Either if you start a small and medium-sized importation business, or you purchase for a large company, you may need to know how to calculate the landed cost. Most of the importers only pay attention to the product and the shipping cost when they are importing from China. This is nothing wrong. But the product and the shipping cost together is not the total landed cost. And you probably will be shocked when you get the products to your door.
Understanding the total landed cost will help you gain a better idea of planning your budget. And knowing how to calculate the landed cost may save you some unexpected costs and make you stay profitable. This article is trying to introduce to you everything about the landed cost. Before reading this piece of information, don’t rush to pay the supplier.
1. What is the landed cost?
Landed cost, simply speaking, is the total cost of purchasing the products from the seller to the buyer or from the exporter to the importer. The landed cost should include every expense you pay to get the products on your hand. From our on-ground experience, the landed cost can be divided into 5 categories as below.
- Product expense
- Logistics cost
- Customs duties
- Risk related
- Overhead expense
And here we will also dive into each category and explain to you what costs are included in each category.
1.1 Product expense
The product expense should be the major cost of any purchase. It will be unworthwhile if other costs are more than the product value. And the product expense not only refers to the product cost itself but also includes costs for buying samples, opening new molds, etc.
1.1.1 Product Cost
This is the major cost that buyers are considering. That’s why every buyer always eager to get a quotation from the supplier. It seems like if the product price is right, then the final cost will fall into their budget. To get a more reasonable product price, you can filter 3 or more suppliers to compare the quotation details.
1.1.2 Sample cost
The very first cost you paid will probably be the sample cost. It will not be too much depending on the value of the item. Some suppliers will ask a higher price, especially it’s a newly released product. It’s understandable as there are competitors out there trying to get samples and make copies. You still can save this cost by asking the seller to refund or deposit if you make a bulk purchase. Some Chinese suppliers also offer free samples, but they will charge the shipping cost. If you don’t trust on the cost they give or you don’t want to pay them directly, you can open a DHL/FedEx account, and let them pick up the sample for you.
1.1.3 Molding cost
If you are going to develop your own product, it will incur the molding costs. You’d better consider doing this when you wish to do bulk production and have enough budget. Depending on the product, the molding cost may start from US$ 500 to US$ 5,000 or even more. You can reduce this cost by finding a reliable supplier. Some suppliers would like to develop new products with buyers. Sometimes, they will gladly share half of the molding cost. If so, you may also need to discuss with them about the ownership of the mold later. In addition, you can ask for making payments for the molding in different stages. For example, to start out, when you get a sample, start production, and after production, etc.
1.2 Logistics Cost
Logistics cost is another main part of the landed cost. In the international trading business, the logistics cost mainly includes inland transportation costs and international shipping costs. If you want to go deeper, then there are a lot of aspects to be considered. For example, packing & repacking, loading & unloading, handling, warehousing, freight, etc. Fortunately, the logistics can be perfectly managed by a broker. To find a logistics broker, it’s easy. But you need to check carefully about their experience in international shipping and ask reviews from their existed clients. An experienced logistics partner can give you solutions and suggestions instead of bringing you troubles.
Shipping your international orders from China, you can choose by express, by air, by sea, or even by railway for some countries. It only depends on the cargo weight and volume, and the required delivery time. To start an importing business from China, make sure that you don’t start with the items with huge volume or heavyweight, which will only bring you too much shipping cost.
1.3 Customs Duty and Tax
When you are involved in importing business, you are required to pay customs duties and tax depending on the imported goods and its value. Duty and tax policies are variable from one country to another. And they are a part of the landed cost.
1.3.1 Import Duty
Import duty is charged by the government to protect your domestic market. In the recent year, 25% of tariffs have been set on US$ 550 billion imported goods from China to the US. If you are an importer form the US, you’d better pay more attention to the import duty to avoid the huge amount of duties. Tariffs and duties refer to the same thing. But the tariff is the percentage of tax charging for specific items, and duty refers to the actual amount of money that needs to be paid. For more information, check our post of Everything You Have to Know About Import Duty.
Except for the regular import duty, you should know that there are other types of duties to be charged possibly. For example, importing to the US, ADD (Anti-Dumping Duties) or CVD (Counter-Veiling Duties) may be incurred depending on the products. If so, then the regular import duty will not apply. As far as we know, some ADD or CVD rates are as much as 100% of the value of the goods.
1.3.2 VAT or GST
VAT refers to value-added tax, and it’s known as GST (Goods and Service Tax) or CT (Consumption Tax) in some other countries. Different from the import tariff/tax, VAT/GST/CT is a single and confirmed tax rate charged by the government throughout the country. This tax is normally imposed on the final cost of the products. The rate of VAT can be from 1% to 27%. For example,
- GST of Australia 10%
- VAT of Denmark 25%
- GST of New Zealand 15%
- VAT of Brazil 7-18%
- GST of Canada 5%
- VAT of Germany 19%
- VAT of Greece 24%
More reference information can be found at 2019 Worldwide VAT, GST and Sales Tax Guide or Value Added Tax Rates (VAT) By Country.
Please note that the U.S does not have a national VAT or GST. The U.S does, however, have a Sales Tax that varies from state to state.
1.3.3 HMF & MPF (Cited from Freighright)
In addition to duty and sales tax, imports to the United States, are subject to “user fees.” These fees depend on the mode of transport (sea, air, rail, road) and the type of entry (formal vs. informal). Goods transported via ocean are subject to both, HMF and MPF.
HMF stands for harbor maintenance fee, and it is collected by the U.S. Customs and Border Protection services, for shipments that are imported via ocean.
HMF takes up 0.125% of the value of cargo declared on the commercial invoice of goods only imported via ocean. HMF does not have a minimum or maximum amount of charge.
MPF stands of merchandise processing fee implemented by the U.S. Customs for most imports into the U.S. through all modes of transport.
The MPF is calculated at 0.3464%. The minimum amount is $26.22, with a maximum amount of $508.70. The fee is based on the value of the merchandise being imported, not including duty, freight, and insurance charges.
For informal entries (imported via mail), MPF is a set fee, which ranges between $2 to $9 per shipment.
1.4 Risk Related
Importing from China, there are not only successful stories, but also failed cases. For example, products are defected or short delivered, potential risk in shipping and transporting the consignment, and suppliers running away with payment, etc. To avoid such bad scenarios, you may have to pay extra cost to do company audit, product testing or inspection, consignment insurance, etc.
1.4.1 Company Audit
Importing from a mystery land and paying the unknown suppliers, you are the only one understanding the concerns. If you are buying from wholesale platforms like Alibaba.com, you can rely on their company audit or trade assurance. But what if you are dealing with an independent supplier/factory who has little presence on the internet? Probably you think that they are not worth to work with. However, many good factories are not specialized in promoting themselves online. Working with them, you can make a few checks to control the risks. ChinaCheckUp gives you easy, quick and affordable access to the information you need to make business decisions. There are many company check service providers. The inspection company introduced below can offer the same service as well.
1.4.2 Inspection cost
If you are buying 100-200 pieces of items to test the market, it’s hard to do product inspection for them as the third party may not want to take the order. In this case, you could work with the factory and ask for product pictures or videos. If you are working with a purchasing agent, most of them will offer a random inspection service. Make sure you utilize the service and lower the risk before shipping.
If you are involved in massive production/OEM manufacturing, a third-party inspection service will be of great help. Depending on the products and your requirements, you can ask for initial production inspection, during production inspection, final random inspection, and loading inspection, etc. And an inspection service provider can do company audit/factory assessment as well. Here are 3 inspection companies for your reference.
1.4.3 Insurance
There are things could go out of control when you ship in bulk via sea or just a few packages by express or air. You need to apply for insurance from the carrier or independent third-party to protect your shipping cargo. Even it’s complex and time-consuming to claim the insurance reimbursement.
Shipping via carriers like DHL, UPS, USPS, or FedEx, their shipping contracts will automatically apply for a declared value coverage up to US$ 100. You can buy additional insurance coverage according to the value of goods.
For sea shipping, the standard insurance rate is 0.5% based on the value of goods. However, the insurance cost will also vary from the declared value, potential risk, and type of products, etc.
1.5 Overhead Expense
Except for the major costs above, overhead expenses should not be ignored in international trade.
1.5.1 Currency conversion
Suppliers/agents can make a lot of money by inflating a few percentages on the currency. Most suppliers quote prices in foreign currency. You can ask for the exchange rate as well. If the exchange rate is not reasonable, have a conversation with the suppliers, you may save a lot of money. You can even manage to pay them RMB if the quote in local currency has an advantage.
1.5.2 Bank charge
Bank processing cost is up to US$30-50. A lot of buyers tend to pay the suppliers in many times. It will only increase the cost. A wise option is to discuss with the suppliers if they can share a bit of the bank handling cost.
1.5.3 Agency commissions
You might deal with agents/brokers to help in sourcing, shipping, and customs clearance, etc. The cost is variable. You can have a discussion with them to save some money. But it’s also important to choose the right agent. There are agents trying to give you a very low commission but earn your money here and there.
So many costs are involved in the import business. Not all the costs above will be applied in different shipments. But as an importer, those costs are supposed to be considered. In each of the costs, we are trying to give as many details as we can, even including how to reduce some of the costs. Still, there is a lot to dive in.
All the information out there is giving calculations on the landed cost. And importers are also asking for a certain formula to calculate the total landed cost. It’s not necessary to have a formula after you learn all the costs above. Simply sum all the expenses together, you will get the total landed cost. Hope this article could help you better plan and control your purchasing budget in sourcing from China.
