LightTrends Newsletter

Can Surging Demand for Optical Connectivity Help Unite the World?

April 2021

Our latest forecast report details the high expectations for sales of optical transceivers and other types of interconnects in 2021-2026. Applications of these products range from connecting servers in datacenters and AI clusters to long haul and submarine networks. We do hope that a more interconnected world will be a more stable one, but it is hard to ignore the escalating tensions between the US and China. If this trend continues, market growth will be disrupted, but this will be a less important issue in that case.

The US imposition of sanctions against Chinese companies in 2020, which prevent Huawei and other Chinese companies from purchasing products made with US technology, was a major political escalation. Fortunately, the sanctions had just a minor impact on the market for optical connectivity, at least so far. Yes, sales of optics to Huawei, including wireless fronthaul transceivers, dropped sharply in the end of 2020, but deployments of 5G in China will continue in 2021 and beyond. We expect 1.3 million 5G base stations to be deployed in China by the end of 2021, compared to 0.1 million in the US. Though the sanctions will prove ineffective at closing this gap, they certainly impacted the IC industry supply chain, as we reported earlier. Shortages of ICs are now impacting the automotive industry, slowing the post-COVID19 economic recovery in the US and Europe – an indirect consequence of the US sanctions on Huawei, that was probably not anticipated by the US government.

Shipments of wireless fronthaul transceivers are projected to decline from 32 million units in 2020 to 27 million in 2021. A majority of these will be deployed in China and made there as well. A higher fraction of these products will use optical and IC chips manufactured in China this year compared to last, negatively impacting the business of many US suppliers in 2021. The immediate impact on the US chip suppliers is minor compared to the longer term damage. Investment in domestic manufacturing of IC and optical chips is surging in China now. One of the industry insiders interviewed by LightCounting commented: “the whole country [China] is working to make sure that Huawei has enough chips”.

Our forecast model for the optical transceiver market does not account for macro-economic uncertainty. If the conflict between the US in China escalates to a scenario described in the novel titled “2034”, all the bets are off. If the world remains united, the optical transceiver market is projected to increase from $8 billion in 2020 to $14.5 billion, as shown in the figure below. Not to mention many other good things (not shown in the figure).

Sales of optical transceivers by market segment in 2021 and 2026

Expectations for the first volume shipments of 400ZR, 400ZR+ and 400G Open ROADM coherent transceivers in the second half of 2021 are very strong. Several suppliers commented that our projections for 400ZR are too conservative, but we base our forecasts on models developed for datacenters and networks connecting, operated by Amazon and Microsoft – two primary customers for 400ZR. We expect to see a wider pool of customers for 400ZR+ and 400G Open ROADM transceivers, which will help to limit price declines. However, a ramp in shipments of these products will be more gradual.

The DWDM market has been rewarding for the suppliers in the past. Acacia and Oclaro own their successful exits to this market segment. Is NeoPhotonics next?

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