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Abstract

Impact made by China on the Global Optical Communications Industry over the last decade is remarkable. Increasing investments in networking infrastructure helped to sustain the global telecom industry during the downturns of 2001-2003 and 2008-2009. Success of Huawei and ZTE has transformed the landscape of the networking equipment market. Significant portion of manufacturing of optical component and modules has been moved to China after the telecom crash of 2001 and helped to foster numerous domestic suppliers. This report offers analysis of challenges and opportunities for Chinese service providers, equipment manufacturers and optical component and module vendors. It also includes profiles of major optical communication equipment, module and component vendors based in China.

, Impact made by China on the Global Optical Communications Industry over the last decade is remarkable. Increasing investments in networking infrastructure helped to sustain the global telecom industry during the downturns of 2001-2003 and 2008-2009. Success of Huawei and ZTE has transformed the landscape of the networking equipment market. Significant portion of manufacturing of optical component and modules has been moved to China after the telecom crash of 2001 and helped to foster numerous domestic suppliers. This report offers analysis of challenges and opportunities for Chinese service providers, equipment manufacturers and optical component and module vendors. It also includes profiles of major optical communication equipment, module and component vendors based in China.

, It is hard to underestimate the impact made by China on the global optical communications industry over the last decade. Rapid industrial development of the country spearheaded by the Chinese government affected many global industries, and the optical communications industry is no exception.
China’s impact is observable across the whole supply chain of the industry:

The Chinese government maintained steadily increasing levels of investment into optical networking over the last decade, while similar projects in many western countries were subjected to delays during economic downturns in 2001–2003 and 2008–2009. After significant increases in capital expenditures (capex) of three major service providers in China in 2008–2009, capex has declined by 13% in 2010, as the government tries to slow down growth of the economy. However, continuing investments in networking infrastructure remain on the top of government agenda. The government budgeted almost $60 billion for deployment of wireless systems in 2011–2012 and $22 billion for new fiber optic networks in 2011–2013. While the total capex allocated for 2011-2013 is almost equal to investments made in 2010, larger fraction of capex is allocated for the latest generations of wireless and broadband access systems
As the national network system becomes mature, slowdown in networking infrastructure deployments in China is inevitable. However, progress made by China sets an example for a number of emerging economies that are likely to increase investments in networking infrastructure as their economies develop. Recognizing this trend, Chinese equipment manufacturers, lead by Huawei, are increasing focus on these developing economies that are prime for growth.

Huawei is certainly one of the great success stories in the telecom equipment market. Huawei displaced Alcatel-Lucent in the number-one position in optical networking two years ago, and it is likely to surpass Ericsson as the largest supplier of wireline and wireless equipment this year. Despite the phenomenal growth in Huawei’s business, there are certainly limits to how dominant any company can become. Mature markets are usually dominated by three major players, creating a stable environment where coalition of two out of the three is strong enough to block any predatory intentions that the third might have. This suggests that ZTE and FiberHome are likely to gain share in the domestic market and that Alcatel-Lucent and Ericsson should be able to limit Huawei’s dominance on a global scale.

Local suppliers of optical components and modules used in communication networks have directly benefited from domestic infrastructure projects and growing global presence of Chinese equipment manufacturers such as Huawei and ZTE. However, Chinese optical component and module vendors remain smaller than western competitors. Continuing dominance of the western component and module suppliers is supported by their extensive manufacturing facilities in China, making their manufacturing cost comparable to Chinese vendors.  The western companies have also an advantage in global presence, while Chinese suppliers are mostly selling into domestic market despite their efforts to increase global presence. Limited sales of Chinese suppliers to the datacom market segment further limit their business growth. Building a solid intellectual property base and catching up with competition in 10 Gbps and 40 Gbps technologies are among many challenges faced by the local manufacturers or optical component and modules.

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Executive Summary

It is hard to underestimate the impact made by China on the global optical communications industry over the last decade. Rapid industrial development of the country spearheaded by the Chinese government affected many global industries, and the optical communications industry is no exception.
China’s impact is observable across the whole supply chain of the industry:

The Chinese government maintained steadily increasing levels of investment into optical networking over the last decade, while similar projects in many western countries were subjected to delays during economic downturns in 2001–2003 and 2008–2009. After significant increases in capital expenditures (capex) of three major service providers in China in 2008–2009, capex has declined by 13% in 2010, as the government tries to slow down growth of the economy. However, continuing investments in networking infrastructure remain on the top of government agenda. The government budgeted almost $60 billion for deployment of wireless systems in 2011–2012 and $22 billion for new fiber optic networks in 2011–2013. While the total capex allocated for 2011-2013 is almost equal to investments made in 2010, larger fraction of capex is allocated for the latest generations of wireless and broadband access systems
As the national network system becomes mature, slowdown in networking infrastructure deployments in China is inevitable. However, progress made by China sets an example for a number of emerging economies that are likely to increase investments in networking infrastructure as their economies develop. Recognizing this trend, Chinese equipment manufacturers, lead by Huawei, are increasing focus on these developing economies that are prime for growth.

Huawei is certainly one of the great success stories in the telecom equipment market. Huawei displaced Alcatel-Lucent in the number-one position in optical networking two years ago, and it is likely to surpass Ericsson as the largest supplier of wireline and wireless equipment this year. Despite the phenomenal growth in Huawei’s business, there are certainly limits to how dominant any company can become. Mature markets are usually dominated by three major players, creating a stable environment where coalition of two out of the three is strong enough to block any predatory intentions that the third might have. This suggests that ZTE and FiberHome are likely to gain share in the domestic market and that Alcatel-Lucent and Ericsson should be able to limit Huawei’s dominance on a global scale.

Local suppliers of optical components and modules used in communication networks have directly benefited from domestic infrastructure projects and growing global presence of Chinese equipment manufacturers such as Huawei and ZTE. However, Chinese optical component and module vendors remain smaller than western competitors. Continuing dominance of the western component and module suppliers is supported by their extensive manufacturing facilities in China, making their manufacturing cost comparable to Chinese vendors.  The western companies have also an advantage in global presence, while Chinese suppliers are mostly selling into domestic market despite their efforts to increase global presence. Limited sales of Chinese suppliers to the datacom market segment further limit their business growth. Building a solid intellectual property base and catching up with competition in 10 Gbps and 40 Gbps technologies are among many challenges faced by the local manufacturers or optical component and modules.

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Table of Contents

• Abstract
• Executive Summary
• Telecom Infrastructure Deployments in China

  • Restructuring of Service Providers
  • Continuing Infrastructure Upgrades
• The Rise of Domestic Communications Equipment Vendors

  • Huawei Becomes the Dominant Global Telecom Equipment Vendor
  • ZTE, Already Strong in Emerging Markets, Plans to Expand into North America and Western Europe
  • Fiberhome, a full-line equipment supplier, is growing
  • Alcatel Lucent Shanghai Bell was the first foreign invested company in China's telecom market
  • Other Domestic Equipment Vendors
• The Emergence of Optical Component and Module Suppliers

  • Emergence of Local Suppliers
  • Western Companies Move Production to China
• Challenges and Opportunities Ahead

  • Service Provider Business and Infrastructure Projects
  • Networking Equipment Manufacturers
  • Optical Component and Module Vendors
• Optical Component and Module Vendor Profiles

  • Accelink
  • ATOP Technology
  • Eoptolink Technology
  • Gigalight
  • HG Genuine
  • Hi-Optel
  • HiSense Broadband
  • Hymax Optoelectronics, Inc
  • Innolight
  • O-Net
  • StarOpto
  • Sunstar Communication Technology
  • WTD
  • Wuxi-ZTE
  • Xiamen San-u Opto-electronic Technology
• Appendix A: Revenues of the Top 10 Chinese Optical Component and Module Vendors

Figures

• Figure 1: Number of Broadband and Mobile Customers by Service Provider, as of September 2010
• Figure 2: Trends in Capital Expenditures of Major Service Providers by Region
• Figure 3: Revenues of Leading Suppliers of Networking Equipment
• Figure 4: Growth in ZTE Revenues
• Figure 5: Market Shares on Chinese Networking Equipment Vendors (as of June 2010)
• Figure 6: Sales of the Top Eight Chinese Optical Component and Modules Suppliers
• Figure 7: Annual Revenues of Accelink, Finisar, Opnext and WTD
• Figure 8: Revenues of NeoPhotonics and Source Photonics
• Figure 9: Size of Telecom and Datacom Transceiver Markets

Tables

• Table 1: Presence of Leading Optical Component and Module Vendors in China
• Table 2: Number of Patents Related to Transceiver Modules Owned by Western and Chinese Vendors
• Appendix A : Revenues of top 10 Chinese Optical Component and Module Vendors

Companies Mentioned

• 3COM
• Accelink
• Alcatel-Lucent
• Alcatel Lucent Shanghai Bell
• Amerilink
• Amoi
• ATop Technology
• Avago
• Bell Canada
• Benchmark Electronics, Inc.
• Celestica
• China Mobile
• China Netcom
• China-Singapore Suzhou Industrial Park Venture Capital
• China Telecom
• China Tietong
• China Unicom
• Cisco
• Clearwire
• Cox Communications
• Crowin Venture Capital
• Datang Group
• Emcore
• Eoptolink
• Ericsson
• Fabrinet
• FiberHome Telecommunications Technologies Co., Ltd. including: W
  • • Wuhan FiberHome Networks Co. Ltd.
    • Wuhan Hongxin Communication Technologies Co., Ltd.
    • Beijing Northern FiberHome Technologies Co., Ltd.
    • Wuhan FiberHome Mobile Communication Inc.
    • Wuhan FiberHome International Technologies Co., Ltd.
    • Nanjing FiberHome Fujikura Optical Communication Ltd.
• Fiberxon
• Finisar
• Flextronics
• Francisco Partners
• Futong Group
• Gigalight
• HG Geniune
• Hengtong Group
• Hi-Optel
• HiSense
• Hon Hai Precision Industry Co., Ltd.
• Huawei
• Hymax Optoelectronics
• Innolight
• JDSU
• Jiangsu Qianrong Ventures
• Kejan
• Konka Group Company
• MRV Communications
• NeoPhotonics
• Neton
• Ningbo Bird Company
• Nokia Siemens Networks
• Nortel
• Oclaro
• O-Net
• Oplink
• Opnext
• Optimus
• Photon Technology
• SAE Magnetics (HK) Ltd.
• Sanmina-SCI Corporation
• SEI
• Sequoia Capital
• Shenzhen Capital Group Suzhou Guofa Innovation Ventures
• Solorein
• Source Photonics
• Sprint Nextel
• Staropto
• Sumitomo Electric (SEI)
• Sunstar Communications
• Superxon
• Tellabs
• Telus
• Venture Corporation Limited
• WTD
• Wuxi-ZTE
• Xiamen San-u Opto-Electronic Technology
• ZTE