Jan. 31, 2019

LightCounting has updated its report titled “Market for Optics in China”

Over the last decade, China has had a greater impact on the global optical communications industry than any other country, and in some cases more than all other countries combined. People in China are proud of these achievements and the Chinese government plans to continue leading the rest of the world with fast paced, large-scale infrastructure projects.

The rapid rise of China raised a few “red flags” around the world in 2018. The US government launched a full scale trade war with China. A temporary ban on ZTE in 2018, and the ongoing dispute with Huawei all seem to be part of a larger US government agenda to curb the influence of China on the global economy. The problem is that world economy is so interconnected now, that trade barriers imposed by one country are likely to hurt consumer confidence and businesses globally.

As this report goes to print, Apple and Nvidia are the first large US-based companies reporting significant drops in quarterly revenues because of slower demand in China. Alibaba implemented its first ever cost cutting measures by delaying hiring and restricting travel expenses in anticipation of slower growth in 2019.

Growth in Huawei’s networking businesses slowed down in 2017-2018, but the company set new records in shipments of smartphones, overtaking Apple as the #2 supplier in the world (second only to Samsung).

Huawei’s founder has recently been quoted in the press saying that the trade war has not impacted Huawei’s business in 2018, but the company might face difficulties and challenges (in the future).

Close to 50% of Huawei’s networking business comes from projects abroad, including many contracts with European Communication Service Providers (CSPs). The company recently reported 26 signed contracts with global CSPs for 5G wireless equipment. Security concerns regarding networking equipment manufactured by Huawei and ZTE, raised by the US government, will certainly slow down the international business of these vendors.

New domestic infrastructure projects will keep the Chinese suppliers busy in 2019. China is accelerating deployment of 5G wireless infrastructure and it granted licenses to the three largest CSPs in December 2018. China Mobile plans to start commercial deployments in the second half of 2019 and China Telecom and China Unicom plan to start in early 2020. Domestic 5G deployment will generate large contracts to the Chinese equipment suppliers to offset slower business abroad. It will also boost demand for higher speed optical transceivers, including wireless fronthaul, Ethernet and DWDM modules.

Upgrades of Cloud datacenters in China to 100GbE connectivity started in 2018. These projects along with future deployments of 400GbE will have the most impact on sales of networking equipment, optical components and modules deployed in China over the next 5 years.

The figure below illustrates growth in sales of datacenter equipment for deployments in China. Revenues of Inspur and H3C ramped by 50-100% in 2018. These companies, as well as Huawei, Lenovo and ZTE, are not just selling their products, they also build complete datacenters and often also manage their operations. Local governments fund many of these projects, often in partnerships with Chinese cloud companies and equipment suppliers.

Figure: Annual revenues of H3C and Inspur


Source: Company Financial Reports and LightCounting Estimates.

Will this growth continue in 2019? Initial data on performance of large state-owned companies in China is very impressive: 10% growth in revenues and 15% growth in profits for 2018. However, many smaller private enterprises are struggling and pointing to tightening credit. The Shanghai Stock Exchange Composite Index contracted by 30% in 2018, and the stock prices of Chinese Internet companies plunged more dramatically than the prices of US technology stocks.

Many on-line lenders went bankrupt in 2018, hurting the confidence of investors and consumers. Car sales in China were down sharply at the end of 2018. On-line spending of Chinese consumers increased by 30% in 2018, compared to 100% in 2017. Bankruptcies of web-enabled bike rental companies in China led to huge piles of unused bikes accumulating on the streets and in vacant lots throughout the year, adding to consumer anxiety.

The Chinese government has acted decisively during previous economic slowdowns and it is often credited with pulling not only China, but also the global economy from a recession after the financial crisis of 2008-2009. The government is already increasing infrastructure spending for 2019, including many new subway lines. 5G wireless systems and Cloud datacenters are part of the increased infrastructure spending as well, supporting our projection for the market for optics in China next year.

However, consumer confidence (or lack of it) will have a larger role to play in 2019. Chinese consumers are much more affluent now, with GDP per capita in China doubling over the last decade, and their spending matters a lot more for the economy, including the Cloud services. It is unclear if the government will be able to boost consumer spending as fast as it can re-energize infrastructure projects. This is a new territory for China to explore and for the world to keep an eye on.

The report titled “Market for Optics in China” discusses current and future infrastructure projects of Communication Service Providers (CSPs) and Internet Content Providers (ICPs) in China. It analyses the impact of these projects on the demand for optical networking equipment, optical modules and components. The report also discussed history of optical component and module manufacturing in China and analyses challenges ahead. It includes profiles of the leading Chinese CSPs, ICPs, equipment manufacturers and suppliers of optical component and modules. Appendix C to the report includes a translation of key production goals from the latest Roadmap of Optoelectronics Industry in China. The report includes a companion spreadsheet containing a detailed 8-year history and 5-year forecast for shipments, pricing and sales of optical components deployed in China.

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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

3D Sensing

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.

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