Chinese manufacturers of optical components and modules reached a milestone in 2021: revenues of the top 10 Chinese suppliers surpassed sales reported by their western competitors. The figure below illustrates how the market share of Chinese suppliers increased from 15% in 2010 to just over 50% in 2021. While this chart is based on publicly reported total sales of the leading optical components suppliers, we believe the conclusion is very similar for sales of optical transceivers alone.
The Chinese government has been a very active participant in the development of China’s optical components industry. Past developments, current objectives and milestones are listed in Table E.1.
The initial success of Chinese suppliers was facilitated by strong demand for optics inside of China, but it was sales of optics to the US-based Cloud companies that propelled Innolight and a few other Chinese vendors to new sales records in 2017-2021.
Demand for optics from Chinese Cloud companies was also ramping up in 2017-2020, but this came to a sudden stop at the end of 2020. This was triggered by new regulations issued by the Chinese government to derail the IPO of Ant Group – a financial business partly owned by Alibaba. Since then, all other Cloud companies in China have come under intense scrutiny, casting doubt on their prospects. This new uncertainty has slowed investments in Cloud datacenter infrastructure in China and we do not expect a rapid turnaround in 2022.
Steady investments in optical networking infrastructure by telecom service providers in China created a $2 billion domestic market for Chinese suppliers of optical transceivers by 2021. Wireless fronthaul and FTTx transceivers and BOSAs accounted for a significant fraction of sales of optics deployed in China. As the current round of 5G mobile and 10G FTTx deployments are completed, we expect that transceivers used in Cloud datacenters and the networks between them will dominate demand for optics in China. However, we have reduced our forecast for sales of high-speed Ethernet optics to Chinese Cloud companies versus our January 2021 forecast, to reflect the new regulatory uncertainty faced by China’s cloud titans.
Another government priority which is impacting the decisions of Chinese service providers is the desire to allocate more business to local manufacturers – not only of transceivers, but also the laser and detector chips used in them. Despite significant progress made by Chinese chip suppliers, they are 2-3 years behind of their western competitors in the development of high speed (50G and above) components. Lack of a domestic supply for 200G, 400G and 800G optics may limit their deployment in China for the next 5 years.
The US sanctions against Huawei are also likely to impact the decisions of Chinese service providers. Since Huawei no longer has access to the latest ASIC manufacturing technology, required for products such as coherent DSPs, CSPs may delay deployment of 400G technology. Numerous upgrade projects completed over the last decade in China must have created sufficient buffer in the network bandwidth for Chinese CSPs to continue deployments of 100/200G optics for next year or two.
All of the above factors contribute to a lower forecast for the demand for optics in China over the next 5 years.
More information on the report is available at: Market reports