Incoterms Explained
EXW, FOB, DDP — these three-letter codes define who pays for what, when risk transfers, and where your responsibility ends. Get them wrong and you are on the hook for costs you did not plan for.
Incoterms (International Commercial Terms) are standardized shipping terms published by the International Chamber of Commerce. They define the point at which responsibility and cost transfer from seller to buyer in an international transaction. Every purchase order with a Chinese factory should specify an Incoterm — without one, you have no clear answer to who pays for freight, insurance, customs clearance, or what happens if goods are damaged in transit.
For hardware founders importing from China, three Incoterms matter the most: EXW, FOB, and DDP. Understanding the difference between them is not academic — it directly affects your unit cost, your cash flow, and your legal exposure.
EXW (Ex Works) puts the maximum responsibility on the buyer. The factory makes the goods available at their premises — that is their entire obligation. You arrange and pay for pickup, export clearance, freight, insurance, import clearance, duties, and final delivery. EXW is the cheapest price on the factory's quote, but it is only suitable if you have your own freight forwarder on the ground in China who can collect from the factory directly.
FOB (Free on Board) is the most common term for sea freight out of China. The factory handles everything up to and including loading the goods onto the vessel at the port of export. Risk transfers to you once the goods cross the ship's rail. From that point, you are responsible for ocean freight, insurance, import clearance, duties, and inland delivery in the destination country. FOB gives you control over the shipping leg without requiring boots on the ground at the factory.
DDP (Delivered Duty Paid) puts the maximum responsibility on the seller. The factory (or their freight forwarder) handles everything — export clearance, freight, insurance, import clearance, duties, and delivery to your door. The price you are quoted is all-in. DDP is popular with Amazon FBA sellers and first-time importers because it removes complexity, but it comes at a price: the factory or forwarder marks up the logistics cost, and you lose visibility into where your goods are and how they are moving.
Two other terms worth knowing: CIF (Cost, Insurance, Freight) is like FOB but the seller also pays for ocean freight and insurance to the destination port. You still handle import clearance and duties. DAP (Delivered at Place) is like DDP but the buyer handles import clearance and duties at destination.
What goes wrong
Using EXW when you have no freight forwarder in China
The factory quotes you EXW and you accept because it is the lowest number. Then you realize you need a trucking company to pick up from a factory in Dongguan and deliver to the port in Shenzhen — and you have no logistics partner in China.
Assuming FOB means the factory insures your goods
FOB does not include insurance. If a container falls off the ship, that is your loss. Always buy cargo insurance separately — it costs roughly 0.3–0.5% of the cargo value.
Accepting DDP without knowing the actual cost breakdown
The factory quotes DDP at a price that looks convenient. But their forwarder may use the slowest shipping method, under-declare customs value (risking seizure), or add a 20% margin on freight with zero transparency.
Not understanding who is the Importer of Record
Under DDP, the seller's forwarder is typically the Importer of Record in the destination country. That means you may not be listed on customs documents — which can cause problems for compliance, resale certificates, and liability.
What founders should remember
Start with FOB for sea freight
It balances cost, control, and complexity. You need a freight forwarder on your side, but you do not need boots on the ground. As you scale, you can optimize further.
DDP is convenience at a premium
It is fine for your first few shipments. But as volumes grow, the markup will become material. Plan to transition to FOB or CIF once you have repeatable logistics.
Always buy cargo insurance
It is the cheapest line item in your entire supply chain and protects against catastrophic loss. Do not skip it.