LightTrends Newsletter

Welcome to the New Cold War

May 2021

May 27, 2021

LightCounting releases its May 2021 State of the Optical Communications Industry Report

The politicians may argue that we are not sliding into the new cold war, but the reality suggests that we are already in one. Direct military confrontation is replaced by a few proxy wars raging around the world with the US, its NATO allies, Israel and Ukraine in one camp, and China, Russia, Belarus, Iran and North Korea in the other. Cyberspace is a new battlefield. A rush to build AI powered by advanced ICs has replaced the previous push to build uranium-powered nukes, but the new technological ‘arms’ race is just as dangerous.

 

The new cold war will not look exactly like the old one: the world it too interconnected now to make a complete decoupling between the superpowers possible. There will not be an Iron Curtain between East and West, but a semi-transparent steel fence with a few gates here and there. Expect a lot more network firewalls where US-made photons will be converted to Chinese ones and vice versa. The industry supply chain will be divided into two, yet most of the production will be done outside of China and the US, where labor costs are too high.

Will the rest of the world’s countries have to align themselves with one sphere or the other, or will they manage to stay neutral? This remains to be seen. There is no international body capable of uniting enough countries to curb the influence of the superpowers on each one of them separately. The European Union may emerge as a balancing force, but it will require a lot more unity between the European countries than we see today.

Having a third superpower, not aligned with either the US-NATO camp or the China-Russia camp would be great for international stability. As we discuss in this report, the mature industries tend to be dominated by three large companies. This “rule of three” adds stability to the market, as companies A and B can unite forces if company C becomes too aggressive. This should work in the politics as well, but we are not there yet.

In the meantime, suppliers of optics based in China are starting to move some of their manufacturing to other countries in Asia in order to avoid US customs tariffs and continue to support their customers in the US. Huawei and many other Chinese companies on the “US entity list” are investing heavily to develop a local supply chain for optics and electronics. One of the industry insiders interviewed by LightCounting commented that “the whole country [of China] is working day and night to make sure that Huawei has enough IC chips”. The opto-electronic industry roadmap set up by the Chinese government a few years ago (summarized in Appendix D of the report) is more critical than ever now.

Figure below illustrates changes in the TOP10 list of optical transceiver suppliers over the last decade. A majority of the Japanese and US-based suppliers have exited this market by 2020, while Chinese vendors led by Innolight have improved their rankings. The list now includes Cisco, which completed its acquisition of Acacia in early 2021 and Luxtera a few years ago. It also now includes Huawei, since we reversed our policy of excluding modules manufactured by the equipment suppliers from our analysis. Huawei and ZTE are leading suppliers of 200G CFP2 coherent DWDM modules today. ZTE was close to making to the top 10 list in 2020 and it is very likely to make it in 2021.

Cisco and Huawei are well positioned to take a lead in forming two separate supply chains: one for generating American photons and one for Chinese.

 

 

The State of the Industry 2021

 

Source: LightCounting

May 2021 State of the Optical Communications Industry Report provides a holistic analysis of the global communications industry, during a period of unprecedented growth in demand for broadband connectivity and the rise of Cloud companies. It examines business strategies of traditional telecom service providers and Cloud/Web2.0 companies, as well as their suppliers of networking equipment and optical/ electronic components.

A detailed analysis of revenue growth and profitability across different levels of the industry supply chain in 2010-2020 is used to identify challenges and opportunities for the future. The report also includes a review of the latest mergers and acquisitions and their impact on the market landscape.

This report takes a deeper look at suppliers of optical components and modules, providing market shares of leading vendors sorted into several categories (top 3, top 4–6, top 7–10, and other). It includes data on diversification of the top 12 leading suppliers of optical transceivers in the Ethernet, Fibre Channel, WDM, FTTx, Wireless, and Optical Interconnect market segments. Many of the leading component vendors shared confidential sales data with LightCounting to support this study.

The success of Chinese equipment and component suppliers is discussed and many Chinese optical component and module vendors are profiled.

More information on the report is available at: http://lightcounting.com/products/MAY2021SOTIR/

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