Assessing the damage of ZTE ban
LightCounting releases June 2018 Quarterly Market Update Report
ZTE became an early casualty of the unfolding trade war. The company was denied access to all U.S.-made products and technologies in April 2018 and the denial order remains in force as this report goes to print.
This situation is worrisome for all companies in the optical networking industry, but ZTE and its suppliers are the ones taking a direct hit in Q2 2018. ZTE is the second largest supplier of optical networking equipment in the world and probably the number one consumer of telecom optical transceivers, since Huawei makes a lot of its own in house.
LightCounting estimates that sales of DWDM, FTTx, and wireless fronthaul transceivers will decline by 20-30% in Q2 2018. The total transceiver market will be down by 8%, sustained by growth in sales of 100GbE optics. This decline will come after a weaker than expected second half of 2017 and a seasonally slow first quarter of 2018, potentially taking the market down to $1.2 billion in Q2 2018 – the lowest level since 2015.
If ZTE re-opens for business in the next few weeks, we should expect some recovery in sales of optics as early as Q3 2018, but the negative impact of the ZTE ban will have longer term consequences for the industry.
It is hard to find any companies that benefit from the ZTE ban. Huawei can take some of ZTE’s business in China, but their international customers will be more hesitant to place orders with any Chinese supplier. Growing anti-American sentiment will make it more difficult for U.S. companies to do business abroad. European suppliers of optical networking equipment, including Adva, Coriant, and Nokia may win more orders in Europe, but these companies also do business and have operations in the U.S. Countries that do not have domestic suppliers may encourage the creation of such businesses, but it will take years if not decades for these new companies to emerge.
The optical networking industry benefited from globalization and contributed to it by interconnecting the world. Erecting trade barriers will hurt this industry and slow down economic development. Network operators will have to reevaluate their strategies for sourcing equipment, causing delays in some projects and potentially increasing the cost of network upgrades. In the end of the day, end users of networking services will see less progress in network performance and will have to pay more for it. This will slow down economic growth by hurting all businesses and consumers, with the least fortunate of them being hit the hardest.
It is not all doom and gloom for the suppliers of networking gear and optics. Despite the looming trade wars, the top 15 cloud companies increased their infrastructure investments in Q1 2018 by 102% compared to Q1 2017. A lot of this investment is going into servers, networking equipment and optical connectivity. Sales of datacom hardware were up 14% in Q1 2018 overall and several suppliers reported record revenues, including Arista, Cisco, Extreme, Lenovo, Mellanox and NetApp.
Among suppliers of optics, II-VI Photonics, Accelink and Innolight reported record quarterly sales in Q1 2018. Innolight benefited from continuing demand for 100GbE optics. LightCounting estimates that more than 1 million 100GbE QSFP28 transceivers were shipped in the first 3 months of 2018.
Finisar and Lumentum are reporting strong demand for WSS modules for deployments of ROADMs in China and India. Oclaro set a new record in shipments of 100/200G DWDM CFP2 ACO transponders in Q1 2018.
Nokia reported 34% growth in sales of optical networking equipment in the first 3 months of 2018, compared to the same period last year. ZTE reported 23% growth over the same period, prior to getting hit with the ban.
The newly published LightCounting Quarterly Market Update provides data and commentary on the Q1 2018 financial results of CSPs, ICPs, hardware, optical components and semiconductor chip makers, as well as detailed estimates for more than 100 optical transceiver products sold in Q1 and Q2 2018, based on interviews with suppliers and quarterly data for 2016-2017, obtained via LightCounting’s proprietary vendor shipment survey. LightCounting subscribers can access the PDF and spreadsheet at: https://www.lightcounting.com/login.cfm
3D Sensing for Self-Driving Cars Reaches the Peak of Inflated Expectations
LightCounting releases a new report addressing illumination in smartphones and automotive lidarIn 2019, the market for VCSEL (vertical cavity surface-emitting laser) illumination in smartphones will exceed $1.0 billion – now nearly triple the size of the market for communications VCSELs. That’s quite remarkable for a market that didn’t exist three years ago.3D sensing in smartphones felt like an overnight sensation, but the technology foundations were laid down years ago with Microsoft’s Kinect – a motion-sensing peripheral for gamers released in 2010 but discontinued in 2017 after lackluster sales. Lumentum supplied lasers to the Kinect almost a decade before the iPhone opportunity emerged; the company was ready to profit from the iPhone X opportunity when Apple decided to launch 3D sensing for facial recognition in September 2017.
Figure: 3D depth-sensing meets the Gartner Hype Cycle
Source: Gartner with edits by LightCounting
If all technologies follow the Gartner Hype Cycle, shown in the Figure above, then 3D sensing in smartphones is now moving up the slope of enlightenment. Android brands raced to add 3D sensing to their flagship phones in 2018 – the Xiaomi Mi8 Explorer and Oppo Find X phones were first – although these only sold in single digit million quantities. Huawei also brought out new phones with 3D sensing, but the ongoing U.S. export ban on the Chinese company must be hurting the company’s traction outside China. Apple continues to dominate the market as all new iPhones released by Apple since 2017 have included 3D sensing on the front of the phone. Apple is expected to introduce 3D sensing for ‘world-facing’ applications in 2020, which adds another laser chip to every phone.
Last year illumination for lidars were not included in our market forecast since LightCounting considered it unlikely that lidar would penetrate the consumer market to any great extent over the forecast period. All indicators now point to a market for lidar illumination ramping up in 2022 and beyond. Optical components firms are now shipping prototypes and samples of VCSELs, edge emitters and coherent lasers to customers developing next-generation lidar systems – many of them building on their expertise in illumination for optical communications and smartphones.
As was the case with smartphones, the foundations for lidar technology were laid down much earlier – in this case with the DARPA Challenge 2007, where the winning vehicle used a 64-laser lidar system from Velodyne Acoustics (now Velodyne Lidar). Lidar is considered by the majority of the industry to be an essential part of the sensor suite required for autonomous driving, helping the vehicle to navigate through the environment and detect obstacles in its path. The first commercial deployments have begun. In Germany, lidar on the Audi A8 enables the car to drive itself for limited periods under specific conditions. In Phoenix, Arizona, you can hail a ride in a Waymo robotaxi.
Investor enthusiasm for lidar is undeniable with nearly half a billion dollars invested in lidar start-ups in 2019 according to our analysis of publicly available investment data. Notable deals include $60 million for U.S. company Ouster in March, Israel’s Innoviz Technologies Series C round of $132 million in the same month, and $100 million for U.S.-based Luminar Technologies in July. Interestingly, these examples illustrate the variety of lidar approaches: each company is building a different type of lidar based on a different wavelength: 850nm for Ouster, 905nm for Innoviz and 1550nm in the case of Luminar. There’s an open technology battle and they can’t all be winners.
The automotive lidar market seems to be close to the peak of ‘inflated expectations’. It’s easy to understand why. The automotive industry is enormous, with nearly 100 million vehicles (including trucks) produced annually. Players like Baidu, GM Cruise and Waymo are backed by deep corporate pockets, and new entrants like Aurora and Pony.ai are attracting hundreds of millions in investment. Intel’s $15.3 billion purchase of Mobileye in 2017 was also directed at autonomous driving. Sensor company AMS is in a $4.8 billion battle to acquire German semiconductor lighting firm Osram with its eye firmly on lidar.
However, signs indicate that the descent into the trough of disillusionment could have already begun. Waymo has yet to roll out its robotaxi services more widely – and this summer admitted that its vehicles needed more testing in the rain. GM Cruise has delayed launch of commercial services for self-driving cars beyond 2019 and is reluctant to commit to a new timescale, with its CEO Dan Ammann observing that safety is paramount; automotive is not an industry where you can “move fast and break things” he said. A casualty of the slow pace was optical phased array lidar developer Oryx Vision, which closed its doors in August and started to hand money back to investors.
While lidar is being deployed commercially today, prices are not conducive to mass production, and there are open questions around regulation, safety, ethics and consumer acceptance. Do local laws prohibit self-driving cars? Will they really be safer than humans? Who is responsible for a crash? LightCounting remains skeptical about the pace of adoption of autonomous vehicles, but will be watching the market closely and with optimism.
More information on the report is available at: https://www.lightcounting.com/Sensing.cfm.