Optical component vendor profits moving toward parity with rest of the supply chain
LightCounting releases State of the Optical Communications Industry Report
Over the past eight years, Internet Content Providers (ICPs) and vendors manufacturing semiconductor integrated circuits have produced average net margins in the double-digit range. Communication Service Providers (CSPs) and suppliers of networking equipment have averaged in the high-single digits. Optical components vendors had consistently been at the bottom in terms of profitability, averaging at less than 2 percent in 2011-2015. 2016 marked a real change in that for the first time ever, optical component companies were as profitable as CSPs and network equipment makers. This improved profitability extended into 2017 as well, despite lower than expected market growth.
Figure 2-2. Net profit margin of different ICT market segments (sales-weighted)
Source: Companies financial reports
Note: One-time tax expenses and benefits due to the change in U.S. tax laws in 2017 are excluded from the analysis of profitability and from net income figures contained in this report.
NeoPhotonics and Coadna (now part of II-VI Photonics) were the only optical component vendors to report losses in 2017. Lumentum and Oclaro lost money in 2012-2015, but both companies refocused their businesses on more profitable products, improving their financials in 2016-2017. The acquisition of Oclaro by Lumentum will solidify the profitability of the new #1 supplier of optics. Finisar’s profits declined in 2017 and their new CEO is probably taking a very close look at the company’s operations as he makes plans for the future.
The success of new publicly traded companies, including Acacia, Applied Optoelectronics, Eoptolink and Innolight, contributed to the improved profitability of the optical component and module vendor group in 2016-2017.
Investments in research and development (R&D) are a major burden for suppliers of optics. Aggressive targets set by ICPs for development of 400GbE transceivers are forcing suppliers to invest more in product development. Consolidation among suppliers is a proven strategy for reducing R&D expenses of the industry. Lumentum’s latest acquisition is certainly a step in the right direction and we expect to see more deals in 2018-2019.
The 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 ICPs and CSPs, 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 2010-2017 is used to identify challenges and opportunities for the future. The report also includes a review of the latest mergers and acquisitions across the industry and their impact on the market landscape.
The report takes a deeper look at suppliers of optical components and modules, providing market shares of leading vendors sorted into the several categories (top 3, top 4–6, top 7–10, and other vendors). It includes market share ranking and data on diversification of the top 12 leading suppliers of optical transceivers, segmented into SONET/SDH, High Speed Ethernet, Low Speed Ethernet, Fibre Channel, WDM, FTTx, Wireless, and Optical Interconnect (AOCs/EOMs) categories. More than 20 of the leading component vendors shared confidential sales data with LightCounting to support this study.
The success of Chinese equipment and component suppliers is evaluated and many Chinese component vendors are profiled, including 10Gtek, Accelink, APAT, Broadex, Eoptolink, Gigalight, HG Genuine, Hi-Optel, HiSense Broadband, Hytera EMS, Innolight, Lightip, Linktel, O-Net, RUIGU, Sinovo, Sunsea, Sunstar, Tsuhan S&T and Xiamen San-U.
More information on the report is available at: https://www.lightcounting.com/SOTIR.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.