Every factory quote you receive will have three letters at the end of the price — "$4.20 FOB Shanghai", "$4.85 CIF Los Angeles", "$3.95 EXW Hangzhou". Those three letters change what the quote actually means by 15–35%. Most first-time founders sign without understanding the difference, and discover the gap when the first invoice for shipping + duties + customs shows up.
This guide explains the three Incoterms you will encounter on real factory quotes — what each one transfers to you, what each one leaves with the factory, and how to pick the right one for your business.
Quick reference: what each Incoterm covers
| Incoterm | Factory pays for | You pay for | Risk transfers at |
|---|---|---|---|
| EXW (Ex Works) | Goods only — at their factory door | Pickup, export, shipping, insurance, customs, delivery | Factory door (the moment goods are ready) |
| FOB (Free On Board) | Goods + export + delivery to port + loading onto ship | Ocean shipping, insurance, destination customs, last-mile | Once goods cross the ship's rail at origin port |
| CIF (Cost, Insurance, Freight) | Goods + export + delivery to port + ocean shipping + insurance to destination port | Destination customs, duties, last-mile | Once goods cross the ship's rail at origin port (same as FOB) |
A subtle but important point: under both FOB and CIF, the risk transfers to you at the origin port — even though under CIF the factory pays for ocean shipping on your behalf. If the container falls off the ship, the insurance the factory bought (under CIF) pays out to you, the buyer.
EXW (Ex Works): the factory's favorite, the buyer's headache
EXW means: the factory's obligation ends the moment they package the goods and have them ready at their loading dock. Everything from that point — pickup, export paperwork, trucking to the port, loading, ocean shipping, insurance, destination customs, last-mile delivery — is your problem.
Why factories love it: zero coordination on their side, zero liability past the factory gate, the lowest-sounding quote price (because it includes nothing).
Why buyers regret it: unless you have a freight forwarder in the factory's country who can handle export paperwork in the local language, EXW puts you in a position you cannot execute. Export documentation in China requires a registered exporter; if your factory is not your registered exporter, you cannot legally move the goods out of the country yourself.
Choose EXW if:
- You have a fully managed freight forwarder with operations in the factory's country (DHL, FedEx, Flexport, your own logistics partner)
- You are doing very small shipments by air courier where the courier handles export
- You want maximum control over shipping choice and consolidation
Avoid EXW if this is one of your first imports. The savings on the quote (typically 3–8% vs FOB) disappears the moment you realize you need to hire a freight forwarder to handle the part the factory just dropped on you.
FOB (Free On Board): the founder default
FOB means: the factory delivers the goods to the origin port and gets them loaded onto the ship you specify. From the moment the goods cross the ship's rail, they are your goods and your problem.
Why this is the founder default: the factory handles the part that requires speaking the local language (port logistics, export customs, loading) while you handle the part where you have leverage (ocean shipping rates, insurance, destination customs broker, last-mile).
The price split typically looks like this for a $5/unit knit shirt out of Shanghai to Los Angeles, 1,000 units:
- EXW Shanghai: $4.20/unit. You then pay an estimated $0.30/unit for pickup + export + port handling = $4.50 effective.
- FOB Shanghai: $4.50/unit. Factory bundles the to-port portion into one number.
- CIF Los Angeles: $5.10/unit. Factory adds ocean shipping + insurance.
The $0.60/unit gap between FOB and CIF on this example is what the factory pays a freight forwarder for the ocean leg. You can almost always beat that rate yourself — a freight forwarder direct relationship will quote you $0.45–0.55/unit on the same route at the same volume. CIF buys convenience; FOB lets you arbitrage the shipping margin.
Choose FOB if:
- You can quote ocean shipping yourself (or use a forwarder like Flexport, Freightos, OpenSea who will give you a same-day rate)
- You want control over which ship and which sailing — matters more than people realize when there are 2 sailings per week and your launch date is fixed
- Standard for any shipment above 100 units
CIF (Cost, Insurance, Freight): convenient until it isn't
CIF means: the factory does everything FOB does, plus pays for ocean shipping and minimum-coverage marine insurance, delivering the goods to your named destination port.
Why CIF feels easy: one number covers the goods plus the entire ocean leg. You only worry about clearing customs at your destination and last-mile delivery.
Why CIF often costs more than it should: the factory marks up shipping. They quote you the freight forwarder's price plus 5–15%. On a $5/unit, 1,000-unit order, that markup is $30–90 — small in absolute terms, but indicative that you are not buying at the best available shipping rate.
The other CIF trap: the insurance a factory buys for you under CIF is the legal minimum (110% of the goods value at the lowest possible rate). If your shipment is valuable, time-critical, or fragile, that minimum insurance pays out so little on a claim that it might as well not exist. Buy your own marine insurance separately.
Choose CIF if:
- This is your first import and you want maximum simplicity
- The volume is small enough that the shipping markup is immaterial to your unit economics
- You do not have a freight forwarder relationship yet
Avoid CIF if you are doing more than a few shipments a year. The 5–15% shipping markup compounds, and the insurance is too thin to rely on.
How the other Incoterms come up (briefly)
You will occasionally see these on quotes — here is what each one transfers:
- FCA (Free Carrier): Like FOB but for air freight or trucking instead of ocean. Factory delivers to your nominated carrier; risk transfers at handoff.
- CFR (Cost and Freight): CIF without the insurance. Almost never used in practice — if a factory wants to organize shipping, they include insurance (CIF) because it is cheap and protects them legally.
- DAP (Delivered at Place): Factory delivers all the way to your warehouse, but you still pay destination customs and duties. Common for small-volume air freight via courier.
- DDP (Delivered Duty Paid): Factory pays for everything, including destination customs and duties. Looks magical until you realize the factory marks up the duty (and gets the HS code wrong half the time, costing you money on the next shipment after the customs broker corrects it). Useful for samples; not recommended for bulk.
The four mistakes that compound on Incoterms
- Comparing quotes across different Incoterms without normalizing. A $4.20 EXW quote and a $5.10 CIF quote can be the same effective unit cost or 15% apart, depending on the shipping market that week. Always normalize to one Incoterm — usually FOB — before comparing.
- Treating CIF insurance as real insurance. The factory's minimum-coverage marine policy pays cents on the dollar against a real claim. Buy your own policy if the cargo is worth more than the policy you can verify.
- Choosing EXW to save 3% without having a freight forwarder. You end up paying the forwarder a one-shot setup fee that wipes out the savings, plus a steep learning curve on export documentation in a foreign language.
- Forgetting that "FOB Shanghai" is not "FOB Los Angeles". Some sellers will quote "FOB destination" — that is not a real Incoterm; it is sales-speak. The named port in FOB is always the origin port. If you see "FOB Los Angeles" on a Chinese factory quote, ask them to clarify whether they mean CIF Los Angeles or DAP Los Angeles.
How Frenzee handles Incoterms in quotes
Every quote that comes back through Frenzee is normalized to FOB at the factory's nearest export port — so the unit price you compare across factories is apples-to-apples. We separately display the estimated ocean shipping, insurance, destination customs, and last-mile to your address, drawn from current spot rates on your specific lane. The total at the bottom is what you will actually pay landed at your warehouse, not the FOB number the factory wants you to anchor on.