Despite a year of no revenue growth, the sky is not falling
LightCounting issues updated Optical Components Market Forecast
LightCounting has just published a semi-annual update of its Optical Components Market Forecast report. Based on first half 2017 shipment data, and subsequent talks with clients and other vendors, we expect that the global market for optical components and modules will be flat in 2017, after a seven year period of steady growth in 2010-2016. Optical transceiver sales will be up 3%, but declining sales of coherent receivers, modulators, tunable lasers and WSS modules will erase growth in the total market.
Telecom segment interrupts steady growth of optical components market
Increasing demand for optics from the Cloud companies will not compensate for declines in the Chinese telecom segment and the rest of the market, as illustrated below.
A drop in demand for optics from China is mostly attributed to the excess inventory of 100G products accumulated by Huawei and ZTE during 2016. Demand for some of these products is starting to come back now, but the transition from CFP/CFP2 to lower priced QSFP28 LR4 modules limits the scale of the recovery. Sales of optical networking equipment by Huawei and ZTE continued to increase in 2017, driven by ongoing upgrades to networking infrastructure in China.
Sales of optics to telecom segments in North America and Europe were expected to remain steady in 2017, but these are likely to be down. Apart from Ciena and Cisco, all other Western suppliers of optical networking gear are reporting declining sales in 2017. Deployments of optics in India are accelerating after many years of delays, but it is not enough to compensate for declines in other countries.
The Cloud companies are deploying huge numbers of 100GbE transceivers in 2017, exceeding our expectations for unit shipments, but steep price declines limit growth in revenues of their suppliers. Sales of DCI optical networking equipment is projected to decline in 2017 also because of faster than expected price erosion.
Global sales of optical transceivers in 2017 are projected to close the year under $6.2 billion, instead of the $6.8 billion we forecast in April 2017, mainly due to a rapid shift from 100GbE CFP and CFP2 LR4 transceivers to QSFP28 LR4 modules. The Ethernet transceiver market will still grow by 17% in 2017 because of very strong sales of many other products, including PSM4 and CWDM4 100GbE modules.
ICPs spending growth continues, but remains well below CSP’s capex level
Infrastructure spending of the leading ICPs is growing quickly, but it remains several times smaller than the capital expenditures of the Top 15 service providers. Chinese service providers cut capex this year, driving down the global total for 2017. Deployment of optical networking equipment in China increased in 2017, however, repeating the pattern observed in 2016. Optical networking gear accounts for only 10% of capex on average, so spending on optics can increase even as total capex declines. Reduced spending on wireless infrastructure in anticipation of 5G deployments in 2020 is the main reason for lower capex in China. Spending of CSPs in Europe and North America is steady.
Leading ICPs increased spending by 15% in the first half of 2017. These companies are reporting stellar financial results in Q3 2017 and we expect that they will set a new record in spending this year. Ethernet optics accounts for significant fraction of their spending. We estimate that Amazon, Apple, Google, and Facebook combined will spend almost $1.1 billion on purchases of Ethernet transceivers in 2017. The rest of the ICP segment will account for another $790 million in sales. Recognizing how much they spend on optics, ICPs are pushing suppliers to reduce costs at a rate not seen in the telecom market.
The Bottom Line: The Sky is Not Falling
Yes, the market for optics will be flat in 2017, but the fundamental market drivers remain in place, and the longer term outlook hasn’t changed. Growth in sales of Ethernet and DWDM transceivers will remain strong in 2018-2022. The transition from 100G to 200G/400G devices will keep suppliers of these products in business, at least the ones that can handle the projected price declines. Access optics for FTTx and wireless, along with optical interconnects will also grow over the forecast period.
China will continue to surprise the market in 2018-2022. Improving communication infrastructure in China and exporting it to the rest of the world remains a priority for the Chinese government. The latest Congress of the Chinese Communist Party re-emphasized the importance of Cloud services and catching up with the western countries in Cloud computing and artificial intelligence. Chinese Internet companies, led by Alibaba, Baidu and Tencent are just embarking on networking infrastructure projects now. We will see a lot more from them in the next 5 years.
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.