Summary of Changes to the Integrated Shield Plan

The following is an edited version of what I wrote to my clients a few months back to explain changes to the Integrated Shield plan.

I understand that there has been some anxiety regarding the proposed changes to the integrated shield hospitalisation plans by the Singapore government in consultation with the six major insurers to address spiraling costs and the subsequent increase in premiums.  As you would have no doubt noticed, there gave been some increase in your annual premium.  The following is an explanation from AIA’s perspective and how it affects you. 

What are the new guidelines from Ministry of Health (MOH) about?

In accordance with the MOH’s guidelines announced on the 07^th March 2018, all integrated plan riders available for sale from the 01^st April 2019 are to incorporate both co-payment and co-payment cap, and will no longer cover 100% of the deductibles and co-insurance of integrated plans moving forward.

Why is this necessary?

Aligned with the recommendations from the Health Insurance Task Force (HITF), these changes encourage everyone to play a more active role in managing their medical care costs, and are part of collective efforts to ensure that healthcare and health insurance remain available and affordable in Singapore.

What is a co-payment feature?

With a co-payment feature, policyholders will need to pay out-of-pocket of a minimum of 5% or more on their hospitalisation, outpatient treatment as well as day surgery bills, net of any rider cash benefit payout.  This means the integrated plan and rider will no longer cover 100% of the bills.

What is a co-payment cap feature?

The aim of the co-payment cap feature is to protect policyholders against large bills by limiting the out-of-pocket amount we have to pay per policy year if we seek treatment from one of our insurer’s preferred healthcare providers or if the treatment has been pre-authorised by our insurer.  The minimum co-payment cap insurers can apply is S$3,000.

How do these changes affect the existing AIA Max Essential Rider?

Riders purchased before 08^th March 2018:

Those with riders purchased before the 08^th March will continue to enjoy the current benefits under their existing AIA Max Essential rider.

AIA will continue to monitor and review the claims experience from time to time, and should there be a need to incorporate the co-payment and co-payment cap features, please be assured that AIA will inform the client on any changes affecting their coverage at least 31 days prior to the change taking effect.

Riders purchased from 08^th March 2018 up to the date on which AIA introduces the new riders based on the new guidelines:

Those with riders purchased from the 08^th March will continue to enjoy the current benefits under their existing AIA Max Essential rider.  However, in accordance with the Ministry of Health guidelines, their AIA Max Essential rider will be revised to incorporate both the co-payment and co-payment cap features, upon you’re their A Max Essential rider renewal from 01^st April 2021.

Please be assured that AIA will reach out to inform the client on any changes affecting their coverage at least 31 days prior to the change taking effect.

How do these changes affect any reinstatement or upgrading of existing AIA Max Essential Rider; or any Mid-Term add of AIA Max Essential Rider?

Upgrading/ mid-term addition or reinstatement request before 08^th March 2018:

The AIA Max Essential rider will be based on the current benefits.

AIA will continue to monitor and review the claims experience from time to time, and should there be a need to incorporate the co-payment and co-payment cap features, please be assured that AIA will inform the client on any changes affecting their coverage at least 31 days prior to the change taking effect.

Upgrading / mid-term addition request from 08^th March 2018 up to the date on which AIA introduces the new riders based on the new guidelines:

The AIA Max Essential rider will be based on the current benefits up to renewal from the 01th April 2021, upon which date co-payment and co-payment cap features will apply.

Please be assured that AIA will reach out to inform clients on any changes affecting their coverage at least 31 days prior to the change taking effect.

How do these changes affect any Downgrade of existing AIA Max Essential Rider?

Downgrading of AIA Max Essential is not considered as a new business, hence the downgraded AIA Max Essential rider will be based on the current benefits.

AIA will continue to monitor and review the claims experience from time to time, and should there be a need to incorporate the co-payment and co-payment cap features, please be assured that AIA will inform the client on any changes affecting their coverage at least 31 days prior to the change taking effect.

Does AIA Singapore do pre-authorisation?

Yes.  In 2017, AIA launched the AIA pre-authorisation service for AIA policyholders who are insured with AIA HealthShield Gold Max A and AIA Max Essential A or AIA Max Essential A Saver.

Pre-authorisation assesses prospective claims based on diagnosis, planned procedures, the estimated length of hospital stay and hospitalisation and surgical charges before the actual surgery or admission.  This currently applies to inpatient admissions at Mount Alvernia, Gleneagles Hospital and Thomson Medical Centre, or any day surgeries performed with a clinic under the AIA Quality Healthcare partners and we will be continuously reviewing this.

Prior to the planned surgeries or hospital admissions, our specialist partners and customers will need to submit the pre-authorisation form for AIA’s review.  A Letter of Guarantee (LOG) with the approved amount will be issued within about 3 working days to the participating hospitals or clinics.

Will there be a reduction of premium since the benefits are reduced?  How much impact would the changes have on claims management and insurance premiums?

In general, premium rates are adjusted from time to time based on the client’s age, individual insurers’ claims experience, medical inflation, as well as general cost of treatment, supplies and medical services in Singapore.  These rates are, therefore, not guaranteed.  The measures proposed by the HITF are introduced with the long-term purpose of ensuring sustainable access to quality healthcare.  The impact of these changes may take some time to realise.  However, we believe that in the long run, alongside our efforts to ensure quality healthcare is delivered to our customers and that these measures will benefit them in managing the level of claims inflation, and, therefore, moderating the level of integrated plan and rider premium increases each year.

It appears that riders are “guaranteed renewal”.  How does the rider policy contract permit AIA Singapore to make changes to my existing rider?

The AIA HealthShield Gold Max and Max Essential riders are guaranteed renewable in nature.  This means that AIA will not terminate the plan at any time, except when there is fraud.  However, given the evolving medical landscape, continuously changing healthcare landscape, it is common for health insurers to vary the premiums, benefits and / or cover or amend any privilege, term or condition of health insurance policies.  Please be assured that AIA will inform policyholders on any changes to their policies, at least 31 days via letter before the effective date of any changes.

How can I be assured that AIA Singapore’s doctor panel will have a sufficient spread of doctors, and uphold good quality of care?

In January 2017, AIA introduced AIA Preferred Healthcare Providers, a network of over 250 trusted, well-qualified and experienced medical professionals.  AIA is the first insurer to establish direct partnerships with the medical community to deliver quality, affordable healthcare together.

AIA Healthcare Partners (private specialists) are chosen based on a strict review on the following criteria:

a.         Minimum of 5 years of specialist experience;

b.         Professional track record;

c.         Claims History;

d.         Appropriate choice of treatment; and

e.         Consistent charging behaviour.

AIA Preferred Healthcare Providers collectively cover over 26 medical specialties, ensuring that our clientele will be able to find a doctor with the expertise needed.  You can view the full list here: AIA Specialist List.

Does AIA Singapore think these changes are sufficient to manage claims?  If not, what else will AIA Singapore be doing?

AIA Singapore continues to work together with all stakeholders in the industry, including MOH and the Life Insurance Association of Singapore (LIA Singapore), to manage healthcare and claims costs in Singapore.  Together, we believe that we can be effective in ensuring quality healthcare is delivered to our customers and managing claims costs to keep health insurance affordable and accessible for all in Singapore.

As an industry leader, AIA Singapore is committed to proactively playing our part to implement the HITF recommendations, including:

a. Establishing a network of AIA Quality Healthcare Partners, making us the first insurer to establish direct partnerships with the medical community to ensure quality, affordable healthcare is delivered to our members;

b. Launching AIA Max Essential A Saver, an alternative rider option for AIA HealthShield Gold Max A policyholders seeking affordable coverage for treatments specifically in Government / Restructured Hospitals, or with any of our AIA Quality Healthcare Partners;

c. Introducing our AIA pre-authorisation service which provides a fuss-free process for pre-approval of treatments for AIA policyholders covered under AIA HealthShield Gold Max A integrated shield plan and AIA Max Essential A or AIA Max Essential A Saver riders; and

d. Beyond the HITF recommendations, AIA are also constantly enhancing our pioneering AIA Vitality wellness programme which inspires individuals to take action and make real change to their health by rewarding them for the small steps they take to become healthier every day.

Third Quarter 2018: A Market Built on Trump Tantrums & Everyone Else’s Discipline

I write quarterly updates for my investors and high-net-worth clients, in my capacity as a financial services consultant at AIA.  It is a long, technical read.  It also explains, in plain terms, how your funds have performed and where they are likely headed next quarter.  Most of the industry – wealth relationship managers, brokers, financial consultants alike – prefer to go quiet during turbulence and hope the client does not look too closely.  I do the opposite.  A professional relationship survives on trust, and trust survives on honesty, not silence dressed up as reassurance.

The Trump Variable

Equity markets closed 2017 strongly, and that momentum carried into January 2018, one of the best months in recent memory, visible in your fund activity statements.  We genuinely expected record growth this year on the back of that momentum.

Nobody could have predicted Donald John Trump’s particular flavour of self-sabotaging protectionism.  His tariff threats in January slowed the market by February, and a series of new US tariffs followed, targeted squarely at China, the largest trading partner Washington seems determined to alienate.  China runs on dignity, on “face,” and anyone who understands the country knows Beijing was never going to back down.  What followed was an undeclared trade war, complete with Chinese retaliatory tariffs, a weaponised US dollar, emerging-market turmoil, a bear market in Chinese equities, and the growing possibility of an oil shock.

Global growth slowed.  Equity markets corrected.  Bond yields retreated.  The US dollar strengthened, benefiting from its reserve-currency status even as the administration causing the turmoil tried to weaponise that very status.  The MSCI World Index stayed virtually flat from the end of 2017 to June 2018, giving up only 20 basis points in US dollar terms.  The United States and Japan, both relative underperformers in 2017, became the outperformers, with modest single-digit returns.  Asia excluding Japan absorbed a total market-weighted loss of 5%, erasing part of last year’s spectacular gains.  The benchmark MSCI Asia Pacific Index fell roughly 5% in recent weeks, wiping out close to US$700 billion this year alone.

Regional Casualties

No Asian market escaped unscathed.  North Asia suffered considerably less than South Asia.  Southeast Asia produced a mixed picture, with currency pressure compounding losses in the weaker performers.  Indonesia made the baffling decision to raise tariffs rather than simply defer payments to protect its current account, a solution with a considerably lower cost to long-term competitiveness.  Malaysia suffered a separate confidence problem entirely of its own making: Tun Dr. Mahathir bin Mohamad’s insistence on relooking or tearing up existing contracts with major trade partners did nothing for investor confidence in a market that already had enough headwinds to manage.

As the market adjusted into the third quarter, bond markets grew concerned about further policy normalisation from major central banks.  The 10-year US Treasury yield rose 70 basis points to a year-to-date high of 3.11% by mid-May, before easing to 2.86% by the end of June as fears of additional US tariffs on Chinese imports drove capital toward safer assets.

Investment-linked policy funds registered negative returns over the last few months, with Asian-themed and emerging-market funds hit hardest.  None of my clients holds emerging-market funds.  There are simply too many political variables in that space for me to consider it viable capital allocation for you.  While others absorbed losses of up to 20%, the worst performer among your holdings sits at a 9% year-to-date loss, with most funds ranging from a gain of 1% to a loss of around 4%.  These remain paper losses, not realised ones, and the distinction matters considerably more than the headline number.

The Three-Year Picture

Over a three-year horizon, every single one of your funds generated positive returns, a direct result of an investment strategy built for a long horizon rather than this quarter’s headlines.  The AIA Acorns of Asia Fund and AIA Regional Equity Fund continue performing strongly, exceeding 8% per annum over three years.  The AIA Global Technology Fund returned 15.2% over the first six months, driven by strong 2018 corporate guidance and a 3.3% outperformance from the fund manager’s stock selection, and 20.8% per annum over three years.  The AIA Regional Fixed Income Fund returned -0.6% as Treasury yields rose alongside widening corporate bond spreads, still cushioning losses elsewhere in the portfolio.

In August 2018, Singapore Telecommunications Limited issued US$500 million in corporate bonds at 3.875%, despite having no operational need for the capital.  Singtel functions as a proxy for Singapore Incorporated, and this issuance was Singapore’s own message to institutional investors: the government is watching regional currency pressure and capital flight, and has just locked in half a billion US dollars of liquidity for a decade.  This is precisely why the Singapore dollar has appreciated against regional currencies such as the Malaysian ringgit, a dynamic that benefits both the AIA Regional Equity Fund and the AIA Regional Fixed Income Fund directly.

China’s Long Game

China has absorbed short-term tariff pain without losing its underlying position as the factory of the world, with alternative markets available across Europe, South America, and Asia, and a deliberate, decades-long push into Africa.  Beijing is playing a fifty-year game.  Our own positioning should match that horizon rather than react to this quarter’s noise.

This downward valuation of Asian equities will eventually correct.  Valuations become attractive, funds circle, and the best bargains sit in East Asia and Southeast Asia.  ASEAN, South Korea, and Greater China remain growth regions.  Growth has slowed, not stopped, and the market, as it always does, has overreacted, which is exactly what short-sellers and short-horizon traders are built to exploit.  None of you are short-term investors.  Your average investment horizon runs seven to fifteen years, which means the correct action, with stocks due for a rebound, is to increase exposure into the right funds now, not retreat from them.

Technology as the Shovel Trade

For the more adventurous among you, greater weighting toward the AIA Global Technology Fund deserves consideration.  The MSCI Asia excluding Japan Index is dominated by technology names, Tencent, Alibaba, Samsung, and Taiwan Semiconductor among them, with information technology accounting for almost 32% of the index and Chinese companies filling seven of the top ten holdings.  Tencent and Alibaba alone command nearly 11% combined weighting.  People are not going to stop buying handphones or scrolling social media because Washington and Beijing are having a tantrum.  Manufacturing and traditional industry absorbed this slowdown.  Technology walked through it largely untouched.

Individual country indices track large-capitalisation, often state-linked names, Temasek Holdings and the Government of Singapore Investment Corporation among Singapore’s own examples.  Economies and stock markets are distinct animals across East Asia, and investors hoping to capture the region’s genuinely fast-moving industries will not find them sitting inside a headline index.

Beyond Trump’s belligerence, the trade cold war, and emerging-market turmoil, real structural transformation continues underneath.  Retail is migrating online, cementing Alibaba’s dominance.  A growing middle class is moving up the value chain in its shopping habits.  The genuine future market is the coming hundreds of millions of new middle-class consumers across China, India, and Indonesia, a demand base an American consumer slowdown will eventually become irrelevant against.  Entrepreneurship is surging across fintech, online retail, and the gig economy, riding China’s growth curve.  None of this shows up cleanly in a quarterly index chart, and none of it disappears because Washington had a bad month.

Selling Shovels, Not Panning for Gold

As I have told many of you before: during the California Gold Rush, it was the people selling shovels and pans who made the real money, not the prospectors panning for gold.  None of the funds I recommend is glamorous, and that is precisely the point.

Smartphones illustrate this well.  China remains the world’s largest smartphone market, shipping over 100 million units every quarter for several consecutive years, with Chinese manufacturers now commanding nearly a quarter of the global market.  Sunny Optical Technology, a smartphone camera component maker, recently reported a pick-up in handset-camera module shipments, a direct signal of the growth still embedded in this supply chain regardless of tariff noise at the border.

Banking tells a similar story, driven by simple underpenetration.  India had nine commercial bank branches per 100,000 adults in 2008; Indonesia had seven.  By 2016, those figures had risen to 14 and 17 respectively, and we expect that trajectory to continue as financial service penetration deepens across both markets, benefiting private banks with strong, experienced management.

Infrastructure completes the picture.  India’s logistics industry, worth roughly US$160 billion, is projected to reach US$215 billion by 2020, a compound annual growth rate of 10.5%.  Indonesia, the Philippines, Vietnam, and Myanmar are all investing heavily in infrastructure, financed substantially through export credit.

Why This Trade War Cannot Last

This trade war will not last, because the United States cannot actually afford to sustain it.  When Trump attempted to weaponise the US dollar against Iran, he shook global confidence in the dollar’s reserve-currency status.  While Washington has tried to walk that back, capital is already testing alternatives, principally the euro and the renminbi.  Capital is returning to the region, and once funds begin picking up bargains in earnest, valuations will rise accordingly.  Those who stayed the course through this quarter will be the ones rewarded for it.  That has always been the actual return on long-term investing, regardless of which president is currently making headlines.

---

Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code

Subsidising the GIC

Singapore needs to relook and adjust its economic model because what we have neither sustainable nor conducive for future growth.  I took data from here Singapore Average Monthly Wages from 1989-2017, Labour, Employment, Wages and Productivity and Singapore Statistics: Employment and Labour.

Assuming an average wage from the period of 1980 to 2010, a period of 30 years, which is one generation.  And assuming a CPF contribution of 4%, instead of 2.5% because I am assuming that, like most Singaporeans, the Ordinary Account is used for housing, leaving the Special Account.  Thus, I am being conservative here, and assuming a best-case scenario, disregarding a weighted average.  This means the average Singaporean worker earned just over $800,000 in wages, and contributed just over $270,000 in CPF.  With the accumulated interest on the CPF, that is a total just shy of $500,000.

In this scenario, the CPF functions as a forced savings mechanism.  Even at 4%, it does not keep pace with inflation, meaning that the average Singaporean, keeping his money in the CPF, is actually making a loss in the long-term.

The accumulated funds in the CPF, the CPF monies, are invested by the CPF Board in Special Singapore Government Securities, SSGS11, that are issued and guaranteed by the Singapore Government.  As per Government Investment Corporation of Singapore FAQ, GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies.  So, while the CPF monies are not directly transferred to GIC for management, one of the sources of funds that goes into the government's assets managed by GIC is the proceeds from SSGS.  The coupon rate of this is between 2 to 3%.  I am doubtful that all our CPF is invested in these bonds; the numbers, even assuming 2.5%, do not add up.  There is a lot of secrecy here, much of it for good reason, but I believe it is safe to assume that all our CPF monies are invested through GIC.

Now, I have no doubt that GIC is competently run.  The average long-term investment has a return of between 6.5 to 8% cumulative.  If we take it at about 7%, converting the GIC reported numbers from USD to SGD, the average Singaporean would have earned about $800,000.  That is $300,000 more than what he saved in that period through the CPF.  So, all these average Singaporeans are now in deficit of $300,000.  They saved $500,000 in that 30-year period, and GIC invested that money and earned $800,000 from each of them.  If we take it as “management fees” for accumulating and investing that money on behalf of us, that is 37.5%.  Hedge funds do not charge that.

A system has been created here where the average Singapore worker is effectively subsidising government investments.  The worker is the commodity, a source of cheap capital.  This structure is inefficient.  The problem with this cheap capital is that it is not cheap in the long-term.  A lot of money has been locked away in a lower yield investment that did not keep up with inflation, impoverishing a generation.  Over time, these funds have been siphoned up, creating a wealth gap.  Perhaps it is time to consider scrapping the CPF as we know it, and allowing Singaporeans to be direct shareholders of the GIC.  This would effectively remove one layer of management cost, put more liquidity into the system, and create greater flexibility in how Singaporeans manage their money.  If the government expects us to trust them, they should also trust us.

Singapore’s Public Debt - Asking the Right Question

Public debt is defined as the debt that the government owes.  As of end 2016, our public debt is approximately 105% of GDP.  A significant portion of that public debt issued by the Central Provident Fund, guaranteed by the Singapore government.  The question that should be asked, however, is not who holds the debt, which is the question most people ask.  Even if almost 30% is owed to CPF, CPF is a captive investor and still part of the government.  The question that should be asked is what happened to the money that was borrowed?

Public debt issued results in funds available that must now be spent or invested.  That money has to go somewhere.  We know that since 1990, the government realised cash flow from increasing borrowing to about $250 billion.  This is in addition to a public surplus of $260 billion.  Between 1990 to 2010, this additional public debt and surplus was about 16% of GDP.  The interest on this is also revenue, and we have not even factored that in.  So how much are we talking about?  This is, at least, half a trillion Singapore Dollars.  As per Singapore GDP Data, our GDP was worth USD 292.74 billion in 2015.  That is still less than half a trillion Singapore Dollars.

If we calculate the accumulated realised free cash on the claimed average annual GIC growth of 7% from 1990, we would arrive at just over a trillion Singapore Dollars, more than double the half a trillion Singapore Dollars.  Even a 1% accumulated growth is more than that half a trillion Singapore Dollars.  Properly managed, a 10% ROI is very much achievable, leaving us with $1.5 trillion.

Coming back to that $500 billion, however, people should ask where it is.  Either that money was lost in bad investments, or there are assets under government control that are off public records.  There are no such additional assets under Temasek Holdings or GIC that come close to that valuation.

The line of questioning here is not about fault-finding, or to even suggest any impropriety.  It is about fundamental differences in our philosophy of investment and public spending.  To even have that conversation, we must begin by asking the right questions so that we can have that policy discussion.

How a Gangster Rapper Hustled a Corporation & Became a Billionaire

Beats Electronics LLC is the subsidiary of Apple Inc. that produces audio products.  The company was founded as Beats by Dr. Dre was formally established as a company in 2006.  It was founded by well-known music producer and rapper, Dr. Dre and former Interscope Geffen A&M Records chairman, James Iovine.  Beats Electronics LLC has a US market share of at least 60% for headphones priced over US$100., and an estimated market valuation of US$1.5 billion.

The story of how Beats by Dr. Dre became Beats Electronics LLC is the story of how a gangster from the streets outmanoeuvred two major corporations for market domination.  In short, Dre hustled and succeeded.

The official story on Wikipedia and the company website is that Dr. Dre and Jimmy Iovine thought Apple’s earbuds were inadequate.  They said that if their music was going to be pirated, then people should, at least, listen to it with the best equipment possible.  Allegedly, Dre said to Iovine, “Man, it’s one thing that people steal my music; it’s another thing to destroy the feeling of what I’ve worked on.”  This is the publicity spiel.

The story of the rise of Beats Electronics LLC is the story of the demise of Monster Cable.  Monster Cable was founded by Noel Lee in the late 1970s, and made its name in overpriced cables and litigation.  The company was a corporate bully.  Monster sued everybody that had “Monster” in its name.  According to the US Patent and Trademark Office and court records, Monster Cable has gone after a mini-golf course, a thrift shop, a used clothes shop, Walt Disney Co. and Pixar Animation for their film, “Monsters, Inc.,” Bally Gaming International Inc. for its Monster Slots, Hansen Beverage Co. for a Monster Energy drink and even the Chicago Bears, whose nickname is “Monsters of the Midway.”  This aggressive legal strategy did not make them any friends.  And people who have no friends, no matter how big, are vulnerable.

Monster Cable did the actual engineering of the headphones for Beats by Dr. Dre.  Monster Cable had built its market domination more on marketing than product quality.  Its market share was built on the uncertain foundations of brand familiarity.

As an extension of their aggressive litigation strategy, Monster Cable was notorious for claiming patents on basic technological concepts.  An example can be seen in the response from Blue Jeans Cable, from the 28^th March 2008: “Monster Cable recently wrote to us claiming that we had infringed various design patents and trademarks owned by it or by its intellectual property holding company in Bermuda, Monster Cable International, Ltd.  We reviewed the patent and trademark filings submitted by Monster Cable, and found that Monster’s claims were completely frivolous - so frivolous, in fact, that there was something amusingly appropriate about the fact that Monster's letter had arrived in our mailbox on April Fools’ Day.”

In all this, Monster Cable’s products were notoriously no better at doing their jobs than coat hangers, as can be found in this example: Audiophile Deathmatch: Monster Cables vs. a Coat Hanger.  And when there are articles like these, all the litigation in the world is not going to protect the brand.  The cables were copper wires sheathed in plastic.  There is only so much that can be done to make them work better.  The best marketing does not change basic physics.  But that marketing cost was passed on to the consumer, raising the price of a mediocre product exorbitantly.

Thus, Monster Cables had painted themselves into a corner and needed Beats by Dr. Dre more than the latter needed it.  Monster Cables thought that the hype of a celebrity endorsement and the promise of further celebrity endorsements by contacts in the entertainment industry would overcome the negative image it was beginning to develop.  Unfortunately for Monster Cables, Dre and Iovine know exactly who held the cards here.  I would not be surprised that these two had identified this weakness and played Monster Cables from the beginning.

The Beats headphones were terrible.  To quote a passage in How Dr. Dre’s Headphones Company Became a Billion-Dollar Business, Burt Helm wrote that Iovine said, “We got dumped on by audiophiles on Day One.”  He continued, “We wanted to recreate that excitement of being in the studio.  That’s why people listen.”

The story here is a that Beats headphones “were not tuned evenly, like the usual high-end headphones.  They were tuned to make the music sound more dramatic.”  “More dramatic” is an euphemism for “they cranked up the bass.”

It was a rubbish product, but consumers fell for the hype, and from its launch in 2008, the company grew exponentially.  In 2010, Taiwanese consumer electronics manufacturer, HTC, bought out Beats by Dr. Dre for USS309 million.  This buy out is noteworthy because, under its terms, Dre and Iovine eventually actually gained executive control of the company from Monster Cables: After HTC Sale, Dr. Dre & Jimmy Iovine Gain Control of Beats Headphones.

By the 23^rd July 2012, HTC sold half its position to Dre and Iovine, allowing them to control 75% of Beats by Dr. Dre, leaving HTC with the remaining 25%.  Not only that, HTC revealed that it had lent Beats by Dr. Dre US$225 million.  In effect, Dre and Iovine bought those shares from HTC with money they borrowed from HTC through Beats by Dr. Dre, and then loaded the liability on the company they now controlled.

With HTC, themselves a manufacturer, invested into Beats by Dr. Dre with a combined stake of almost half a billion in both equity and debt, Monster Cables were no longer needed.  Monster were understandably unhappy with this and agitated for a better return on their investment – greater market visibility and a substantial payout.  In response, Beats by Dr. Dre ended their partnership with Monster Cables: Monster Will No Longer Make Beats Headphones.

On the surface, it looked counterintuitive, but it was a calculated move.  Monster Cables did not own the rights to a single drawing, idea or even the diagrams for the plastic parts: The Exclusive Inside Story of How Monster Lost the World.  From the very beginning, Monster Cables were outmatched.  When Kevin Lee, son of founder, Noel Lee, went to Los Angeles to negotiate, he had only a bachelor’s degree, no business experience outside of working for his father and no legal support.  He went into a meeting alone, against two men and an entire corporate team.  And in their desperation to enter a new market before their old one collapsed, got into a partnership where they built a business for a rival for free and never realised it until it was too late.

A few months later, Dre and Iovine took advantage of HTC’s financial struggles and bought the remaining 25% from them for US150 million.  Considering the market share and the actual value of Beats by Dr. Dre, this was a bargain.  Dre and Iovine had full control of the company now, which was the next part of the plan.

Ending the agreement with Monster Cables cost them hundreds of millions, and they did not take it kindly.  Considering their litigation history, they predictably tried to sue.  Before the case could go to court, in January 2014, Beats by Dr. Dre revealed its streaming music service.  This was the business they actually set out to build, instead of questionable headphones.  It was a hit with critics, and its success brought a bigger fish to the table: Apple.  Before June 2014, Apple agreed to buy Beats by Dr. Dre for US$3.2 billion, making Dre and Iovine billionaires, and changing the company name to Beats Electronics LLC.

Monster Cables filed a suit, claiming, among other things, that Beats by Dr. Dre stole proprietary headphone technology, that Beats by Dr. Dre unilaterally ending their partnership was illegal, and that Monster Cables were entitled to a portion of the billion-dollar Apple deal.

Here, Monster Cables had not considered the consequences of its actions.  It was outplayed, and still refused to accept that it was outplayed.  Apple was brutal.  Monster Cables had its rights to manufacturing Apple’s products revoked: Apple Revokes Monster’s Authority to Make Licensed Accessories.  How bad is this?  Consider this: Apple Revokes Monster's 'Made for iPhone' License Following Beats Lawsuit, where “According to Monster, 900 of its more than 4,000 products produced since 2008 have been made under the MFi program, and the company has paid out more than $12 million in licensing fees since that date.  Monster lawyer David Tognotti says the move is excessive and ‘shows a side of Apple that consumers don’t see very often.’

David Tognotti, the man who justified Monster Cable’s litigation excesses against smaller businesses, finally said, “Apple can be a bully.”

On the 30^th August 2016, not only did Monster Cables lose its suit against Beats Electronics, Beats Electronics countersued for legal costs.  And this is how a hustle works on a massive scale.

Investment Opportunity: Indonesian Beef Programme

The following is an investment opportunity.  This is an outline of the Trade Catalyst Special Purpose Vehicle (SPV) specifically for the purpose of investing in the Consortium to fund the supply of beef and cattle products to Indonesia.  Our client is in the business of food security for nation states and independent political entities.

To date, over USD 100 million has already been raised from financial institutions and private investors.  ARK Nusantara Pte. Ltd is looking to raise a further USD 5 million through private placement and is offering up to 10% ROI per annum, and are issuing medium term notes (MTN) for a 5-year period.  This means, that in addition to the ROI per annum, the investor gets the principle back at the end of the period.  The company through which the system is run, PT Surveyor International, is rated by Dun & Bradstreet at 5A2.

In the current market, it is almost impossible to find a similar investment with that level of returns that is genuine.  In this case, the buyer is the Indonesian government, through her vehicles for their domestic market, and the suppliers are backed by instruments of the Australian government.  The cattle are fully insured by Lloyds, meaning that even in the unlikely event of loss of a shipment due to force majeure or disease, the investor is still paid a return.

Since the buyer is the Indonesian government itself, there are no tariffs and all imports are cost plus, meaning that the investor is not exposed to market fluctuations.  This ensures that there will always be a profit for every shipment.

For serious, large investment clients, MTN can be issued in alternative currencies to the US Dollar to mitigate against currency exposure.

Serious investors may email me at terence.nunis@gmail.com for the brochure and further enquiries.

Getting What You Really Want by Asking for More

There is a method to any form of negotiation that any woman bargaining for a trinket knows.  A study called “Reciprocal Concessions Procedure for Inducing Compliance: The Door-in-the-Face Technique,” explored the idea of mutual reciprocal concessions, or give and take in negotiations.  Previous studies had shown that the idea of making an initial firm offer and holding to it was not an effective way to negotiate.  The best way is to start higher and allow the other side to negotiate it down to an equitable level.  This is sometimes known as the door in the face approach.

How does it work?  You begin by making a request that you know the other side will not accede to.  And then you come back with what you really wanted in the first place.  The idea behind this is that the person will feel bad for refusing your first request, so when you ask for something lesser, they feel obliged to give in.  People want to appear to be reasonable, and this allows them to do so, but at your benefit.  This works as long as the same person is the one who asked both the greater and the lesser concession.  And that is why, in a negotiating team, there should be only one person making the demands.  This invariably works when there is some sort of relationship where both sides are ready to deal.

This system is used in a gradated scale in the course of the negotiation process, and as the other side denies larger requests, they will increasingly agree to lesser ones, and will eventually offer their own concessions.  This way, both parties leave the negotiating table believing they have achieved something, while at the same time, ensuring that they got what they really wanted.

It is important to end negotiations on an amicable note because this is the beginning of a business relationship.  There is no gain to approaching this as a zero-sum relationship, since this engenders resentment and latent hostility, and this might complicate future negotiations.