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An eventful week for the end of July: Infinera acquires Coriant as ZTE goes back to work

LightCounting analyzes the impact of these developments on the optical networking equipment and modules markets

This was a busy and important week for the optical networking market. ZTE is finally back in business putting to rest speculation about its potential bankruptcy. There will be no free lunch for its competitors and they will have to find other ways to gain market share. Coincidentally, Infinera just made a bold move in this direction by announcing its acquisition of Coriant. Both companies were struggling to reach profitability. Can they find a solution by joining forces?

ZTE suspended operations in early May 2018, soon after the U.S. government imposed a ban on sales of U.S.-made product to ZTE. Getting back into the swing of business after a 3-month interruption will probably take another 3 months. The majority of ZTE customers are very likely to delay their projects and wait for ZTE to recover, but it is also likely that at least some of the ZTE customers will turn to other suppliers. More than 75% of ZTE’s revenue from optical networking equipment came from China in 2017 and these customers are likely to stay with ZTE. The company’s international business will be more impacted by the ban, but increasing anti-American sentiment around the world plays in ZTE’s favor. ZTE will probably make only 50% of sales planned for 2018 and lose half of its market share this year, but it will regain most of the losses in 2019.

ZTE held a steady 11% market share (measured in terms of shipments of 100G DWDM port equivalents) in Q1 2018 – the same as for the whole year of 2017. Their market share will probably decline to 5-6% in 2018, leaving the remaining 5-6% for its competition to share. The combined market share of Infinera and Coriant was 10% in Q1 2018 – on par with Nokia and with Cisco. These vendors will compete for the #3 position in the global optical networking market, while ZTE is recovering.

This market is not truly global since Huawei and ZTE are not doing business in the U.S., while Ciena and Infinera are not selling products to China. Coriant did some business in China and Infinera will have to decide on whether to change their policy. Apart from China and the U.S., however, all the vendors compete freely. Consolidation among these suppliers is long overdue. Intense competition led to very steep price declines in 2016-2017, with Coriant offering the most aggressive pricing to gain market share.

Infinera’s target for $250 million in saving from operating synergies and vertical integration of Coriant’s products suggests a very aggressive schedule for transitioning from Acacia’s and Elenion’s optics to internally made InP PICs. Timely implementation of this plan will be critical for Infinera’s success. This market is brutal and falling behind the schedule may be deadly. The risk is high, but the reward of reaching a larger scale and further lowering the cost of Infinera’s PIC-based products is well worth it.

Increasing vertical integration of equipment vendors is a bad news for suppliers of optical components and modules. LightCounting estimates that Coriant was the second largest consumer of pluggable 100G DWDM DCO transponders in 2017 (ZTE was #1). Moving Coriant’s products onto Infinera’s PIC platform would make a significant dent in the merchant market for pluggable DWDM modules.

ZTE started prioritizing internal development of high-speed coherent solutions a few years ago and the latest ban added urgency to this transition. Huawei and Ciena already rely heavily on internally designed optics. Huawei makes pluggable DCO modules based on internally sourced silicon photonics technology and Ciena may do the same. Cisco and Juniper also have silicon photonics expertise in house. This is not good news, not only for suppliers of modules, but also for suppliers of LiNbO3 modulators and coherent receivers, as was discussed in the latest Market Forecast report.

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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.