As the demand for mining machines declines, how can mining hardware suppliers seek change?

Under the impact of the bear market in 2018, the market demand for digital currency mining hardware has dropped sharply. In order to offset the declining demand in the mining industry, more and more mining hardware suppliers are seeking transformation.

Bubble in the mining hardware supply chain

From April 2017 to March 2018, the cryptocurrency mining industry was booming. Last year, with the massive media coverage of the virtual currency market, the bull market trend of cryptocurrency also peaked. As the demand for mining hardware reached an unprecedented level, whether it was GPU, CPU or ASIC chips, the sales of mining hardware suppliers in the supply chain were record-breaking, and the stock price was once at a high level. Bitmain, a domestic ASIC chip supplier, was once listed as one of the top ten customers of TSMC, the world's largest semiconductor manufacturer.

The profit data also gives us a glimpse of this. Canaan Creative, a well-known mining machine ASIC chip supplier, had an operating income of 1.308 billion in 2017, a year-on-year increase of more than 4 times, and a net profit of 360 million in 2017, a year-on-year increase of 6.9 times. In addition to ASIC chips, the revenue of GPU manufacturers Nvidia and AMD also rose.

According to AMD's first quarter financial report for fiscal year 2018 released in April this year, AMD's revenue in the first quarter was US$1.647 billion, a year-on-year increase of 40%; net profit was US$81 million, a turnaround from loss to profit compared with the same period last year. AMD's chief financial officer said that digital currency mining-related businesses contributed about 10% of revenue for the quarter.

Similarly, Nvidia's first-quarter financial report released after the U.S. stock market closed in May showed that Nvidia's OEM and IP operating income in the quarter increased by 148% year-on-year, of which about 75% of the revenue was related to digital currency mining.

Expected earnings dropped sharply

The tide quickly receded. According to a report from Digitimes, despite some price increases in May, the decline in returns on mining investments has forced many small mines to close, and industry insiders said that only some medium-sized and large mines continue to operate, but they will also reduce the scale of purchasing mining machines.

This has caused Taiwan's GPU manufacturers' inventories to increase rapidly, and sales prices will return to the level of early 2017. Suppliers may be forced to return to the gaming market, looking forward to resuming growth momentum in the second half of the year.

In April, according to CNBC, Wells Fargo Securities analyst David Wong said that Wells Fargo Securities had significantly lowered its expected earnings for NVIDIA due to "declining demand for GPUs used for mining." At the end of the month, TSMC lowered its revenue forecast for mining chips; in addition, due to the decreasing market demand for mining equipment, Taiwan's Gigabyte Technology Co., Ltd. expects motherboard sales in 2018 to be less than 10 million units.

On the other hand, ASIC supply chain manufacturers are also affected by the bleak mining market. TSMC has revised downward its expectations for Bitmain's ASIC mining chip revenue in 2018.

The road to AI transformation

While GPU manufacturers are able to refocus their efforts on the gaming market, ASIC miners are exploring other revenue streams to offset the decline in demand for mining hardware.

Last July, the Chinese government announced plans to transform China into a leading AI nation by 2030, investing in research and supporting related businesses. Obviously, mining machine companies with chip design and R&D capabilities will be the first to reap the policy dividends.

Bitmain is transforming into artificial intelligence. Bitmain CEO Jihan Wu said in an interview with Fortune magazine that Bitmain is turning to artificial intelligence to seek alternative sources of income. He expressed the hope that in the next five years, the artificial intelligence chips produced by Bitmain will bring 40% of the company's revenue.

Canaan Creative is also looking to the artificial intelligence market to increase profits. Previously, Canaan Creative disclosed that it would be listed on the Hong Kong stock market. The Hong Kong Stock Exchange announcement showed that Canaan Creative's IPO net proceeds would be invested in four projects, the first of which was to develop ASIC chips for artificial intelligence algorithms and applications.