A new report from LightCounting finds that the last 20 years of the optical component and module industry offer a case study of how globalisation can radically change a market in just a decade or two. The market analysis firms says it started in 2001 when China became a member of the World Trade Organisation and western suppliers started to relocate manufacturing of optical components to China. Demand for optics used in communications dropped sharply in 2001-2003 after the telecom bubble burst. Too many suppliers were left fighting for whatever was left of the market and prices plunged. Moving production to China was the best option for suppliers to reduce cost and stay afloat.
Subsequently, it did not take long for local businesses in China to form and start replicating the manufacturing of optical components and modules, learning from the western companies. By 2010, sales of Chinese suppliers of optics exceeded US$500 million and grew to US$3 billion by 2018, prior to declining slightly in 2019, as illustrated in the figure below.
Sales of Top 10 Chinese and Top 7 non-Chinese suppliers of optical components and modules.
LightCounting says however that the US government cannot take credit for reversing the trend by imposing import tariffs on products made in China. It says the decline in sales of Chinese suppliers last year had little to do with the tariffs. The bulk of the decrease was due to lower sales by Innolight to the major Cloud companies, who reduced purchases of high-speed Ethernet transceivers in late 2018 – early 2019. By September 2019, when the US government imposed a 15% import tariff on optical transceivers made in China, Innolight’s sales to the Cloud companies had started to pick up and the company is projected to report record sales in the last quarter of 2019. The tariff on transceivers was reduced from 15% to 7.5% in January 2020, and was completely cancelled out by the lower value of the Chinese currency now.
The US-based suppliers of high-speed Ethernet transceivers were also impacted by weaker demand for high speed Ethernet modules in 2019. However, combined revenues of the Top 7 non-Chinese suppliers of optics increased by 3% in 2019, driven by stronger demand for Wavelength Selective Switches (WSS) – one of a few products not currently manufactured by a Chinese owned company. Strong demand for pump lasers used in optical amplifiers also helped to sustain the business of II-VI Photonics and Lumentum in 2017-2019 – the two largest non-Chinese suppliers.
In addition to recovery in demand for high speed optics, Innolight and several other Chinese suppliers are projected to report record revenues in 2020 because of the extremely strong demand for fronthaul optics needed to support 5G deployments in China. None of the western suppliers are likely to ship transceivers for this application in China. Demand for WSS modules, amplifiers and pump lasers is starting to moderate now and if this trend continues, revenues of the Chinese suppliers will account for more than 50% of the total market in 2020.
It should be noted however, that data presented in the figure above is based on publicly reported financials, but the report also includes ranking of the Top 10 transceiver suppliers in the global market, based on transceiver sales data collected by LightCounting, but in order to protect the confidentiality of this data, it does not report the actual market shares.
LightCounting says Finisar was the largest transceiver supplier in 2018 and all the years before that. Finisar, as part of II-VI Photonics, is likely to remain number 1 in 2019, but there is a good chance that Innolight will take the number 1 position in 2020. If this happens, this will be the end on an era dominated by Finisar. This will be also the first time for having 5 Chinese companies on the Top 10 list. HG Genuine and Eoptolink are projected to set new records in 2020 on sales of fronthaul optics and join the Top 10 list for the first time. Accelink and Hisense are likely to do well in 2020 and maintain their high rankings. It is important to note however, that this ranking is based on sales of optical transceivers only. It excludes WSS modules and other products that account for significant part of revenues of II-VI Photonics and Lumentum.
With Cisco’s pending acquisition of Acacia, Broadcom’s reunion with Avago’s transceiver business and Intel’s success in 100GbE transceiver market, II-VI Photonics and Lumentum will be the only two western transceiver suppliers on the Top 10 list. Broadcom, Cisco and Intel can invest a lot more into the development of new optical technologies than all other vendors on the Top 10 list combined. Huawei is starting to make more optical transceivers internally and it may need to be added to the list in a year or two. Ciena, FiberHome, Infinera, ZTE also plan to make coherent DWDM modules internally, intensifying competition in a very crowded market.
25 years ago, most of the components for optical communications were made by suppliers of networking equipment: Alcatel, Lucent, Marconi, Nortel and a few others. These companies spun off their optical component manufacturing in late 1990’s, but it seems that the optics is “coming back home” to the equipment suppliers and switch ASIC vendors now. High speed optics emerged as the most important technology for innovation in switches, routers and transport equipment and this is why the leading suppliers of these products are bringing the optical manufacturing in house. However, there will be plenty of room left for merchant suppliers of optical transceivers and other components for really high volume and low-cost applications. This is where the Chinese suppliers are likely to take the lead and we will see more signs of it in 2020.
LightCounting’s “Market for Optics in China” report discusses current and future infrastructure projects of CSPs and ICPs in China. It analyses the impact of these projects on the demand for optical networking equipment, optical modules and components. It includes profiles of the leading Chinese CSPs, ICPs, equipment manufacturers and suppliers of optical components and modules. The report also includes a companion spreadsheet containing a detailed 5-year history and 5-year forecast for shipments, pricing and sales of optical components deployed in China and compares those with the global market for these products.