Recently, LightCounting, a well-known market research organization in the field of optical communications, released the latest market report. LightCounting pointed out that the optical device and module industry over the past 20 years has provided a typical example of how globalization can fundamentally change a market in just 10 or 20 years.
It all started in 2001, the year China officially became a member of the World Trade Organization, and Western suppliers began to move some production lines to China. With the bursting of the Internet bubble, from 2001 to 2003, the demand for optical components used in the telecommunications industry dropped sharply, resulting in excess demand and plummeting prices. Therefore, moving production to China is the best option for suppliers to reduce costs and maintain their livelihoods.
Shortly thereafter, local Chinese companies quickly learned from Western companies and started replicating the manufacture of optical components and modules. By 2010, sales of Chinese optical component suppliers exceeded $500 million, grew to $3 billion in 2018, and declined slightly in 2019, as shown in the chart below.
▲ Figure: Sales of China’s top ten and non-China seven optical device suppliers
At the same time, LightCounting believes that the drop in sales to Chinese suppliers last year has nothing to do with U.S. tariffs on Chinese-made products. The decrease was mainly due to the decline in sales of companies such as InnoLight to major cloud service companies, which reduced their purchases of high-speed Ethernet optical modules from the end of 2018 to the beginning of 2019.
In addition, LightCounting pointed out that U.S. high-speed Ethernet optical module suppliers were also affected by weak market demand in 2019. Still, total revenue for the top seven non-Chinese optical component suppliers grew by 3% in 2019 on the back of strong demand for wavelength selective switches (WSS). It is understood that WSS is one of the few products that has not yet been produced by a wholly Chinese-owned company. In addition, strong demand for pump lasers for optical amplifiers also helped underpin the business of II-VI and Lumentum in 2017-2019.
In addition to the recovery in high-speed optical components market demand, several Chinese suppliers are expected to report record revenue in 2020 due to very strong demand for fronthaul optical components needed to support 5G deployments in China. In addition, as demand for WSS modules, amplifiers and pump lasers begins to slow, if this trend continues, Chinese suppliers will account for more than 50% of the total market revenue by 2020.
Until 2018, Finisar has been the world’s largest supplier of optical modules, and may remain the first in 2019 (currently, Finisar has been acquired by II-VI), but this situation may change, InnoLight may Take the number one spot in 2020. If this happens, an era ruled by Finisar is coming to an end. At the same time, it will also be the first time that five Chinese companies will enter the top ten in the world at the same time. According to LightCounting, HGZ and EOS will set a sales record for fronthaul optical modules in 2020 and enter the top ten for the first time. Accelerator and Hisense Broadband will also achieve good results in 2020 and maintain a high ranking.
LightCounting noted that the ranking is based on optical module sales and excludes WSS modules and other products that account for the majority of II-VI and Lumentum’s revenue.
In addition, LightCounting said that with Cisco’s imminent acquisition of Acacia, the restructuring of Broadcom and Avago’s optical module business, and Intel’s success in the 100GbE optical module market, II-VI and Lumentum will be the only two Western optical components in the top ten list. supplier. Broadcom, Cisco, and Intel are able to spend massive amounts of money on R&D, which is more than all the other vendors in the top ten combined. In addition, Huawei began to produce more optical components in-house. Ciena, Fiberhome, Infinera and ZTE also plan to manufacture coherent DWDM modules in-house. This will lead to increased competition in a very crowded market.
Twenty-five years ago, most components for optical communications were produced by network equipment suppliers, including Alcatel, Lucent, Marconi, Nortel and a few others. These companies, which stopped producing optical components in the late 1990s, appear to be “returning” to system equipment manufacturers and ASIC manufacturers. LightCounting said that high-speed optical communication technology has become the most important technology in the innovation of switches, routers and transmission equipment, which is why the leading suppliers of these products are bringing optical components in-house. However, there is still plenty of market space left for suppliers of optical modules and other components for truly high-volume and low-cost applications. This is where Chinese suppliers are likely to lead the industry, and we will see more signs in 2020.