Exporters yearning for switch to global payment terms to protect business

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East West Hardwood Co., Ltd. acts as a sales representative in Vietnam for lumber mills in the United States and supplies Vietnamese manufacturers through ports in Ho Chi Minh City, Quy Nhon, and Haiphong, applying CIF terms to all shipments.

CIF refers to an expense paid by a seller to cover the costs, insurance, and freight of a buyer’s order while it is in transit. With CIF terms, the seller bears the costs of any loss or damage to the product before fully loaded onto a transport ship. Further, if the product requires additional customs duties, export paperwork, inspections, or rerouting, the seller must cover these expenses.

Currently, the majority of wood material imports to Vietnam are carried out under CIF or CFR terms, with the latter (costs and freight) referring to the fact that the seller is not responsible for procuring marine insurance against the risk of loss or damage to the cargo during transit.

Meanwhile, most Vietnamese companies are exporting at free-on-board (FOB) prices, meaning that they transport their goods to the nearest port and load them onto a ship. However, which ship that is, is decided by the buyer, who is then also responsible for every consecutive step.

According to statistics by the Vietnam Timber and Forest Product Association (Viforest), most key markets of the wood industry have seen a change in terms of delivery conditions for exporters. The US accounts for around 60 per cent of the export turnover, with the majority applying FOB prices. However, the rate of FOB prices decreased from 98 per cent in 2016 to 96.9 per cent in 2020.

Weak internal abilities

Congestion and severe global supply chain disruptions have pushed freight rates to record highs. The latest Logistics Vietnam 2020 report by the Ministry of Industry and Trade shows that container freight rates have increased by four times compare to before the pandemic, and may further peak in Q4.

“Many delivery orders are cancelled because customers do not have a shipping plan,” said Vu Hai Bang, chairman of the board of Woodsland JSC. “There are many buyers who want to switch to buying timber products at CIF prices,” Bang said, which would mean that Vietnamese exporters had to take care of shipping, insurance, and related costs until the goods reach their destination.

While most exporters rely on FOB terms, data from the General Department of Vietnam Customs showed that on average, up to three-quarters of wood products into Vietnam are imported at CIF prices, with the rate is increasing. The value of goods imported at CIF prices stood at $1.69 billion in 2018 and has increased to $1.96 billion in 2020.

When exporting at FOB prices, domestic businesses do not have to worry about rising transport prices, but they are not proactive in the delivery of goods and depend on importers for containers. Sometimes, due to dependence on foreign customers, the slow arrival of ships damages goods that have been gathered at the port or in the warehouse, while some warehouses do not have enough capacity.

Tran Thien, director of Thanh Hoa Co., Ltd., said that fluctuations in logistics prices have prompted partners to change their buying and selling methods to push risks towards Vietnamese businesses. “As the local logistics capacity remains weak, most companies in Vietnam import under CIF terms and export under FOB terms,” he summed up.

The core issue is not the transaction method, but the intrinsic capacity of exporters and wood processing enterprises. Due to strong foreign competition and no support for manufacturers – who mainly process for exports following orders of partners – wood export enterprises are unable to compete with overseas-invested ones in their market.

“Redirecting exports from FOB to CIF terms is not easy,” said Nguyen Liem, general director of Lam Viet JSC. According to Liem, only when Vietnam has large shipping lines that can control logistics issues, domestic enterprises can switch to selling at CIF prices. However, as selling at these conditions comes with additional costs, some businesses may not survive.

Great risks

An Lac Wood Co., Ltd. has imported raw materials from the US and EU at FOB prices. Phan Thi Thu Trang, head of the company’s Import Department, said that enterprises importing under CIF or FOB terms differ in pricing. “When we buy with FOB terms, we will have a price advantage over imports at CIF prices, as we can decide upon which shipping line gets used,” Trang said.

The pandemic has also caused an unbalance in international freight between those markets that have seen early recovery and growth and those that are still dealing with the economic effects. This makes it difficult for international shipping lines – mainly overseas – to optimise schedules, containers, and operating costs.

Currently, 80 per cent of all exports from Vietnam take place under FOB conditions, and more than 10 per cent under CIF terms. However, companies applying these terms are mainly Chinese and Taiwanese enterprises. They follow a professional chain in which they cooperate with businesses specialising in raw material procurement, commerce, and logistics.

In 2020, Vietnam’s export turnover of wood products reached over $12 billion, while the country imported over $2.5 billion.

According to Do Xuan Lap, chairman of Viforest, it is still a long way until Vietnamese exporters can switch to CIF terms. “Businesses are in need of support from relevant ministries and agencies to connect domestic and international transport systems, as well as establish synergies and links with working units and logistics services,” Lap said.