FOB is the preferred incoterm for many businesses that manufacture in Asia and then import products to their country. We usually recommend it because it gives you a lot of control over your shipping process. However, there is a danger that can cause trouble for some importers: the FOB risk of loss that doesn’t always get spoken about. Let’s look at this risk here…



A quick summary of FOB

When selecting incoterms for your shipment from Asia, you will probably note that FOB is often recommended.

As we wrote on the FOB shipping page in our glossary:

The Free On Board shipping incoterm clearly outlines who is responsible for the products and when that responsibility crosses over from vendor to buyer. Buyers enjoy that the vendor has to take some responsibility for the goods while they’re being transported internally from factory to port, and it also allows them to control their own costs by negotiating a lower price for sea freight and insurance with their own choice of forwarder.
Vendors will also approve of FOB terms as they know that the sale is complete when the goods have left their factory and once they have been loaded onto the ship they are no longer their responsibility.

Consider this…if you’re an importer, you would probably like that your seller remains responsible for the goods until they are loaded onto the vessel, reducing both logistics costs and risks for you, as well as reducing your involvement in the export process (which your supplier may be more accustomed to anyway since it is their country) as you will not be required to deal with export clearance and transportation, either. Another bonus is that you’ll have more control over the shipping option and can select your preferred option rather than leaving it to your supplier who may not have the same priorities.

So, FOB offers a blend of control and value, so is it the perfect incoterm for importers from Asia?


FOB risk of loss is a downside we normally don’t consider

Our usual incoterms advice is to select FOB for sea shipments in order to avoid the difficulties of EXW and the risk of hidden fees that often come with CIF. And, of course, we advise that buyers pay for insurance of the cargo for the time that cargo is under the buyer’s control and responsibility.

However, one downside of FOB is that the goods could get lost/stolen/damaged after you make your payment to the supplier and they’ve delivered them to the carrier at the port, but before they are under your responsibility and control.

To be clear about where your risk lies in the FOB shipping process, let’s look at this graphic:

FOB transfer of risk

(Source: InternationalCommercialTermsGuru)

You can see in FOB that the transfer of risk, i.e. when you, the importer, become responsible for the goods, occurs just as goods are on board the vessel. This is where the  FOB risk of loss for you lies in wait.

In his post, Beware FOB Shipping Terms on the China Law Blog, Dan Harris makes this point about such a risk:

Risk of loss is a fundamental issue for all international trade business. Failure to do it right is not a technical issue. Failure to do it right can be a huge issue for both sellers and buyers. The Tianjin explosion illustrates why.
So where does risk of loss transfer? This issue is decided by the choice of shipping terms. In my experience, most U.S. and EU buyers make the mistake of choosing Free On Board (FOB) as their shipping term. They make this choice as a pricing term. That is, they chose FOB to ensure the price of the product does not include the price of insurance and freight to ship the product from China to the U.S.
When they chose FOB, these buyers do not account for their risk of loss. Under FOB, risk of loss passes only after the product has been loaded onto the vessel (crosses the rail). Since risk of loss transfers when the product crosses the rail, the buyer purchases insurance that covers the product at that point. Now ask yourself: who has the risk of loss from the time when the product leaves the factory until the time the product is loaded onto the ship? The answer of course is that the factory has the risk of loss.
But I have NEVER encountered a case where a Chinese company has purchased insurance for the brief period between when the product leaves its factory until it is loaded on the vessel. The factory just assumes the buyer has purchased insurance AS IF the risk transfers when the carrier takes delivery. But this is not true.

Dan is absolutely right here, as something might happen in these phases:

fob risk of loss phases
If your goods are lost or damaged during this period it becomes a big problem if you have already paid your supplier for most/all of the products.


The common payment term (In China) that can work against you

When dealing with Chinese suppliers in particular, it is unfortunately also common that you might have paid them for the goods by then. As we wrote in How to Pay Chinese Suppliers by T/T Payment (Bank Wire Transfer), Chinese suppliers like to negotiate a 30/70 split for the goods and pay the final or balance payment before shipment and export as illustrated in the payment term’s flow here:

common chinese payment term

If there is a problem with your goods which are now delivered and sitting near the port ready to be loaded, how receptive do you think your supplier, who has now been paid in full, will be to your claims that they should bear responsibility? You’re stuck in a gray area and out of pocket.


Is FCA the answer?

Dan Harris suggests using a different incoterm to reduce the FOB risk of loss:

The solution to this problem is simple. Use the right shipping term. As the drafters of Incoterms clearly state, for modern shipping by sea, the FOB term should never be used. The proper term is Free Carrier (FCA). Under FCA terms, risk of loss passes when the shipment is put into the custody of the carrier. It does not matter where the carrier takes delivery. It may be at the factory or it may be at the port. Since the buyer can be certain where risk of loss passes, the buyer can be certain that it has obtained the appropriate insurance. The issue of insurance is not left to the seller. The responsibility and benefit of insurance rests on the buyer which is where it belongs.

While the FCA incoterm clearly has some merits, we have mixed feelings about this suggestion.

On the one hand, we can’t argue that the buyer does not carry the risks Dan pointed to for importers using FOB. We never thought about it because we were never involved in such a case in China or Vietnam. In India, we did hear of cargo inexplicably “disappearing” while in transit to the port, but that was 10+ years ago.
No one will deny that it’d be a great thing for the seller to have insurance on the goods all the way to the point where risk is transferred to the buyer.

Still, that’s a valid point. Typically, a buyer would have a hard time getting compensation from the supplier if the goods are stolen, lost, or damaged when they are delivered to, or stored at, a warehouse located by the port. The buyer would probably not even be aware of what really happened, how, when, etc.

However, when the vessel is delayed (and that can happen relatively often), FOB seems more favorable to the buyer when it comes to potential expenses. In that situation, the seller will pay additional costs such as storage under FOB. Under FCA, once it’s delivered to a specified location, the seller’s job is done, so the buyer would have to pay storage and other fees.

About Renaud Anjoran

Our founder and CEO, Renaud Anjoran, is a recognised expert in quality, reliability, and supply chain issues. He is also an ASQ-Certified ‘Quality Engineer’, ‘Reliability Engineer’, and ‘Quality Manager’, and a certified ISO 9001, 13485, and 14001 Lead Auditor.

His key experiences are in electronics, textiles, plastic injection, die casting, eyewear, furniture, oil & gas, and paint.

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