China will remain the most important region for suppliers of optics in 2019-2023


LightCounting has updated its report titled “Market for Optics in China”


Over the last decade, China has had a greater impact on the global optical communications industry than any other country, and in some cases more than all other countries combined. People in China are proud of these achievements and the Chinese government plans to continue leading the rest of the world with fast paced, large-scale infrastructure projects.

The rapid rise of China raised a few “red flags” around the world in 2018. The US government launched a full scale trade war with China. A temporary ban on ZTE in 2018, and the ongoing dispute with Huawei all seem to be part of a larger US government agenda to curb the influence of China on the global economy. The problem is that world economy is so interconnected now, that trade barriers imposed by one country are likely to hurt consumer confidence and businesses globally.

As this report goes to print, Apple and Nvidia are the first large US-based companies reporting significant drops in quarterly revenues because of slower demand in China. Alibaba implemented its first ever cost cutting measures by delaying hiring and restricting travel expenses in anticipation of slower growth in 2019.

Growth in Huawei’s networking businesses slowed down in 2017-2018, but the company set new records in shipments of smartphones, overtaking Apple as the #2 supplier in the world (second only to Samsung).

Huawei’s founder has recently been quoted in the press saying that the trade war has not impacted Huawei’s business in 2018, but the company might face difficulties and challenges (in the future).

Close to 50% of Huawei’s networking business comes from projects abroad, including many contracts with European Communication Service Providers (CSPs). The company recently reported 26 signed contracts with global CSPs for 5G wireless equipment. Security concerns regarding networking equipment manufactured by Huawei and ZTE, raised by the US government, will certainly slow down the international business of these vendors.

New domestic infrastructure projects will keep the Chinese suppliers busy in 2019. China is accelerating deployment of 5G wireless infrastructure and it granted licenses to the three largest CSPs in December 2018. China Mobile plans to start commercial deployments in the second half of 2019 and China Telecom and China Unicom plan to start in early 2020. Domestic 5G deployment will generate large contracts to the Chinese equipment suppliers to offset slower business abroad. It will also boost demand for higher speed optical transceivers, including wireless fronthaul, Ethernet and DWDM modules.

Upgrades of Cloud datacenters in China to 100GbE connectivity started in 2018. These projects along with future deployments of 400GbE will have the most impact on sales of networking equipment, optical components and modules deployed in China over the next 5 years.

The figure below illustrates growth in sales of datacenter equipment for deployments in China. Revenues of Inspur and H3C ramped by 50-100% in 2018. These companies, as well as Huawei, Lenovo and ZTE, are not just selling their products, they also build complete datacenters and often also manage their operations. Local governments fund many of these projects, often in partnerships with Chinese cloud companies and equipment suppliers.

Figure: Annual revenues of H3C and Inspur
Source: Company Financial Reports and LightCounting Estimates.

Will this growth continue in 2019? Initial data on performance of large state-owned companies in China is very impressive: 10% growth in revenues and 15% growth in profits for 2018. However, many smaller private enterprises are struggling and pointing to tightening credit. The Shanghai Stock Exchange Composite Index contracted by 30% in 2018, and the stock prices of Chinese Internet companies plunged more dramatically than the prices of US technology stocks.

Many on-line lenders went bankrupt in 2018, hurting the confidence of investors and consumers. Car sales in China were down sharply at the end of 2018. On-line spending of Chinese consumers increased by 30% in 2018, compared to 100% in 2017. Bankruptcies of web-enabled bike rental companies in China led to huge piles of unused bikes accumulating on the streets and in vacant lots throughout the year, adding to consumer anxiety.

The Chinese government has acted decisively during previous economic slowdowns and it is often credited with pulling not only China, but also the global economy from a recession after the financial crisis of 2008-2009. The government is already increasing infrastructure spending for 2019, including many new subway lines. 5G wireless systems and Cloud datacenters are part of the increased infrastructure spending as well, supporting our projection for the market for optics in China next year.

However, consumer confidence (or lack of it) will have a larger role to play in 2019. Chinese consumers are much more affluent now, with GDP per capita in China doubling over the last decade, and their spending matters a lot more for the economy, including the Cloud services. It is unclear if the government will be able to boost consumer spending as fast as it can re-energize infrastructure projects. This is a new territory for China to explore and for the world to keep an eye on.

The report titled “Market for Optics in China” discusses current and future infrastructure projects of Communication Service Providers (CSPs) and Internet Content Providers (ICPs) in China. It analyses the impact of these projects on the demand for optical networking equipment, optical modules and components. The report also discussed history of optical component and module manufacturing in China and analyses challenges ahead. It includes profiles of the leading Chinese CSPs, ICPs, equipment manufacturers and suppliers of optical component and modules. Appendix C to the report includes a translation of key production goals from the latest Roadmap of Optoelectronics Industry in China. The report includes a companion spreadsheet containing a detailed 8-year history and 5-year forecast for shipments, pricing and sales of optical components deployed in China.

Subscribers can download the report here.

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