incoterm negotiations. Export packaging is one: standard domestic packaging may not be suitable for a 30-day ocean voyage, and the cost to upgrade to export-grade packaging can add 2–5% to the shipment value. Export documentation fees are another: the bill of lading, certificate of origin, and any inspection certificates required by the destination country each carry a processing charge, and these charges may or may not be included in the supplier’s quotation. Port handling charges at the origin terminal — THC (Terminal Handling Charge) — are a line item on most ocean freight invoices, and a supplier quoting FOB should include this cost; some do not.
Ask the supplier to list exactly which cost items are included in their quoted price and which are excluded. A checklist covering export packaging, trucking, export clearance, documentation fees, terminal handling, freight, insurance, import clearance, duties, and final delivery clarifies which party carries each cost and prevents an unwelcome invoice arriving after the goods have shipped. These line items collectively can add 3–7% to the total landed cost if they are not accounted for in the original comparison. Identifying them early is far cheaper than discovering them on the receiving dock.