July 25, 2018

LightCounting analyzes the impact of these developments on the optical networking equipment and modules markets

This was a busy and important week for the optical networking market. ZTE is finally back in business putting to rest speculation about its potential bankruptcy. There will be no free lunch for its competitors and they will have to find other ways to gain market share. Coincidentally, Infinera just made a bold move in this direction by announcing its acquisition of Coriant. Both companies were struggling to reach profitability. Can they find a solution by joining forces?

ZTE suspended operations in early May 2018, soon after the U.S. government imposed a ban on sales of U.S.-made product to ZTE. Getting back into the swing of business after a 3-month interruption will probably take another 3 months. The majority of ZTE customers are very likely to delay their projects and wait for ZTE to recover, but it is also likely that at least some of the ZTE customers will turn to other suppliers. More than 75% of ZTE’s revenue from optical networking equipment came from China in 2017 and these customers are likely to stay with ZTE. The company’s international business will be more impacted by the ban, but increasing anti-American sentiment around the world plays in ZTE’s favor. ZTE will probably make only 50% of sales planned for 2018 and lose half of its market share this year, but it will regain most of the losses in 2019.

ZTE held a steady 11% market share (measured in terms of shipments of 100G DWDM port equivalents) in Q1 2018 – the same as for the whole year of 2017. Their market share will probably decline to 5-6% in 2018, leaving the remaining 5-6% for its competition to share. The combined market share of Infinera and Coriant was 10% in Q1 2018 – on par with Nokia and with Cisco. These vendors will compete for the #3 position in the global optical networking market, while ZTE is recovering.

This market is not truly global since Huawei and ZTE are not doing business in the U.S., while Ciena and Infinera are not selling products to China. Coriant did some business in China and Infinera will have to decide on whether to change their policy. Apart from China and the U.S., however, all the vendors compete freely. Consolidation among these suppliers is long overdue. Intense competition led to very steep price declines in 2016-2017, with Coriant offering the most aggressive pricing to gain market share.

Infinera’s target for $250 million in saving from operating synergies and vertical integration of Coriant’s products suggests a very aggressive schedule for transitioning from Acacia’s and Elenion’s optics to internally made InP PICs. Timely implementation of this plan will be critical for Infinera’s success. This market is brutal and falling behind the schedule may be deadly. The risk is high, but the reward of reaching a larger scale and further lowering the cost of Infinera’s PIC-based products is well worth it.

Increasing vertical integration of equipment vendors is a bad news for suppliers of optical components and modules. LightCounting estimates that Coriant was the second largest consumer of pluggable 100G DWDM DCO transponders in 2017 (ZTE was #1). Moving Coriant’s products onto Infinera’s PIC platform would make a significant dent in the merchant market for pluggable DWDM modules.

ZTE started prioritizing internal development of high-speed coherent solutions a few years ago and the latest ban added urgency to this transition. Huawei and Ciena already rely heavily on internally designed optics. Huawei makes pluggable DCO modules based on internally sourced silicon photonics technology and Ciena may do the same. Cisco and Juniper also have silicon photonics expertise in house. This is not good news, not only for suppliers of modules, but also for suppliers of LiNbO3 modulators and coherent receivers, as was discussed in the latest Market Forecast report.

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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