Incoterms for Industrial Spares From China

Incoterms decide who arranges transport, who pays for it, where risk transfers, and - the part that causes most disputes - who handles customs at each end. For industrial spares moving out of China, the difference between EXW and DAP can be several weeks and a material share of the landed cost, and buyers routinely compare quotes on different terms as though they were the same number. This guide covers the four terms that account for almost all industrial equipment shipments, what each actually obliges, and how to choose.

The four that matter

The single most misread column is the third. Under CIF the seller pays for carriage to the destination port but risk has already transferred at the origin port. If the vessel is lost, the buyer bears the loss and claims on the insurance the seller arranged. CIF is not a delivered term, and treating it as one is the most common Incoterms misunderstanding in industrial trade.

EXW - why it is usually the wrong choice

EXW gives the buyer maximum control and, on paper, the lowest price. In practice it creates a specific problem for shipments out of China: the buyer is formally responsible for export clearance, but a foreign buyer generally cannot act as exporter of record in China. The result is either the seller performing export formalities without contractual obligation, or a shipment that cannot leave.

For most industrial buyers, FCA - where the seller handles export clearance and delivers to a named place - achieves what they wanted from EXW without the structural problem. If you are asking for EXW because you want to control freight, ask for FCA instead.

FOB - the workhorse

FOB is the default for containerised sea freight in this trade and it is a sensible default. The seller handles export clearance and gets goods on board; the buyer controls carriage, which means the buyer controls schedule, carrier choice and cost, and can consolidate with other shipments.

• Buyers with a freight forwarder relationship almost always land goods cheaper on FOB than on CIF, because the seller's CIF margin on freight exceeds the buyer's negotiated rate.
• FOB gives the buyer visibility of the actual freight cost rather than having it embedded.
• Strictly, FOB applies to sea and inland waterway transport. For containerised cargo handed over at a terminal rather than loaded across the ship's rail, FCA is the technically correct term - though FOB remains near-universal in practice.
• Always name the port: "FOB Shanghai" not "FOB China".

CIF - convenient, and you pay for the convenience

CIF suits buyers without a forwarder relationship, or where the buyer wants a single landed-to-port number for budgeting. Two cautions.

First, the insurance obligation under CIF is minimum cover, which is a restricted-perils policy, not all-risks. For industrial equipment this is frequently inadequate. If you want all-risks cover, specify it explicitly in the contract - "CIF Cartagena, insurance to Institute Cargo Clauses (A) for 110% of invoice value" - rather than assuming.

Second, CIF ends at the destination port. Terminal handling charges at destination, customs clearance, duties, storage and inland transport all fall to the buyer. Buyers comparing a CIF quote against a DAP quote are comparing two different scopes.

DAP - single number, one trap

DAP delivers to the named place - often the buyer's plant - with the seller carrying transport and risk the whole way. It is the cleanest term for a buyer who wants one number and no logistics involvement.

The trap is import clearance. Under DAP the buyer clears the goods and pays duty and import taxes. Buyers frequently read DAP as fully delivered and are surprised by a duty and VAT invoice. If you want the seller to bear import clearance and duty, that is DDP - and DDP is often impractical because the seller must act as importer of record, which in many jurisdictions requires local registration the seller does not have.

Air freight for urgent spares

A large share of industrial spare parts move by air because the part is small and the outage is expensive. The sea terms map awkwardly onto air freight - FOB in particular is a maritime term. For air, the correct terms are FCA (seller delivers to the carrier), CPT or CIP (seller pays carriage, and under CIP insurance, to destination), or DAP.

CIP is worth noting because, unlike CIF, its insurance obligation is all-risks cover as standard - the higher level. If you are moving a high-value control board by air, CIP gives you better cover than CIF would on the same value by sea.

Choosing, practically

1. 01Do you have a freight forwarder you trust and a negotiated rate? If yes, FOB or FCA. You will land cheaper and control the schedule.
2. 02Do you want one budgetable number to the port and are you set up to clear customs? CIF or CPT.
3. 03Do you want it delivered to your plant and can you clear customs? DAP.
4. 04Do you want the seller to handle everything including import duty? DDP - and confirm the seller can actually be importer of record before you accept the quote.
5. 05Is it urgent and small? Air, on CIP or DAP.

Writing it correctly

An Incoterm without a named place is incomplete and unenforceable in the way it was intended. Write "FOB Shanghai, Incoterms 2020" or "DAP Buyer's warehouse, Lagos, Incoterms 2020". Name the version, because the terms have changed between revisions - DAT became DPU in the 2020 revision, and insurance levels under CIF and CIP diverged.

And put the documentation obligations in the contract separately. Incoterms allocate cost and risk; they do not specify that you get a certificate of origin, mill certificates, serial-numbered packing lists or a certificate of authenticity. Those are contract terms, and for industrial equipment they matter as much as the delivery term.

Insurance: what each term actually obliges

Insurance is the most misunderstood element of Incoterms, because only two terms oblige the seller to arrange it at all, and the two oblige different levels.

Two practical implications. Under CIF, the buyer receives insurance that covers a restricted list of perils and excludes many ordinary causes of cargo damage - the cover is genuinely minimal and for industrial equipment it is usually inadequate. Specify a higher level contractually if you want one. And under the terms where nobody is obliged to insure, cargo frequently travels uninsured because each party assumed the other had arranged it. Confirm explicitly who is insuring, at what level, and for what value.

Risk transfer versus cost transfer: the distinction that causes disputes

Every Incoterm defines two separate points: where risk passes from seller to buyer, and how far the seller pays. On the "C" terms - CFR, CIF, CPT, CIP - these points are different, and that asymmetry is the single largest source of Incoterms disputes in industrial trade.

Under CIF Cartagena, the seller pays freight and insurance to Cartagena, but risk passed when the goods were loaded in China. If the container is damaged in transit, it is the buyer's loss, claimed against the policy the seller bought. Buyers routinely assume that because the seller is paying to Cartagena, the seller carries the goods to Cartagena. They do not. On the "D" terms - DAP, DPU, DDP - risk and cost both transfer at destination, which is why those terms feel intuitively simpler.

Documents, payment and the letter of credit interaction

Incoterms interact directly with payment mechanisms, and a mismatch stalls payment even when the goods have arrived safely.

• A letter of credit requiring a bill of lading marked "freight prepaid" is incompatible with an FOB sale, where the buyer pays freight and the bill would be marked "freight collect".
• CIF sales under a letter of credit require an insurance certificate as a presented document, and its terms must match what the credit specifies.
• D-terms sit awkwardly with letters of credit because payment is normally triggered by document presentation at shipment, not by delivery at destination.
• Ensure the Incoterm in the sales contract, the Incoterm in the letter of credit, and the documents presented all agree. A discrepancy is a discrepancy regardless of whether the goods arrived.

A practical decision checklist

1. 01Name the term, the place, and the Incoterms version, in every quotation and every purchase order.
2. 02Confirm who is exporter of record and importer of record explicitly, in writing.
3. 03Confirm who insures, at what level, for what value.
4. 04Confirm who pays destination terminal handling, customs clearance, duty and taxes.
5. 05For D-terms, confirm the seller can actually perform the import formalities in that country before accepting.
6. 06Specify the documentation deliverables separately - Incoterms do not cover certificates of origin, test certificates or authenticity documentation, and for industrial equipment those matter as much as the delivery term.

How we quote

We quote FOB and CIF as standard alternatives on sea shipments, and CIP or DAP on air, with the named place and the Incoterms version stated explicitly on every offer. Where a buyer asks for DDP we confirm first whether we can act as importer of record in that country; where we cannot, we say so and propose DAP with the import formalities on the buyer's side, rather than accepting a term we cannot perform.

We also state separately what documentation accompanies the shipment - certificate of origin, manufacturer certificates, serial-numbered packing list, and conformity documentation where the destination requires it - because Incoterms allocate cost and risk and say nothing about the paperwork that decides whether goods clear. On industrial equipment, that paperwork is frequently the difference between a delivery and a delay.

The terms you will occasionally meet

Beyond the four that dominate industrial trade, five more exist and appear occasionally enough to be worth recognising.

• FCA - seller delivers to a named place, cleared for export. The technically correct term for containerised and air cargo where FOB is used loosely.
• CFR - as CIF but without the insurance obligation.
• CPT - carriage paid to a named destination, any mode, no insurance obligation.
• DPU - delivered at place unloaded. The only term where the seller is responsible for unloading. Replaced DAT in the 2020 revision.
• FAS - free alongside ship. Rare outside bulk commodity trade.