April 17, 2018

With all the rhetoric about tariffs on steel, pork and numerous other products, suppliers of networking equipment and components got entangled in a real trade war this week

The U.S. Department of Commerce announced on April 16th that it would ban U.S. companies from providing components to ZTE for seven years for failure to comply with the terms of a disciplinary agreement reached in March 2017 arising from U.S. export law violations. The Commerce Department has determined that ZTE not only failed to discipline most of the employees identified as participating in the export scheme, but paid them bonuses as well. While this does look like a slap in the face of the U.S. Department of Commerce, the seven-year ban seems to be a very harsh reaction. It is unclear if ZTE will be able to appeal this decision.

Seven years is an eternity in the communications market. Can ZTE manage during the first year? Plugging holes in the supply chain during the next few months is a real challenge for the company which was not expecting any disruptions after paying more than $1 billion in fines to settle with the US government a year ago. ZTE was probably better prepared for such a ban a year ago, before the settlement was reached. The company created an emergency inventory of key components during 2016, but reduced purchases from many western suppliers last year after the settlement.

Many suppliers of optical components and modules will be negatively impacted by the ban. Shares of Acacia declined by 35% after the announcement because of a significant exposure to ZTE. Lumentum and Oclaro were down 9% and 15%, respectively, by the market’s close on April 16th.

Acacia supplies ZTE with 100G DWDM DCO modules and DSP chips, which are hard to replace. NEL – a subsidiary of NTT – is the only independent, non-US based supplier, offering similar products. Hisilicon makes these products in China, but it is a subsidiary of Huawei – the main rival of ZTE in the optical networking market. Will the Chinese government ask Huawei to help their comrades at ZTE?

Lumentum and Oclaro supply ZTE with a number of products, including 100GbE transceivers. These products can be sourced from Innolight – a rapidly growing Chinese company or Sumitomo Electric in Japan. Other Chinese suppliers, including Accelink, Eoptolink and HiSense can potentially supply the necessary 100GbE modules as well, but all of them source optical and electronic chips from the US-based suppliers. Will this be impacted by the ban, if it is known that their chips will be ultimately sold to ZTE. Where do we draw the line?

Sourcing of the electronic chips must be a much more serious concern than  sourcing optics for ZTE. The company’s cell phone business relies on chips made by Qualcomm. ZTE’s optical networking and datacenter products must be using chips from Broadcom, Intel, Macom, Semtech and other US-based semiconductor manufacturers. Finding replacements for these chips from outside of the US will be really hard, despite the proximity of Samsung and TSMC. A weakness of Chinese suppliers in optical and electronic chip manufacturing, was noted and emphasized by President Xi last year. The Chinese government has embarked on a very aggressive program to develop these technologies domestically, but this will not help ZTE in 2018.

It is hardly a coincidence that the deadline for China’s regulatory approval of Qualcomm’s $44 billion takeover of NXP Semiconductors was April 17th. Qualcomm withdrew this application a few days earlier in order to avoid an unfavorable ruling. The company plans to file a new application, which will extend the deadline by 6 months. Will this give enough time to the US and Chinese governments to resolve their trade issues or at least make a commitment to finding a compromise?

The situation does not look promising. More security concerns were raised in the UK and the US about doing business with Huawei and ZTE in early 2018. Unfair trade with China remains one of the favorite topics for the US president and the Chinese government promptly responds to his presidential tweets. This had remained largely rhetorical, but it is starting to make a real negative impact on the communications industry now.

Actions of the US government in Syria a few days ago, supported by France and the UK, but vigorously opposed by Russia and China, indicate a rapidly growing political and economic divide. Decisions made in the next few months may shape the world order for decades to come. It does not take long to build walls, impose trade barriers and turn partners into enemies. It may take decades to dismantle these barriers and turn enemies into partners again.

Let us hope that wisdom will prevail. If it does not, the problems currently faced by ZTE and its suppliers will appear trivial compared to the many more yet to come. There are no winners in trade wars or any other kind of wars. Why have not we learned this from history by now?

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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