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Demand for optics in the cloud will lead the market’s growth in 2018-2023

LightCounting releases Optical Communications Market Forecast Report

God bless the Cloud! It pulled the optical components market from a ditch last year and it is likely to do it again in 2018. Demand for 100GbE transceivers from operators of mega datacenters in the United States remains strong and cloud companies in China are starting to deploy this technology as well. We expect that sales for 400GbE optics will expand the Cloud market segment (including Cloud in China) from about $2 billion in 2017 to more than $6 billion in 2023, as illustrated in the figure below.

Global sales of optical transceivers by application

 Source: LightCounting

Decline in the rest of the market in 2017 was mainly due to weaker than expected sales of optics to Huawei and ZTE, including optics sold for deployments in China (also shown in the figure as China- Telecom only). Suppliers of optical components and modules first reported sharp drops in sales to these customers in March of 2017 and this was related to excess inventory accumulated by Huawei and ZTE in 2016. Most of the excess inventory was depleted by the end of 2017, but suppliers continue to report slower than expected business with these Chinese customers. The latest ban on sales of US-made products to ZTE creates even more confusion in the market.

As this report goes to print, new information emerges on a criminal investigation of Huawei launched by the US Justice Department, related to a possible violation of export sanctions against Iran. The same crime that ZTE was convinced of. On a far more positive note, top-ranking US government officials are heading to Beijing to attempt to resolve the trade disputes. It is certain that ZTE’s and Huawei’s situation will be among the bargaining chips on the table, along with Qualcomm’s acquisition of NXP, which needs to be approved by China.

In the best case scenario, the ZTE ban will be lifted in a matter of weeks and the markets will go back to normal. In case of a prolonged trade war, sales of optics by  US-based companies to ZTE and potentially Huawei will drop sharply in 2018. This will do more damage to the business of the US-based suppliers than to Huawei and ZTE. The Chinese government will certainly help Huawei and ZTE to stay in business while dealing with disruptions in their supply chains, but none of the US-based optics suppliers are “too big to fail”.

Our current forecast for sales of optics to China in 2018 assumes the best case scenario for resolving the situation with Huawei and ZTE, which account for about 50% of the global sales of telecom optical networking equipment. Needless to say, sales of optics used in telecom equipment will drop sharply in 2018 in case of a prolonged trade war, as many projects will be delayed.

However, our long term market forecast is unlikely to change. Both Huawei and ZTE embarked on a long-term strategy for reducing their dependence on Western optics suppliers several years ago. This strategy was elevated to the governmental level in 2017 and early 2018, the latest escalation of trade disputes by the US government only adds further urgency to this transition.

Huawei is already making a lot of optics internally and ZTE is starting to catch up. Our forecast for 2019-2023 assumes that these companies will make most of their high-end optics, including DWDM components and modules, in house. However, there will be opportunities for suppliers of DWDM modules to do business with Huawei and ZTE. For example, future products like 400ZR. LightCounting projects that shipments of 400ZR will exceed 100,000 units by 2022 – much higher than any other coherent DWDM product on the market today. Merchant suppliers of modules shipped in such volumes should be able reach higher scale and lower cost, compared to internally made products even within large companies such as Huawei.

This report provides a detailed market demand forecast through 2023 for optical components and modules used in Ethernet, Fibre Channel, SONET/SDH, CWDM/DWDM, wireless infrastructure, FTTx, and high-performance computing (HPC) applications.

Key inputs include an analysis of the business and infrastructure spending of the top 15 service providers and leading Internet companies, and sales data from 2010 to 2017 for more than 30 transceiver vendors, including more than 20 vendors that shared their confidential sales information with LightCounting. The forecast is based on LightCounting’s proprietary forecast model, which correlates transceiver sales with network traffic growth and the projected deployments of LTE and FTTx systems for broadband access.

LightCounting is also grateful to many industry experts for their critical review of the forecast projections.
More information on the report is available at: https://www.lightcounting.com/Forecast.cfm



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ABOUT LIGHTCOUNTING MARKET RESEARCH

LightCounting is a leading optical communications market research company, offering semiannual market updates, forecasts, and state-of-the-industry reports based on its analysis of primary research with dozens of leading module, component, and system vendors as well as service providers and other users. LightCounting is the optical communications market’s first choice source for the accurate, detailed, and relevant information necessary for doing business in today’s highly competitive environment. For more information, visit: www.LightCounting.com or follow us on Twitter at @LightCounting.