Recovery in sales of Ethernet transceivers will have to wait until 2021
LightCounting updates High Speed Ethernet Optics Report.
Market forecasting during the economic disruption caused by COVID-19 is very challenging. Uncertainly on how far the virus will spread over the next 4-6 weeks, makes it difficult to predict the economic situation in the next 3-6 months. Most economists are predicting a deep economic recession in 2020, despite significant financial stimulus introduced by the governments in China, Europe and the U.S. How long this recession will last is also unclear, since there has never seen a case where the major global economies come to a sudden stop.
Yet, the sky is not falling. Businesses are adapting to the new conditions as people work from home in most of the U.S. and many countries in Europe. Telecom networks and datacenters are critical infrastructure facilities, which will continue to operate while many other businesses are shutting down. Datacenter and network operators are reporting huge spikes in data traffic, while airlines, hotels and restaurants all have very few customers. People are spending more time on video calls, playing games, streaming movies and doing more shopping online. The pandemic propelled us into a new futuristic world only imagined back during the dot-com bubble. The lock down is not fun, but just imagine dealing with a pandemic without the Internet.
Just before the virus was discovered, demand for optical connectivity was very strong and sales of optical transceivers set a new record in Q4 2019. However, total sales of Ethernet optics in 2019 declined by 17% as illustrated in the figure below. Weaker than expected demand from several large customers and steep price declines, which started in late 2018, are the main reasons for this decline.
Figure: Global Sales of Ethernet Optical Transceivers.
The market momentum turned positive in the second quarter of 2019 and accelerated by the end of the year, but it was too late to prevent the first decline in sales of Ethernet transceivers since 2009 and the first ever double-digit decline in this market segment. Even during the telecom crash, sales of Ethernet transceivers (mostly for enterprise networks at the time) were a bright spot in the market.
Strong demand for 100GbE modules in the second half of 2019 resulted in shortages for some products, which is great for stabilizing prices. As Wuhan was shut down by the virus, the shortages spread over many other product categories since so much is now manufactured in that city. Factories in Wuhan are resuming operations now, but it will take time for the global supply chain of the optical communications industry to recover from having one of its central manufacturing hubs shut down for two months.
The Chinese government is prioritizing networking infrastructure projects now, including 5G and Cloud datacenters. Demand for optics by Alibaba, Baidu, Bytedance, Tencent, and many other datacenter operators in China is very strong, as these companies are catching up on slower deployments of optics for most of 2019 and now this most recent disruption. This trend will continue as long as Chinese consumers are willing to pay for Cloud services, but a global economic recession will impact consumer confidence in China and the business of Chinese Cloud companies. We have seen this in the second half of 2018, when the China/US trade war hit the confidence of Chinese consumers, which in turn cut revenues and spending of the local Cloud companies.
Business and consumer confidence across the world is down sharply now. They will be spending less, then earning less, and that is how an economic downturn feeds on itself. Spending on communications and Cloud services is probably up at the moment in sharp contrast to spending on travel, but a global economic recession is not good for anyone or any industry. Telecom service providers and datacenter operators plan to spend more in 2020, but this may change as their revenues start to decline.
New ambitious datacenter projects may be put on hold until there is less uncertainly. Adding bandwidth to the legacy infrastructure is a safer option now. This will negatively impact sales of next generation “200GbE and above” transceivers. We reduced our 2020 forecast for sales of these products, but kept the longer term outlook largely unchanged.
We expect that sales of 2x200GbE and 4x100GbE modules to Google and Amazon will continue to grow this year. Facebook’s plans for deploying 200GbE in the end of 2020 may shift into 2021, but should not be delayed significantly. Alibaba and other Chinese Cloud companies had no plans for deploying 200GbE or 4x100GbE optics in 2020, but all of them are likely to do so in 2021.
The lifecycles of legacy products, including 40GbE and 100GbE will be extended by a year or so, but it will be new versions of 100GbE transceivers, such as DR1 and FR1, which will keep sales of “100G and below” products steady in 2021-2025.
This report analyzes the impact of growing data traffic and the changing architecture of data centers on the market forecast for Ethernet optical transceivers with a focus on the high-speed modules used in data centers. It leverages extensive historical data on shipments of Ethernet modules combined with extensive market analyst research to make projections for sales of these products in 2020-2025. The report offers a comprehensive forecast for more than 50 product categories, including 10GbE, 25GbE, 40GbE, 100GbE, 200GbE, 2x200Gb, 400GbE and 2x400GbE transceivers, sorted by reach and form factors. It provides a summary of technical challenges faced by high-speed transceiver suppliers, including a review of the latest products and technologies introduced by leading suppliers.
The report is based on confidential sales information and on detailed analysis of publicly available data released by leading component and equipment manufacturers along with considerable input from industry experts.
LightCounting subscribers can access the report in our online account portal: http://lightcounting.com/auth/login