Previewing our upcoming Riskgaming scenario, “Powering Up”

Danny Crichton:

All right, Ian, welcome to the program.

Ian Curtiss:

Hey, Danny. Thank you. No, I'm thrilled to be here.

Danny Crichton:

Not only are you thrilled, we pay you to be here, so it's great.

Ian Curtiss:

Indeed. Yeah. Yeah.

Danny Crichton:

You work for a lot.

Ian Curtiss:

Two birds with one stone.

Danny Crichton:

Now, you are on your, I just have to say you're like a Phineas Fogg of the 21st century because you are on this around the world voyage. Where are you calling in from today?

Ian Curtiss:

Today I am just outside of London. I'm in Maidenhead. Maidenhead, England.

Danny Crichton:

Ah, our Theresa May's constituency.

Ian Curtiss:

That's right. Theresa May. Yeah, exactly. And yeah, went paddleboarding on the Thames the other week, which was lovely. Don't lick your fingers after touching the water, but it was a lovely experience.

Danny Crichton:

If you've been reading, and clearly you have not, if you've been reading the Riskgaming newsletter, you would know that Thames Water has been dumping sewage all throughout the waterways of England and not to drink the water while paddleboarding.

Ian Curtiss:

Yeah. This was part of the discussion as we were on the water, was diving into the sewage systems of England, which was fascinating to me. Very different when water's everywhere versus where I'm from in Arizona where you know exactly where to send the sewage. That way. It's one way to go.

Danny Crichton:

Exactly. Well see, you're going from Phoenix, which has no water, to England, which has polluted water. And then as you go through Eastern Europe and Asia in the coming months, you can taste the water at every place and let us know what to expect.

Ian Curtiss:

Oh, that should be it, is like a global water flavor blog. That's brilliant.

Danny Crichton:

Phineas Fogg, Phineas Water, something like that. We're not here to talk about literature, although literature is a really fun topic. We're here to talk about the Chinese electric vehicle market. A market that I think four years ago, no one had paid any attention to. No one really cared. The Chinese car market has always been massive and is the largest in the world. It was sort of ignored. And then somehow during COVID, there was this extraordinarily fast acceleration of the transition from internal combustion engines over to electric vehicles to a point that just in the last couple of weeks, we've seen Ford, GM, and other Western car manufacturers basically pull out some of their assets out of China, conduct layoffs, and are sort of completely resetting their expectations of growth in the middle kingdom. You were interested in this and have a background in China. Why don't you give us a little bit of context?

Ian Curtiss:

The EU market in particular is just changing dramatically. Just what I think April of this year was the Beijing Auto Show that just blew everybody away. The best example of that was the Xiaomi car. And so the context is Xiaomi is a cell phone maker that has made news in many other ways, but most recently they pivoted to make an entire EV car on their own. In the end, it is a Xiaomi car that looks incredible, seems to drive incredibly well and is a completely effective competitor. The Xiaomi car is pretty much there.

Danny Crichton:

If you did not see the Beijing Auto Show, look at the videos. The amount of traction that these cars are getting is unreal. The amount of progress they've made in the last couple of years is incredible. And what's really happened here is China has combined its battery prowess with companies like BYD and C-A-T-L, CATL, alongside the software and hardware of a Xiaomi and other companies. And it really is pushing the edge of all of these cars. And so one of the things that I was really intrigued by when we were thinking about designing new Riskgaming scenarios was this sort of language from a lot of US execs who said, "Look, it's one thing to make money in China, but the real challenge is actually a lot of the innovation that's happening in the world is happening in China. And if you don't have access to the Chinese market, you just don't know what's going on anymore. And you're going to fall behind, not just in the Chinese market, but globally as well."

Ian Curtiss:

If you think about it from broader inputs of the supply chain into EVs as well, such as critical minerals, you think about all these other things that go way, way, way down the supply chain, china just continues to have a strategic advantage or competitive advantage or economies of scale, to your term here, depending on what angle you want to talk about. There's just a lot that builds up to this EV industry. And I think when you add on top of that the lens of sustainability, climate change, so on and so forth, it just brings even more weight to that value that China brings to this industry, which is EVs are the best market to test out batteries and to bring and find the capital to advance and innovate battery capabilities. That's all happening in China, and China has huge sway over that.

Danny Crichton:

So you worked in China for multiple years with American Chamber of Commerce. You saw a lot of the dynamics between US execs in particular and the Chinese political economy structure that was going on. And that was sort of the conversation when you first joined us as a Riskgaming designer was to sort of explore, look, this is a really complicated scenario. Many execs have to do this whether they want to or not, whether they think it's patriotic or not. The kind of vagaries in the market demand that you are here, present, and actually listening to that market and understanding the innovations that are going on there. How do we sort of go from that kernel into the powering up game that you just designed and we just published?

Ian Curtiss:

So yeah, I was there for almost six years from language studies to a master's in international relations at Peking University onto my work at AmCham with US Chamber and so forth. As one of my mentors said, "If you're not confused, you're not paying attention," because there's just always so many signals, there's so much noise, and the nature of the political economy just adds so much complexity to operations in China that nobody feels confident about what they're doing. And so that was a big part of this game of creating this.

Danny Crichton:

And I think when you talk about this, I mean, it's hard I think for folks from particularly a US context to understand there's not good market research, there's not transparency in the courts, there's not transparency in the political institutions. IP, you could try to sue someone for stealing your intellectual property. The reality is that will take years. And in these fast moving markets, by the time you get to a courtroom, it will not matter at all anyway in the end. And so that currency that you have within the Chinese market, which by the way, has only gone more opaque over time. I mean, even basic economic figures like the unemployment rate are now confidential information within the Chinese economy in the last year. Entire databases of corporate registrations are now behind basically closed walls. We don't know who actually owns many companies anymore because Western firms are using that to analyze firms. Due diligence firms have gone away.

So it's actually gotten harder to understand what's going on, which means your social connections that you have across the system, being able to actually get the real story, the real scoop, turning the secret into information that you have in your own possession is critical to surviving in this market. And that is a gap that I think the game really tries to highlight of you just can't assume you know what's actually going on.

Ian Curtiss:

What was really interesting, again, to get it in front of different people who played the game, different people brought totally different assumptions to the game because it was so unknown.

Danny Crichton:

Well, and I think we've seen this experience, so this is the second scenario we're publishing publicly. We have four kind of behind the scenes including this one. We've played this across Washington. So we have everyone from Capitol Hill, the Pentagon, White House staffers, all the way through the tech community, CEOs, VCs, etc. And it is actually really fascinating to see what a dichotomy these two kinds of environments have. Because on the government side, one of the things that I had no expectation for this game, but it ended up being really, really intrinsically important was, this is about doing business in China. And that was our original, I think code phrase for this was like, "The doing business in China game," or at least that was the folder on my desktop on how it was called. And it was not really focused exclusively on EVs, it was really trying to just get you to role play of the complications of being an international Western exec working in Beijing or Shanghai or whatever the case may be.

And then what we ended up learning in particularly in the Washington circles was there was a much more fundamental challenge of how do you do business? It wasn't doing business in China. You could just cut the "in China" part and start asking questions like, "How do companies make money? How do you invest? How do you use capital to transition between different technologies and adapt?" And we've seen this with a game we did on the future of national security and artificial intelligence, which will come out in a couple of months when we get around to producing it officially and formally. We've seen this with our hand in the crossroads. There's all these sort of investments that people have to make and you just don't realize in the government, we don't think about profits. You don't think about free cash flow, you don't think about expenses in the same way.

If you're Congress, you just burn through $2 trillion every year and throw it on the credit card and everything seems to work out okay. And so I think one of the interesting things has been you do learn this unique kind of context of the Chinese market. You certainly learn the vertical of electric vehicles and just how rapidly that is changing and why that is so important. But then you just learn this sort of more fundamental skill of how do you work as a business exec in general, which is an experience that most policymakers do not have.

Ian Curtiss:

Yeah, I think my favorite quote in that line was somebody who, I think she was involved with an association, a policy-focused association, and I had to come back to her multiple times to talk to her about revenues and budgets for companies. And she said at one point, she said, "Well, it would just be so much easier if the government would just give me money that I knew I would have each year."

Danny Crichton:

Yeah, exactly. We all should just get money from the Appropriations Committee. But it's one of those, it's very easy to make fun of. It's very easy coming from a startup world. It's very easy where Lux Capital, here are 300 companies plus, whatever, in the portfolio. I mean, you see all the spreadsheets, all the decks, all the business models all the time. And so you're constantly seeing how companies construct a financial model and how they construct a business that makes money. And they may be unprofitable for a very long time as they're growing and expanding and trying to do technology or whatever, but there is a real focus around let's find a core engine that creates wealth, that grows the company, makes it bigger and successful, and hopefully one day a dynamite company.

And coming from the government, you just don't think in this way at all. It's all about allocation. You have taxes coming in, you have a pie, it needs to get allocated to different programs. You have different needs, and there's a debate on how to go do that. And so to me, there's a real interesting cognitive leap of saying, "Look, you got to get out of this allocation model to a growth model. There is no money until you actually create it, and then it comes in through the front door."

Ian Curtiss:

Yeah, there's two things that are interesting about that. One, I'd say, and I'll circle back. One is the purpose why we're making these games and why we create them the way we do. Secondly is again the China angle. So the China angle being is in a dynamic political economy, there is less stove piping in these skill sets. And what I mean by that is so policy people purely understanding the relationships, the trust, the illegal processes required to develop policy, and then the commercial executive types understanding about how money is used, the leverage and the momentum that money creates for an organization, and that whole life cycle of money. In a political economy, you get these really incredibly, incredibly savvy, smart executives and policy makers who understand both sides because the market that they are operating in is so heavily impacted and volatile, if you will, by both market forces and political or non-market forces.

And so they have to understand both, and they build these deep psychological-like understandings and gut understandings of these things, I think in ways that, like I was saying before, that people from traditionally liberal economic markets have a harder time understanding. And so to the previous point of why we developed these games is A, to force people to sit in different roles, but B is these subconscious, literally brain synapses that people are creating by experiencing these things versus just reading about it in a book. I love when you spoke with Kelly Clancy the other week. You talked about some of this is, our minds are not made, we're not designed to learn through books solely. And there has become this culture of that's how we are supposed to learn apparently for some reason.

But we know there's pretty good data that shows we don't get the same amount of subconscious sort of gut instincts, type one thinking, if you will, through that sort of learning. You have to experience it, you have to feel emotional pain and excitement around these things. I think to connect it to the game specifically, I think people in China have experienced emotional pain and excitement through political as well as market dynamics a bit more than some people in the West have. And then this game forces people to experience both in a two-hour period.

Danny Crichton:

And I think what you're getting at is, I think the way we build the American economy is people are rationalized in the sense that people are sort of given different buckets of tasks to do, and there's specialization that comes through that, right? So if you're a bureaucrat, you don't have to learn how to build businesses. You're mostly meant to get out of the way, right? You're supposed to be a free market economy, laissez-faire, don't do industrial policy, get out in the world. Just try to keep as much of a limit on you as possible. And same for businesses. You do your thing and we think in terms of externalities, right? I do something, but it might have a bad effect or a positive effect on other folks, and that mostly comes outside of me. And I think of Coase's theory of the firm of I just focus on my own internal dynamics and then transaction costs with everyone else.

I think the interesting thing as you built this game, and it has six players, three auto manufacturers, two vice mayors of cities of China, so sort of these high ranking officials who are goading for economic growth in their local regions, and then one consultant who sort of represent due diligence firms or consulting firms, etc. What you're getting at is folks actually have to understand much more systematically in a way that's sort of that kind of specialization, rationalized model in the West. You have to understand how all the pieces fit together because you're working in a much more ambiguous environment. All those pieces actually have ways of affecting you. So you have to understand the national government's priorities at the center, you have to understand your regional priorities. You have to understand business, you have to understand overseas markets. You have to understand if the largest employer in your city is a battery manufacturer who relies on lithium and lithium is sort of held up in other countries, Indonesia or whatever the case may be, that matters to you.

Now you're a foreign policy expert. And in the West we sort of say, "Well, that would go to the State Department. That's who handles lithium." And then you realize there is no lithium office at the State Department. There's no one who actually picks up the slack there, because someone is almost always assuming that someone else is doing the work. And so I do think it's eye-opening to see how much more of the hedgehog versus a fox, and you just see a lot more foxes here where you do have to have a full skill set, you do have to have a full toolkit. And you have to have the knowledge of all these different models and different ways of seeing the world and combine that and synthesize it all in one person. And to me, it requires a lot more exceptional skills, but clearly the results have been dramatic over the last 20 years for China.

Ian Curtiss:

Yeah, I mean, the interesting point to that is what kind of I think strummed the heart, the guitar, or whatever the term is, of my master's degree at Peking University. This was in 2011, and one of the required courses was non-traditional security. When we were talking about water security issues and economic security and climate security and all these other issues that it was, the program was only foreigners and there was no Chinese in the room, which was, that's another interesting thing was we were completely separated from our Chinese classmates at the university. Here, we had a professor telling us, who was educated from the US, who is educating us about non-traditional security issues. And none of us had any background in these areas. Nobody in the room had been taught these issues in their undergrad, political science, international relations degrees, and it was mind-blowing for everybody. We clearly weren't getting it. And here we are in 2024, economic statecraft is on the menu and all these other things that our government is trying to figure out how to catch up on, essentially.

Danny Crichton:

Well, and it's been interesting, obviously as a perennial theme for the Riskgaming newsletter and podcast and everything we do is sort of the economic statecraft component of it, right? So all these rules coming out of the Department of Commerce trying to hamper China's AI growth or sort of cut into EVs or de-risk, it's been interesting because they're so lawyerly, and I would actually argue in a very negative way, of, "Okay, what we need to do is we will put in a rule that says China cannot buy chips, and we have solved the problem." And then China's like, "We will rent the chips from Singapore," and now all the chips are in Singapore, and Singapore is the fastest growing chip market in the world. It's amazing. And there's been great reports in the last two, three weeks in a couple of different publications talking about it's actually cheaper now for China to rent chips than it is to just buy them.

It's actually coming out ahead. It's actually saved them so much money by doing this because in many cases the electricity may be cheaper or the export duties, whatever the case may be. And so we've actually benefited them because we didn't have a sort of systematic understanding of how this market economy would work, and sort of the second-order effects of what these decisions are. And so to me, it's one of these, it just behooves us to get people into this world better to understand those systems and how different parts of it connect. And to your earlier point, I mean, you were talking about how there's this challenge around book reading, that you just read a book and you just don't really grasp or understand. And we had Danny Kahneman on the podcast two years ago before he passed away last year, or earlier this year, I'm sorry.

And I think one of the highest priorities I put on the Riskgaming experience, the reason you do these games in person is the emotion is how you learn. For those who listen to Kelly Clancy, as you pointed out, dopamine matters a lot to learning. We are designed to survive, and because we're designed to survive, anything that frightens us, anything that surprises us gives us a dopamine hit. It is one of those things where if you thought something was going to be red and it turns out blue, we're surprised, and dopamine actually triggers our memories to remember that particular fact because it is designed for pattern recognition, designed to help us learn, etc. But it's one of the reasons why if you have depression, it's oftentimes hard to learn. Memory goes down. It's one of the very strong correlates between the two.

And my view or the view of scientists is also just dopamine is a huge part of that loop. And so when you look at these games, what we're really designing them for is dopamine, both positively and negatively. But the idea here is you are surprised. You go into a situation, you expect a player to do something, they do something else, and then you realize you didn't really understand the underlying incentives, and therefore you just learned something new and you're not going to forget that. Whereas you could have read 30 policy memos and never picked up that particular fact.

Ian Curtiss:

And I've seen this again and again in MBA curriculums is like, strategy class is really a finance class, and there's a little bit of market psychology of understanding what people might want. But beyond that, no strategy class that I've ever seen has a robust discussion around these sorts of political or socio political inputs into seriously where you're going to spend your money. It's always like, "Well, if the politics change, then we'll just change then."

Danny Crichton:

Right, right. Well, and it's interesting because we're exiting this period of stability from roughly the fall of the Berlin Wall to sometime in the last couple of years, let's call it COVID, as the litmus test, where we went from, look, you didn't have to think about supply chains. The product come in just in time, right into the front door, you build a car, it gets exported. Markets are free, the world is flat. Thomas Friedman is having the time of his life. And over the last couple of years, and this is a theme in a newsletter I wrote recently, obviously we are exiting that role. We have a little bit more chaos going on. Things are not as resilient. You have to have ideas on where everything is, and supply chains have gotten so complicated. Everything is, we kind of remove vertical integration as a way to financialize a lot of companies.

And so you look at companies like Boeing where there are thousands and thousands and thousands of parts and players scattered across, I think almost a hundred countries. It's actually kind of insane if you look at a 787 Dreamliner, but let's call it dozens of countries all across Western Europe, Japan, China, a whole world combines into one craft that if any single part is missing, you can't just lose a wheel, so to speak. And I'm sort of exaggerating, but that's what sort of takes place. This is what took place during COVID is there are hundreds of computer chips in every automobile, and so you can have, let's say 599 chips, but if that last chip for the brakes is not available, you don't have a car.

And there's now I think more and more realization of the cross dependencies of these extremely complex systems and a desire from business execs to sort of simplify, and in many cases, raise costs, because that's sort of why they went down that road the first place and say, "Look, it's better to be resilient with a higher priced product than to have any single product fail, and now we can't produce anything." But that was not trained in business schools or MBAs for the last 20, 30 years, how to build those sort of resilience supply chains, thinking about sustainability, thinking, and not just in terms of climate sustainability. I'm talking about corporate sustainability, like having your own company survive multiple times. Thinking about risk, thinking about ambiguity. And my view is frankly, it's a degree that almost has to be completely rebuilt. Sure, learn finance, learn corporate accounting, managerial finance, whatever the case may be. I mean, those basic skills are still the same, but philosophically, the world is an entirely different place, which requires that to filter down in all those skills in a unique and different way.

Ian Curtiss:

Yeah, yeah, exactly. As you were talking, what I was thinking was a static world allows for excellent classification of everything. You can classify everything if it's not changing.

Danny Crichton:

Yeah, rationalization. Yes, yes.

Ian Curtiss:

Yeah, right. Exactly. Exactly. And so in a highly classified world, then you can specialize, which means you can assume everything else is handled by somebody else. And so, I mean, to connect all the dots then, I wonder, I propose that this means that you can then delve deeper on your type two thinking in your specialization, right? It's all rational kind of areas of thinking. It's not as much gut development that you have to develop in terms of emotional responses to change. We have to relearn how to learn and get back to that kind of type one thinking through this gamification of things and throwing people into these wild, ambiguous experiences.

Danny Crichton:

Well, and I think it's how do you deal with ambiguity? I mean, Nate Silver just published a book on this subject. I know our producer, Chris Gates, read it. I have the book, I have not read it, but I have read reviews of it, so therefore I'm an expert like any New York based intellectual. I think the key piece that we're starting to see in the economy, and I don't know if Nate Silver's book, it happens to be the bestseller right now going on that's talking about this very subject, is basically how do we deal with ambiguity? There are people who are risk-seeking, who are willing to take risks, who understand the probabilistic nature of reality, who are able, in many cases, to be founders, and maybe one might even dub it founder mode as Paul Graham has done. But the ability to sort of seek out all this information, synthesize in your head and say, "Look, I am in charge of this crazy company. Every single piece matters to me. I have to keep being paranoid. I got to keep fighting. I got to keep my company alive and surviving and thriving long-term."

And for most execs, you're sort of like, "I go to work. I go to my couple hours of meetings, I'm not really paying attention to how all the pieces and parts fit together, I go home." And there's just no way to actually go build a company long-term that way, particularly when everyone in the building is taking their little role and not seeing the full picture.

Ian Curtiss:

Yeah. It's like when you're connecting the dots, it's really painful to get everybody else to understand how those dots are connected I think, given they've all received their pipeline education.

Danny Crichton:

Well, we're switching subjects now because we're almost at the end of the episode, but so we just published this new game called Powering Up, focused on the China EV market, and what's next? What's on your mind these days? What are you looking to build and design next?

Ian Curtiss:

The next Lux game that I'm working on is our Arizona and chip fabs and water game, which I'm pretty excited. It looks like it might be a bit bigger than this previous one, and excited to get a bit more local in the dynamics there. But other just broader topics that I think are really interesting to engage in at this point is again, getting back to the frontiers of economics or border economics is like critical minerals and sourcing those issues, understanding the complexities of that. And then I think there's some interesting things to do on the security side of understanding what is the reality of Greek power competition like in Romania right now? How's Romania dealing with these issues versus we always just read about the latest from Germany, Washington DC, and Beijing. What about all these other countries that are actually having to deal with it on a daily basis?

Danny Crichton:

Well, that sounds great. Ian Curtiss, thank you so much for joining us.

Ian Curtiss:

Absolutely, Danny. Thank you.

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