Import Management - II - R R Padmanabhan

Inco Terms 2020

I always used to wonder at the prosperity of tiny island state, Singapore.  The state is prosperous despite all the odds against it.  The birth of this state as an independent nation itself was seen as curse bestowed upon it.  The place was part of Malaya but Malaya did not want to have Singapore with it, for it considered the place as a burden on the Malaya’s economy.  Literally, the place had nothing to grow to feed its people, heavily dependent on its neighbours like Malaya, Indonesia and Thailand.  No cultivable land, no industries worth mentioning – but in spite of these handicaps, the place was strategically located in one of busiest in sea-lanes of the word.  That was the only advantage!  This advantage could only be used in International trade.

Despite all these, place has become a state by itself by empowering its people with skill and knowledge.  Now, the place is a thriving economy engaging mainly in entrepot trade. If you know how tiny the state is and how little the population, one eyes widen to know the strength of its economy.  The state is of twice the size of chennai but half of its population (roughly).  But how much does a Singapore dollar cost?  It is about Rs.50 per dollar.  It means you have to pay Rs.50 to get one dollar.  Most of the Indian travellers to this city-state splurge their money in Serangoon Street, the shopping paradise of Singapore. 

It is because of the skill of people that catapulted the city-state in to this formidable economic position.  So strong they are economically, that they are no longer a developing country but by all parameters of development, they have become a developed one. But to succeed in international trade, knowledge and practice of various concepts of international business are to be understood in its entirety.  You can imagine how these people have become asset to their economy by simply buying cheap and selling to a place where the merchandise is dearer. The most important knowledge is about the Inco Terms.  

Now I present another important fact that we often gloss over! India’s major export is garments.  The frequently used almost without exception used Inco term is Ex Works.  Why?  It is this term that provides the buyer with control over the transition of goods from sellers’ premises to that of buyer’s.  What are the costs?

By using this term for the purchase of goods from India, the buyer nominates his own freight forwarder to transit the goods.  The foremost advantage is no doubt, the predictability and one stop source for information regarding movement of goods.  The second advantage is that of freight cost which is roughly about 20% (Not necessarily all the time) but by after negotiation the price is fixed at a relatively lower levels.  The price is usually for a year or so. Even Insurance is also arranged at the buyer’s end covering all risks from the seller’s premises to buyer’s doorsteps.  This is called as Warehouse-to-Warehouse risk coverage. Insurance is normally reckoned at 1% of the value whereas in the market one can get insurance covered for as low as 0.10%

But let us turn to purchase practice of Indian companies.  In many of the SME segment, the knowledge levels are very low. Foreign suppliers normally provide CIF as their price.  Our buyers never bother to ask for the break of the quote.  Of course, this may not be possible in a one off transaction.  At least one can make a try.  Leave alone trial, our people lack knowledge about these concepts and international business practices.  They tend to loose money in the bargain.  In fact, by having control over these costs, they can save on duty leviable on the imported goods. The duty is levied as a percentage of the value of goods at the time and place of importation.  Naturally, it is CIF only.

Now, let us see what these Inco Terms are!

Inco terms simply mean International Commercial Terms.  With almost unfailing regularity, these terms are revised once in a decade, except perhaps during the World War II.  The present Inco Terms is effective from 1st January 2020 and is known as Inco Terms 2020.  The previous version of it was Inco Terms 2010.  Inco Terms is the work of International Chamber of Commerce.  These terms consider

Inco Terms can be divided in two broad categories as:

There are five modes of transport namely water, air, rail, road and pipeline.  The following diagram tells us what are the different terms under the two broad categories:


In the other category, we have:

Please visit the website of International Chamber of Commerce for a detailed exposition of all these terms!

The Article appeared in the e bulletin of Andhra Chamber of Commerce for the month of October 2020.


R R Padmanabhan
Director
Exim Academy

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