University of Economics Ho Chi Minh City Hong Cam, PhD

Instructor Trieu

I. Introduction of using FOB term and CIF term of Vietnamese enterprises in export and import activities Along with the process of globalization is being accelerated, international trade and international investment has been constantly developing and becoming one of the most important sectors in the economy of most countries around the world. Vietnam is not outside that process, especially after Vietnam became an official member of the International Trade Organization WTO. Business and trade activities between Vietnam and other enterprises, economic organizations in countries around the world are growing strongly. Foreign direct investment as well as import and export activities of goods are increasing. In those activities, international transport plays important role in transporting goods and materials, etc from exporting countries to importing countries. Today, all modern modes of transport such as sea, rail, automotive, aviation, etc are used. Especially, the most important role is sea transport. The Ministry of Transport of Vietnam said that 90% of the import and export commodities of the country are transported by sea. For the carriage of goods by sea, the division of responsibilities between the exporter and importer depends on terms that were specified in the foreign trade contracts. According to Incoterms 2000, therere 13 trading terms that apply for international commercial activities. In there, terms relating to transport by sea are: FAS, FOB, CFR, CIF, DES, DEQ. Parties often use FOB and CIF. FOB term in Incoterms 2000: FOB (Free on Board): Free on Board means that the seller delivers when the goods pass the ships rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export. By using this term, the sellers complete responsibility of delivery when goods have been transferred completely through the ship's rail at the port of shipment. Sellers dont have to sign contracts for transportation and buying insurance for goods. The buyers will bear all costs and buy insurance, charter and pay the freight. CIF term in Incoterms 2000 Cost, Insurance and Freight means that the seller delivers when the goods pass the ships rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination BUT the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

University of Economics Ho Chi Minh City Hong Cam, PhD

Instructor Trieu

However, in CIF the seller also has to procure marine insurance against the buyers risk of loss of or damage to the goods during the carriage. This policy was endorsed by exporter and transfer to the importer. Thus, for the importation, import by using CIF term, the right of transport and insurance belong to foreign partner. With those rights, they arbitrarily charter ship and buy insurance. In developed countries, when exporting goods, the sellers often seek ways to delivery by CIF term and when importing goods, the buyers always negotiate to buy the goods by FOB term. BUT in Vietnam, most import and export enterprises are doing opposite manner. They export by using FOB term that means delivery to the buyer on the buyer's vessel at the port of Vietnam and import by using CIF term that means receive goods on sellers vessel at ports of Vietnam. This action has formed since we participate in trade with the world market and become a habit. That's business practice of the import - export activities in Vietnam. It has been formed for a long time and still exists .The foreign buyers also have the habit of asking to buy goods with FOB term and selling with CIF term when deals with Vietnamese enterprises. We can see this situation through the numbers The market share of transporting export and import goods of Vietnams fleets in 1996 reached 14.25% and 12.68% in 1997. In1998, there was only 13.43% of the total volume of export and import goods. In 1197, import turnover was insured in Vietnam that reached nearly 19%. In 1998, although imports insurance increased by 17.9% compared with 1997 but only insured for 25% of total import turnover. II. The cause of exporting with FOB term and importing with CIF term The reasons of using FOB term in exporting and CIF term in importing are influenced by external factors and factors inside the enterprises. 1. External factors Maritime industry in our country is not really strong enough Companies provide maritime services and transport agents are still not expandable into foreign markets. Vietnam's transport network in foreign countries is too small. Thus, the maritime industry in Vietnam doesnt meet import and export demand. Most of ships and equipments are old and obsolete (ships of Vietnam have a high age that most of them are in about 10 to 20 years, even the ship from 25 to 30 years), so therere high fuel consumption, high costs for repairs. This leads to increase cost of transport. Transporting goods on old ship with obsolete equipment will be so risky and the premium for goods.

University of Economics Ho Chi Minh City Hong Cam, PhD

Instructor Trieu

Transport network of Vietnam is still low and not expandable to foreign markets. The freight is high but ships dont have enough quality to transport commodities safely. Therefore, the enterprises will export by using FOB term. If the goods are transported by using FOB term, the buyer will charter and pay the freight, so Vietnam enterprises will transfer risk to the buyer. The insurance industry is not really prestigious Long time before, Vietnam has only one insurance company which has a monopoly in insurance sector. Thus, settlement of complaints and compensation for loss of customers are delayed .So, prestige for domestic and oversea customers is very low. Insurance staffs are not trained much, so when dealing with customers to settle complaints, they often embarrass and delay compensation. Capital of insurance companies are little, so when a large amount of insurance must be re-insurance in foreign insurance companies The calculation of the premiums of insurance in Vietnamese companies is not reasonable. Vietnam's insurance companies are still immature and the staffs have no experience, so that enterprises dont rely on the ability of insurance companies in Vietnam. Therefore, the enterprises will transfer obligation of buying insurance for shipment to the buyer if export with FOB term, or to the seller if import with CIF term. The government doesnt have policies to encourage or regulations required import and export companies charter and buy insurance in our country. In 1991 the world has more than 40 countries that specified their import goods must be insured in the company of their country, to reduce costs to a minimum of foreign currency, and to support the National Insurance Company. In Vietnam does not have regulations on this issue, companies should still be free on export by using FOB term and import by using CIF term. 2. Factors inside the enterprises Export and import companies are afraid of risk in chartering ship and buying insurance Because they export by using FOB term and import by using CIF term, they dont need to charter ship and buy insurance for goods. Thus, these enterprises should be able to avoid the risk such as the increasing in freight and the premium, the ship is not suitable, etc. Vietnam enterprises dont dare to take risks to achieve greater efficiency. Lack of knowledge about transport insurance The import-export companies are not master in charter and insurance. They dont have relationships with all transport and insurance companies to choose the prestigious carrier. Especially, when large quantities of goods need ship to transport, the charter is complicated but level of many enterprises cant afford.

University of Economics Ho Chi Minh City Hong Cam, PhD

Instructor Trieu

In our country,in a long time, exporting and importing enterprises are state enterprises. Thus, high or low effectiveness is not the most important criteria. Conversely, the safety is very importance. Export enterprises have difficulty in capital Capital of many enterprises is capital that borrowed from banks. So, they dont have enough money to pay their freight and insurance. Besides that, Vietnam's export products are mainly source of raw materials or with lowvalue. Thus, the ratio of freight compared with value of goods is high. III. Influences of using FOB term on exporting goods and CIF term on importing goods.
1. Influence on market share of insurance busines s

Insurance business is very diverse with different types of insurance, including import and export goods insurance that is very important position. However, import - export customs in our country is completely contrary to international practice that has resulted in as: Enterprises of non-life insurance in Vietnam are almost complete loss of market share in export and import insurance field. When the foreign traders have a right to charter that means they also have a right to choose service providers to insure the goods. However, foreign traders who seek to buy insurance of Viet Nams enterprises are probably very little.
2. Influence on economic of country

Our country is in the process of promoting industrialization and modernization. Annual export and import turnover are very large and tends to increase rapidly. Premium for quality goods is a huge number. So, losing insurance premium for amount of goods is a tremendous loss not only for insurance business but also for the entire national economy. IV. Proposition Most Vietnamese import-export enterprises are now still holding the old habit that are exporting with FOB term and importing with CIF term. We know that the enterprises are afraid of risk and do not trust the transport service in Vietnam, but this action has a large effect on the business of insurance as well as the entire economy. Changing this habit will require a long time. Because, theres no any legal documents that required enterprises using FOB term in exporting and CIF term in importing. Meanwhile, enterprises can use other delivery terms such as exports by using CIF and import by using FOB term .Although these terms are high risk, but they bring many benefits not only for enterprises but also for the economy.For example, if the exporters use CIF term or CFR term, it can facilitate shipping companies and domestic insurance companies have more customers.Consequently, shipping and domestic companies have chance to develop and expand. So, that can create the conditions of employment for
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University of Economics Ho Chi Minh City Hong Cam, PhD

Instructor Trieu

workers in transportation services and insurance industry. Besides that, using CIF term or CFR term can increase revenue for enterprises by selling with high-price. If you export with CIFterm and import with FOB term, the enterprises will receive commission or discount from the shipping company. So if you want to change Vietnamese enterprises s habit, we can rely on the causes of that habits to offer suitable solutions. Therere some of the following measures: The Government and Maritime industry: need to upgrade Vietnam's sea transport to be enough capability to transport goods from Vietnam to other countries in the world and in contrary direction with high safety and reasonable charges .So, export and import enterprises will be convince when sending goods for transport companies. Besides that, the Government should have suitable policies to encourage local enterprises charter and buy insurance in our country. For example, the Government will help enterprises a part capital if they charter and buy insurance in Vietnam. Logistic enterprises and insurance companies: The enterprises in logistic field need to improve professional skills, foreign languages and knowledge of international trade quickly. Consequently, they can support import and export enterprises in exporting with CIF term and importing with FOB term. The insurance enterprises and the logistic enterprises need to work each other to advice and support import and export enterprises to change mode of delivery so that they can choose the most appropriate method. If initial difficulties of import and export enterprises in the changing modes of delivery and receiving are support, the mode of exporting with CIF term and importing under FOB term will become popular.Therefore, market share of imported goods insurance will be "returned" to the insurance enterprises and effect of import and export enterprises and logicstic enterprises will also increase. The import and export enterprises: improve professional import and export business. They need to understand Incoterms correctly and have good language skills. When choosing term, they should consider carefully which one is the most appropriate term. They also need consult organizations that have experiences and knowledge in transportation and insurance field. V. Conclusion I think the export and import enterprises should change their old habit of using FOB term in exporting and CIF term in importing. If they still hold that method , it will cause a large effect to the insurance industry as well as the entire economy later. The import and export enterprises boldly try to use other methods such as export by using CIF term and import by using FOB term. With this change, theres not only benefits for the enterprises but also for the economy.I hope the enterprises should consider carefully when choosing delivery terms to get the best effect for themselves and economy.