Ex Works (EXW) vs. Free on Board (FOB): What's the Difference?

Free on board (FOB) is a trade agreement in which the seller is responsible for the goods till they are loaded on board or beyond. Thus, the seller is the owner of the goods and he also bears the cost related to the transportation, etc. After reaching the specified destination, the ownership and costs shift to the buyer.

The term FOB can be divided into two types: FOB origin and FOB destination. Under FOB origin, the seller is responsible for the goods up to the point of origin (i.e. the loading port). Once the goods are in transit, the buyer bears the ownership, costs, etc. Under FOB destination, the seller remains the owner till the goods reach the destination.

The term Ex works is used in those trade agreements where the seller is obligated to make the goods available to the buyer at the place mentioned in the contract. For instance, the seller may be required to make the goods available at his warehouse, factory or at port as mentioned in the contract.

In such a scenario, the buyer has the maximum responsibility for the goods and the seller has the minimum liability.

The following table explains the key difference between fob vs ex works shipping for your better understanding.

If you are a buyer or seller and are struggling to choose between FOB and EXW, you must consider a few factors. Depending on the individual situation, you must make a choice that is more beneficial to you.

-Risk Tolerance Capacity: If you have a high-risk tolerance capacity, you must opt for Ex works as it also gives you more control over the goods. However, if you want to bear lesser risk, consider the FOB trade agreement.

-Cost Control: If you want to be in control of the costs related to the goods transportation, opt for Ex-works as it allows you to choose a transporter of your choice and negotiate the cost too.

-Buyer Experience: If you have a good understanding of the logistics at the seller’s place, you can choose the ex-works. However, if you don’t have any knowledge of logistics, it is better to choose FOB as it provides more security for the goods.

-Buyer-Supplier Relationship: If you have a good rapport with the supplier and trust his capability to handle customs and clearance of your goods in his country, you may opt for the FOB incoterm. However, if you are not very sure of his capabilities, you can opt for ex-works.

-Advantages for the Buyer and Seller

• FOB results in cost savings for the buyer and seller both. The seller can get the goods delivered to the shipment port with customs clearance at lower prices due to his contacts. Thus, the cost for both parties is lower as compared to Ex works.

• All the documentation and formalities related to customs and clearance is handled by the supplier so the buyer can sit back and relax.

-Disadvantages for the Buyer and Seller

• Sellers agreeing to carry out the export procedures without having any knowledge and experience may not be able to do it appropriately.

• The seller may charge a higher amount for the local charges he has incurred, which may increase your total shipment cost.

• There is a chance that the supplier may refuse to bear the local cost, even though it was agreed upon.

-Advantages for the Buyer and Seller

• The Buyer has a clear idea of the total cost that he will have to incur. It is cheaper as compared to the FOB method.

• There are fewer chances of any overcharging by the seller for local charges as the buyer must incur them.

• The seller has fewer responsibilities, so the transaction is easy for them.

• It is a good option for sellers whose operations are local-based and who do not have permits for exporting goods.

-Disadvantages for the Buyer and Seller

• Buyer has to shoulder more responsibilities as he must arrange for transporting the goods, get the clearance, etc.

• The cost may increase for the buyer as he may not have the advantage of economies of scale.

Knowing the total landed cost of your goods gives you an idea of the total expenditures, allowing you to calculate which incoterm will be the better option. Thus, one should carry out the calculation under both FOB and Ex-works to find out the landed cost.

Let us consider an example to understand the same.

-Cargo Details:

285 kgs of garments

Delivery: London

Place of Origin: India

FOB Mumbai Costs:

Cost of Product: GBP 8.460

Transportation Cost: GBP 733

Cost of Duties: GBP 1.125 (12%)

Total Landed Cost: GBP 10.498

EXW Lonavala Costs:

Cost of Product: GBP 8.450

Transportation Cost: GBP 1.034

Cost of Duties (12%): GBP 1.138

Total Landed Cost: GBP 10.622

Considering the costs above, one should import the garments using FOB incoterm.

FOB vs ex-works shipping is a choice that must be made after careful consideration of various factors such as business goals, nature of the goods, relationship with the supplier and so on. Both shipping methods have pros and cons, which both parties must consider.

No matter which shipping method you choose, the goods are exposed to the risk of sea perils while in transit. Hence, a marine insurance policy is a must-have. It protects your goods from damage while facilitating international trade. Buying marine insurance is a big decision, which must be made carefully.

You must choose trusted insurance providers such as TATA AIG, which is a renowned name in India’s insurance industry. Our marine insurance in India offers flexible coverage as per your business requirements and gives you international coverage across international borders.

Besides, our claim settlements are quick, hassle-free and convenient. Whether you are a ship owner, marine contractor, trader or anyone dealing with goods, our insurance can help you. We offer coverage to goods not only through the sea but also through roads, railways, etc.

You can also opt for a marine open policy, which offers coverage to multiple shipments over the year. It is a cost-effective way to protect your shipments against various kinds of damages, such as ship sinking, collision, fire, overturning, stranding and much more.

-Who bears the import charges in an FOB agreement?

The buyer must bear the import charges under the FOB agreement, though the import clearance is done by the seller as per the agreement.

-When does the risk transfer under the EXW agreement?

The risk under EXW transfers when the seller makes the goods available at the agreed location.

-Which is better? FOB or EXW?

The choice depends on various factors that one must consider before making the decision. Factors such as the nature of goods, business goals, relationship with the supplier, and understanding of export formalities play a significant role in the choice between EXW vs FOB.