LightTrends

 

ECOC 2019: Deals, Tariffs, Silicon Photonics, 400G, Co-Packaged Optics and 5G

 

LightCounting releases a research note on ECOC2019

 

Vendors Feeling Increasing Pressure from US/China Trade War.

In our conversations with companies at ECOC 2019, the 15% tariffs on products made in China shipping to the U.S. that went into effect on September 1 are causing headaches for module vendors with production in China and demand in the U.S. As a result, we’re hearing some vendors are looking to more aggressively move production outside China.�� For example, Innolight, a key supplier to Google, is now exploring production in two facilities outside of China. Shipping in the other direction, some U.S. vendors (like connector companies) are seeing essentially all of their business in China disappear overnight as they struggle with 32% tariffs.

Ultimately, we believe that tariffs are potentially helping to accelerate a trend that began years ago as the cost of labor in China increased and manufacturers went looking for other places where labor remains relatively cheaper. Of course, as the manufacturing process for transceivers has become more automated, the cost of labor has become less relevant. What’s more important is that production (particularly final test and assembly) be completed in a “neutral” location from a trade policy perspective. The U.S./China trade dispute also further reinforces the sense that module makers remain a weak point in the supply chain, further encouraging large customers like the hyperscale public cloud and ICP companies to try to exert more control.

Will the Cisco/Acacia Deal Go Through?

The acquisition of Finisar by II-VI closed on September 24th, allowing II-VI to achieve a new level of scale in the industry and reclaim the crown as the largest optical component vendor in the world (back ahead of Lumentum). However, as a condition of approval, the Chinese trade authority MOFCOM required that II-VI run Finisar’s WSS business separately for three years, robbing II-IV of a potential source of cost synergy.

The approval by China of the other major pending deal in the industry, Cisco’s acquisition of Acacia, seems somewhat in doubt. We’ve heard more than one institutional investor openly question whether China will approve the deal, and with Acacia shares trading at a 6.4% discount to Cisco’s stated cash offer price of $70, capital markets are expressing a less than 100% probability that the deal gets approved and closes. (As an aside, merger-arbitrage investors take this discount and calculate a rate of return by annualizing it to the anticipated closing date, or in this case to some point before July 2019 which is less than one year. In that context, the annualized return expected from holding Acacia shares is well above the “risk-free” rate on treasury bills.

This creates additional uncertainty for current Acacia customers who may or may not want to continue to do business with Acacia once Cisco owns it. It also creates uncertainty for LightCounting as we try and provide forecasts for the merchant DWDM module business; for now, we plan to continue to treat Acacia as a merchant supplier until we know definitively that the deal is closing. Also worth noting ��� while it’s not a pure “optical” deal, approval of the acquisition of Mellanox by Nividia also appears to be in doubt as well, with Mellanox shares trading at a 12.5% discount to the $125 cash offer price.

Wireless fronthaul optics: all options are on the table

Demand for 25G fronthaul optics in China skyrocketed in 2019 and projections for next year are mindboggling. However, there is a lot of uncertainty about the product mix: grey optics, BiDi, CWDM and even DWDM products may see significant demand next year in China and the rest of the world. LightCounting Market Forecast Report, scheduled for publication in the very end of October, will attempt to add clarity to this situation.

In the meantime, the vendors have no choice, but to offer everything on the wish list of their customers. Figure below shows a demo of various solutions for fronthaul optics made by Finisar.


Figure: Wireless Fronthaul Optics demo at Finisar booth

Source: Finisar, photo by LightCounting

A link to the full version of the research note was emailed to LightCounting subscribers. It includes additional sections on co-packaged optics, Infinera’s new products, 400G and Silicon Photonics.

 


About LightCounting Market Research 
LightCounting -- The name alone is what sets us apart and defines us as a company. We are a leading optical communications market research company, offering semi-annual market updates, forecasts, and state-of-the-industry reports based on analysis of primary research with dozens of leading optics component, module, and system vendors, as well as service providers and cloud companies. LightCounting is the optical communications market's source for accurate, detailed and relevant information necessary for doing business in today's highly competitive environment. Register to receive our monthly newsletter: LightCounting.com or connect with us on LinkedIn and Twitter.

Interested in meeting with LightCounting at these upcoming industry events? Email us today to schedule a meeting with our team. View our recently published reports and 2019 Research Roadmap.