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Dialogue with Sales Director of Avalonminer: How Miner Manufacturers Survive the Winter Smoothly

Abstract : Recently, Chen Feng, Sales Director of Avalonminer gave an exclusive interview to ChainDD and discussed issues such as the sales performance of miners manufactured by Canaan Inc. in 2018, the current state and development prediction of the whole miner industry, sales strategies in the bear market, the company's IPO and AI transition, and layoffs in the blockchain industry.

ChainDD
ChainDD

Jan 14

In the final week of 2018, in retrospection, the news of three large mining companies submitting applications to be listed on the Hong Kong Stock Exchange was definitely a hot story.

The application of Canaan Inc, the earliest miner manufacturer to have filed the application to the Hong Kong Stock Exchange, lapsed in November 2018. Doubts by the Hong Kong Stock Exchange about Canaan's mode of operation and its prospect linger in the market.

However, Chen Feng, Sales Director of Avalonminer told ChainDD App, “Even though the first application for listing lapsed, we are still in the process of application and being listed is our primary objective.”

In December 2018, at the first Global Consensus Security Industry Summit held in Wuhan, Chen Feng gave an exclusive interview to ChainDD App, and discussed issues such as the sales performance of miners manufactured by Canaan Inc. in 2018, the current state and development prediction of the whole miner industry, sales strategies in the bear market, the company's IPO and AI transition, and layoffs in the blockchain industry.

Chen Feng revealed, “A couple of years ago, we stored up enough 'ammunition' so the company is resilient now. If the bear market goes on for three years, it is not a problem. After all, the cost is quite low and we are also doing business in the field of AI chips and other investments.”

Commenting on the doubt about miner manufacturers' transition into the AI field, Chen Feng replied that, “We have to tread 'this path' since the influence of market fluctuation is too great on bitcoin miners but AI is not under such influence. Currently, we are only involved in a small section of AI and will use it as our entry point into the business of AI chips. Actually BitMain is pursuing the same strategy.”

He further explained that, “Within a short period of time, same high return generated from bitcoin miners is practically impossible. However, in the next one or two years, it is possible to generate 30% of the total operating revenue from AI chips.”

Following is the transcript of the dialogue, edited by the ChainDD Editor:

1. How did Canaan Inc. perform in sales in 2018? Was most of the sales concentrated in the first half of the year?

Chen Feng: In 2017, our net profit was 360 million RMB Yuan and this year, it is approximately 700 to 800 million Yuan. In general, our sales this year is satisfactory. Due to the BCH hard fork battle earlier on, domestically, only Antminer and we have sufficiently large stock. This year, clients are mainly from Russia, North America and Central Asian regions. Thus, shipment of miners increased a lot compared to last year.

Overall profit was concentrated in the first half of the year, In the third quarter, we were operating at break-even. In fact, our sales target this year was 10 billion RMB Yuan but we didn't achieve that.

If the market condition had not been this bad, we would have succeeded since our sales in the first half of the year was close to 5 billion Yuan already. So it is really impossible to predict the “bear market”. Right now, for most miner manufacturers, survival is good enough.

2. What miners do you sell right now? What kind of adjustment will Canaan adopt in response to the bear market?

Chen Feng: We currently sell two miners: A851 and A911. Actually our stock is quite low. Our pressure is relatively low in comparison to our peers.

To cope with the bear market, our measures involve mainly two aspects, namely “increasing income and reducing expenditure”. “Increasing income”means selling stock for cash since “miners”need to be upgraded and nobody knows when the market condition will improve. It is better to convert the stock to cash than leave them in the warehouse and wait for better times.

“Reducing expenditure”doesn't mean layoffs. We have approximately 400 employees, including the staff working for our factory, not really a large workforce. Since the overall income of the blockchain industry is slightly higher, we may perform optimization of the salary structure or the staff. For example, formerly it took “three men”to do “one man's work”and now, it will take “one man”to do “one man's work”. To be honest, as long as we have our core team, there will be opportunities.

Therefore, overall, our ammunition saved from the previous two years is sufficient to last. If the bear market goes on for three years, it is not a problem. After all, the cost is quite low and we are also doing business in the field of AI chips and other investments.”

3.  How will the development of the coin circle look next? Who are the potential users of miners in the bear market?

Chen Feng: Recently, we hear many people say, “We don't want to play the game any more. We've lost confidence.” I believe the coin circle will continue to enjoy a healthy development, since mining is at the forefront of the whole industry. Those who are complaining that it is impossible to go on are speculators.

Next, maybe there won't be such “exorbitant profit”in the bitcoin mining industry, just like the traditional internet and real-estate industries, which also enjoyed exorbitant profit in the early days but later their profitability slowly turned more rational. The market condition of digital currencies last year was not rational. However, in comparison to traditional industries, the coin circle may still enjoy better profitability. The maximum net profit of traditional industries will not exceed 10%, usually between 5% and 10%.

Therefore, many traditional enterprise clients are entering the coin circle, such as businesses in real-estate or in the real economy. Their investment is usually between one and five million RMB Yuan, just for testing the water. After all, they don't really know the industry. For traditional enterprise clients, the cost of miners is quite low. The period of return of traditional funds is five years. So, these clients are satisfied if the return period is one or two years. Of course, we have also supporting plans to provide resources for miners and mining sites, and complete after sales services.

4. This year, three large miner manufacturers planned for IPO but nothing materialized and there is now no news about these IPO applications. What in your opinion is the most important reason? Is it because of the bad market condition or lack of acceptance by the traditional capital market?

Chen Feng: The main reason is that the mining industry hasn't gained wide recognition. When we started our application, the market condition was relatively good and profitability was presentable.

However, for Hong Kong's capital market, “sustainable profitability”is of more importance and our industry is under too much influence of market fluctuation. In the third and fourth quarters we could only operate at break even.

In addition, the revenue models of these several miner manufacturers suffer the problem of lack of variety and therefore, we are in the process of AI transition. We released our Canaan K210 chip this September and it is already in mass production. People can find it on Taobao. So even though our first application already lapsed, we are still in the process of application and being listed is our primary objective.

5. Compared with enterprises such as Cambricon and Cisco, bitcoin miner manufacturers are late comers in the AI field. How do you see market's doubt about these mining companies' transition?

Chen Feng: We will definitely not be able to compete against companies like Cambricon if we do engage in full-scale competition. Many traditional manufacturers are only involved in a small segment on the industry chain. However, they run some very large businesses.

Therefore, what we are doing now maybe only touches on a small section and we will use it as our entry point to break into the market of AI chips. Actually, BitMain is pursuing the same strategy and we are seeing hope.

For miner manufacturers, this “path” is inevitable since the influence of market fluctuation is too great on bitcoin miners but AI is not under such influence. Within a short period of time, same high return generated from bitcoin miners is practically impossible.

However, in the next one or two years, it is possible to generate 30% of the total operating revenue from AI chips.

It is usually difficult at the beginning. When we started our mining business, it was really hard. However, profits will increase more and more when we enter the AI field comprehensively.

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