The “inverted dot com crash” will leave no industry immune
LightCounting releases Quarterly Market Update report and comments on the market outlook for 2020.
LightCounting’s new Quarterly Market Updatesummarizes market data for Q4 2019 and guidance for Q1 2020, but the key question is what to expect for the rest of the year. The LightCounting team is just starting to update its forecasts now, but it is clear that expectations for transceiver sales in 2020 are not great. Our industry will not be affected by virus-related impacts as much as the travel and hospitality segment, but no industry will be immune to a global economic recession.
Demand for networking and cloud services is skyrocketing as people around the world are learning how to work from home. (Microsoft Teams added 12 million Daily Active Users in just the past week, on a base of 32 million). Network and datacenter operators will be scrambling for bandwidth and pledge to increase investments, but it is unclear how many infrastructure projects can be completed as the economies in Europe and the US come to a sudden stop. While demand for bandwidth is high, the optical communication industry is likely to experience an inverted dot com or telecom crash of 2001 in 2020: we love all the telecom and dot com companies now, but the market is still crashing.
Despite the panic in the financial markets, the downturn in optical networking and transceiver demand is likely to be short lived, as suggested in the figure below. We expect that it will be followed by a very strong recovery, given the new urgency for adding bandwidth across the networking infrastructure. Using the historical data for 2009 is a good template for charting the market swing in 2020. At least we hope so.
What is most frustrating is that sales of optics were just starting to recover after 3 years of stagnation. The last quarter of 2019 exceeded all expectations, reversing our projections for a decline in sales of transceivers last year. Shortages for 100GbE transceivers and many other products started in the end of 2019, well ahead of the supply chain disruptions caused by the virus.
Having factories in Wuhan shut down for the last two months was a challenge for many suppliers, yet they managed to keep up with the increasing demand. The Chinese economy is restarting now and even Wuhan is opening up for business, while the sudden stops gain momentum in Europe and the North America.
The Chinese government is determined to complete all the networking infrastructure projects planned for 2020 and they usually do what they say. However, a global recession will hit on the nerves of Chinese consumers, negatively impacting revenues of the local Cloud companies and sales of optics for deployments in their datacenters. We have clearly seen this in the end of 2018 as the trade war between China and the US spooked Chinese consumers and Alibaba, Baidu and Tencent curbed deployments of 100GbE optics. These just started to pick up in the end of 2019. Now what?
This is frustrating, but let us keep our priorities straight. As long as we are all healthy, we will be fine. We have been through downturns in the past and we will get through this one. Thanks to our industry (which was looked down on 20 years ago), we can all work from home now and our kids are keeping up with school work from their rooms (at least we hope they are).
Once the world is back to normal or the new normal, the networks and datacenters will be on the top of investment priorities for many years to come. It is hard to predict the timing of a recovery, but it will be a strong one. Start planning for it now. LightCounting will do its best to help you.
More information on this report can be found here: March 2020 Quarterly Market Update Report.