After experiencing a brief trough during the second quarter of 2018, the optical module industry began to pick up in the second half of 2019.As one of the few industries that have remained relatively unscathed by the pandemic, the optical module industry has also benefited from a new infrastructure policy in 2020 and is now enjoying a golden moment.
New infrastructure is a powerful driver
News of "explosive" 5G construction has arrived.2020 is the first year that 5G will shine against the backdrop of initial construction beginning in 2019.
Tang Haiqing, chief analyst of the CT industry for TF Securities, told a reporter from egs.stcn.com that 5G construction will drive demand for optical modules. From a construction perspective, 5G needs more base stations than 4G and each 5G base station requires more high-speed optical modules. In the long run, after 5G construction is completed, a large number of new 5G-based applications – including VR/AR, UHD videos, Internet of Things, Internet of Vehicles, artificial intelligence, and cloud computing – will drive the sustained, rapid growth of network traffic. In turn, the demand for optical modules, the core component for carrying network traffic, will rise in parallel.
Optical module companies have varied characteristics
“Optical modules are used in two major markets, datacom and telecom. The latter can be subdivided into wireless networks, transmission networks and access networks,” said Wang Jun, vice president and secretary of the board for Zhongji Innolight, to the egs.stcn.com reporter.
He continued, “In different market segments, we have obvious advantages in datacom. We lead the industry in delivery capacity and market share in 100G and 400G optical modules. We’ve developed 800G products that we will roll out and we’re also developing 400G silicon light modulators and optical modules. In the telecom industry, we’ve developed a full range of 5G optical module products ranging from 25G fronthaul and 50G midhaul to 200G and 400G backhaul, all of which are available in the 5G market or have been delivered to clients as samples.”
Tang said that at present, domestic manufacturers in the digital optical module market have developed mature technologies, and the degree of localization in the low-end and mid-range telecom market is high. Aiming to become leading chip suppliers, some international manufacturers have chosen to exit the optical module business to focus on chips, which have a higher barrier to market entry.
Traffic drives growth in demand
Benefiting from the construction of 5G networks and the recovery in demand for data centers, the global optical module market was worth about US$6 billion in 2018.
Wang is optimistic about the future of cloud data centers and optical modules, “People’s social activities are inseparable from data and traffic. With the maturity of 5G networks, application technologies that require 5G’s speed and low latency, like cloud gaming, artificial intelligence, IoT, the Industrial Internet, and driverless technologies, will gradually mature and drive rapid traffic growth. Growth in data and traffic will drive data center construction and demand for data-center hardware such as switches, servers and optical modules.”
Wang believes that increasing demand for replacing optical modules, as a result of technical iterations in traffic rates, should also be considered. Based on existing industry trends, digital optical modules are iterated every 3 to 5 years.100G products were launched globally in 2016, 400G products started to be deployed on a large scale in 2020, and it is predicted that 800G products will be enter commercial deployment in three years. The rates of future optical modules will evolve to 1.6T and 3.2T, and traffic increases will ramp up the technical iterations and market growth in optical modules.
When the economy picks up, listed companies in the optical module industry will expand production. Zhongji Innolight announced on January 23 that to maintain its first-mover advantage in 400G products and improve the utilization rate of its raised funds, it will adjust its original investment projects and allocate an unused 40 million yuan to increasing production capacity to allow for an additional 500,000 400G products.
Zhongji Innolight also announced on February 15 that it plans to acquire a minimum of 51% of Chengdu Tsuhan, a company listed on the National Equities Exchange and Quotations (NEEQ).According to Tianyancha, Chengdu Tsuhan was founded in October 2009 as a high-tech company specializing in the development, production and sales of optoelectronic components for the communications industry. Cambridge Industries Group (CIG) announced a revised private placement plan on February 25, stating that it plans to raise up to 750 million yuan for high-speed optical modules and a 5G optical module project, and to supplement its working capital. On March 7, Eoptolink published its private placement plan to raise 1.65 billion yuan, 1.35 billion yuan of which will be allocated to a high-speed optical module production line project for expanding the production of 5G communication optical modules, as well as 100G and 400G optical modules.
Tang believes that the optical module industry will bring in excellent economic opportunities in the telecom and datacom markets in 2020.The large-scale construction of 5G will stimulate high demand for supporting optical modules in the telecom market. In the datacom market, the industry will grow as new-generation 400G products go into mass production and as global manufacturers continue to increase CAPEX on cloud computing.
