ECOC 2019: Deals, Tariffs, Silicon Photonics, 400G, Co-Packaged Optics and 5G
LightCounting releases a research note on ECOC2019
Vendors Feeling Increasing Pressure from US/China Trade War.
In our conversations with companies at ECOC 2019, the 15% tariffs on products made in China shipping to the U.S. that went into effect on September 1 are causing headaches for module vendors with production in China and demand in the U.S. As a result, we’re hearing some vendors are looking to more aggressively move production outside China. For example, Innolight, a key supplier to Google, is now exploring production in two facilities outside of China. Shipping in the other direction, some U.S. vendors (like connector companies) are seeing essentially all of their business in China disappear overnight as they struggle with 32% tariffs.
Ultimately, we believe that tariffs are potentially helping to accelerate a trend that began years ago as the cost of labor in China increased and manufacturers went looking for other places where labor remains relatively cheaper. Of course, as the manufacturing process for transceivers has become more automated, the cost of labor has become less relevant. What’s more important is that production (particularly final test and assembly) be completed in a “neutral” location from a trade policy perspective. The U.S./China trade dispute also further reinforces the sense that module makers remain a weak point in the supply chain, further encouraging large customers like the hyperscale public cloud and ICP companies to try to exert more control.
Will the Cisco/Acacia Deal Go Through?
The acquisition of Finisar by II-VI closed on September 24th, allowing II-VI to achieve a new level of scale in the industry and reclaim the crown as the largest optical component vendor in the world (back ahead of Lumentum). However, as a condition of approval, the Chinese trade authority MOFCOM required that II-VI run Finisar’s WSS business separately for three years, robbing II-IV of a potential source of cost synergy.
The approval by China of the other major pending deal in the industry, Cisco’s acquisition of Acacia, seems somewhat in doubt. We’ve heard more than one institutional investor openly question whether China will approve the deal, and with Acacia shares trading at a 6.4% discount to Cisco’s stated cash offer price of $70, capital markets are expressing a less than 100% probability that the deal gets approved and closes. (As an aside, merger-arbitrage investors take this discount and calculate a rate of return by annualizing it to the anticipated closing date, or in this case to some point before July 2019 which is less than one year. In that context, the annualized return expected from holding Acacia shares is well above the “risk-free” rate on treasury bills.
This creates additional uncertainty for current Acacia customers who may or may not want to continue to do business with Acacia once Cisco owns it. It also creates uncertainty for LightCounting as we try and provide forecasts for the merchant DWDM module business; for now, we plan to continue to treat Acacia as a merchant supplier until we know definitively that the deal is closing. Also worth noting – while it’s not a pure “optical” deal, approval of the acquisition of Mellanox by Nividia also appears to be in doubt as well, with Mellanox shares trading at a 12.5% discount to the $125 cash offer price.
Wireless fronthaul optics: all options are on the table
Demand for 25G fronthaul optics in China skyrocketed in 2019 and projections for next year are mindboggling. However, there is a lot of uncertainty about the product mix: grey optics, BiDi, CWDM and even DWDM products may see significant demand next year in China and the rest of the world. LightCounting Market Forecast Report, scheduled for publication in the very end of October, will attempt to add clarity to this situation.
In the meantime, the vendors have no choice, but to offer everything on the wish list of their customers. Figure below shows a demo of various solutions for fronthaul optics made by Finisar.
Figure: Wireless Fronthaul Optics demo at Finisar booth
Source: Finisar, photo by LightCounting
A link to the full version of the research note was emailed to LightCounting subscribers. It includes additional sections on co-packaged optics, Infinera’s new products, 400G and Silicon Photonics.
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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.