After you have familiarized yourself with the Incoterms and the Customs Tariffs, you want to establish your import calculation scheme for the selected products.
Other Costs
This may seem to you like too much bureaucracy, but believe me, it is necessary if you want to become successful with your import business.
Before you travel to China, you must do some homework and do your calculation for the different products you want to import, otherwise negotiations will be much more time consuming.
You already have a rough idea of the achievable buying price from your recent communications with the suppliers but of course, rough means not final. You should do some reverse calculating because you need an idea at what price you can sell larger quantities in your home country at the highest possible profit margin for your company. Based on that price, you will do your reverse calculation by taking into consideration all costs that apply – only then can you arrive at your ideal buying price.
If you want to negotiate better prices from your factories, you need to first decide which buying terms will apply.
The Incoterms most commonly chosen by importers are FOB and CIF.
FOB
This stands for Free On Board and its terms are:
- Carriage to be arranged by the buyer
- Risks transfer from seller to buyer when goods pass the ship’s rail
- Costs transfer from the seller to the buyer when the goods pass the ship’s rail
CIF
This stands for Cost, Insurance, and Freight and its terms are:
- Carriage and insurance to be arranged by the seller
- Risks transfer from seller to buyer when goods pass the ship’s rail
- Costs transfer at port of destination with buyer paying such costs as are not for the seller’s account under the contract of carriage
Most importers will choose buying at FOB prices because it allows them more flexibility in choosing their own freight forwarder, insurance company, and a greater transparency of total costs.
Factories always want to reduce their own risk by calculating higher freight rates for their CIF price quotations to be on the safe side. This has a negative impact on your landing cost and you have no way of really knowing the breakdown of costs. It is much better to negotiate FOB prices and control the freight rates by selecting the forwarder/shipping company of your choice.
Once you have built up a business relationship with your forwarder you can expect preferential treatment and receive early warnings. For instance, if there is an indication that the freight rates will go up in near future.
The same applies to the insurance costs, which you can reduce by negotiating better terms with insurance companies in your home country.
Here is a comparison of buyer & seller responsibilities for FOB versus CIF:
| Services | FOB | CIF |
| Warehouse Storage | Seller | Seller |
| Warehouse Labor | Seller | Seller |
| Export Packing | Seller | Seller |
| Loading Charges | Seller | Seller |
| Inland Freight | Seller | Seller |
| Terminal Charges | Seller | Seller |
| Forwarder’s Fees | Buyer | Seller |
| Loading On Vessel | Seller | Seller |
| Ocean/Air Freight & Insurance | Buyer | Seller |
| Charges On Arrival At Destination | Buyer | Buyer |
| Duty, Taxes & Customs Clearance | Buyer | Buyer |
| Delivery To Destination | Buyer | Buyer |
Simple Cost Calculation
As an importer, you should always keep complete cost calculations in mind. This requires more than only calculating the landed costs.
Below is a simple calculation scheme, which can be applied for various kinds of products but for some specific products, such as consumer electronics, extra charges may apply that have to be taken into consideration.
I do not recommend buying products at ex-factory prices because you will be involved in organizing the local transport in China which is sometimes very difficult, depending on the region your factory is located. The factory already has the connections and can handle that much more efficiently than you.
Simple Calculation Scheme
EXW (ex-factory selling price)
+ FOB costs (outbound)
= FOB
+ Ocean transport
= CFR
+ Insurance
+ Finance
+ Provision for bad debts
+ Credit insurance
= CIF (landed cost)
+ of equal importance for the exporter’s consideration:
+ Import duties
+ Inland transport
= DDP
+ Importer’s margin
+ Wholesaler’s margin
+ Retailer’s margin
+ VAT (UK and EU Only)
= Consumer price