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Ciena – A Western Alternative to Huawei and ZTE

LightCounting Reports from Ciena’s Analyst Day

 

Ciena’s financial performance might have been overshadowed by success of Huawei and ZTE, but the company has been reporting steadily growing revenues for several years now. Ciena exceeded $2 billion in annual revenues back in 2013 and it is on target to reach close to $3 billion this year.

New business opportunities with leading Internet Content Providers (ICPs) deploying optical networking systems certainly contributed to Ciena’s success, but it remains a small part (only about 10%) of Ciena’s direct business.  The Company estimates that another 5% to 10% is through carrier managed services. “Spending of ICPs on optical networking contracted in 2017,” commented James Frodsham - SVP & Chief Strategy Officer at Ciena. “Price per port compression is greater than the bandwidth increase”.

Optical networking equipment sales growth has been mostly driven by demand from China – a country that Ciena does not sell to. Excluding sales to China, the market for optical networking equipment was flat in 2014-2016 and is projected to decline by 5% in 2017. Yet, Ciena’s annual revenues are likely to grow by about 7% this fiscal year. The company is clearly gaining market share in a very competitive environment, as detailed in our latest Quarterly Market Update Report.

Are there too many companies in the optical networking market?

A well-developed market typically includes 3 large vendors, with combined market share of at least 80%, and several small vendors, chasing niche opportunities too difficult for the larger companies to keep track of. The global optical networking market clearly does not have this structure, at least not yet.

One problem is that the global market for optical networking is fragmented by government policies. China is effectively a closed market, where FiberHome, Huawei and ZTE are given preferential treatment. The US market is closed for these Chinese suppliers. Free competition exists only outside of China and the US, but it is not an even playing field. The Chinese government offers direct financing of infrastructure projects in many countries and often uses indirect incentives for doing business with Chinese suppliers. Huawei and ZTE offer very aggressive pricing, limiting opportunities for other vendors. Many of these vendors are clinging to the US market, where Huawei and ZTE are not competing.

It is unlikely that 3 dominant global vendors can emerge in this situation. A more realistic market landscape would consist of 3 vendors dominating the Chinese market and another 3 vendors controlling the US market. Three of these six vendors may have leading positions in the rest of the world, unless we see new barriers protecting domestic suppliers.

Are we converging on this model? The leaders in the Chinese market are well defined. Ciena and Cisco are doing well in the US, while Coriant, Fujitsu, Infinera and Nokia are competing for the remaining place among the top 3. Juniper added optical transport capabilities with its acquisition of BTI Systems in 2016. Huawei and ZTE gained share in the rest of the world, but some feel that there must be limits to their influence.

A well needed western alternative.

Ciena and Nokia are doing good business in India now, which has finally started upgrading optical networking infrastructure after many years of delays. Huawei and ZTE were not able to secure large contracts there because of geopolitical concerns. Relations between India and China are tense. Both countries are making efforts to expand trade, but the government in India is not comfortable with Chinese vendors building their optical networks.

Potential security concerns stimulate emergence of domestic networking equipment suppliers in India and other countries. Tejas Networks is still small, but the company reported a 50% increase in Q2 2017 revenues. The Russian government introduced a policy for encouraging domestic suppliers of networking equipment in 2016. IPG Photonics – a major US based supplier of high power fiber lasers, founded by a Russian engineer – expanded their business to provide optical networking solutions in Russia. Padtec – a vendor based in Brazil does good business in this country and in the Latin American region.

Gary Smith, CEO of Ciena, talked a lot about the strength of the Chinese vendors and influence on Ciena and the rest of the market, particularly the smaller vendors that are attempting to catch up. Given the current state of the industry he feels that Ciena is best-positioned to be the western alternative in countries concerned about the growing influence of China.

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