Chinese systems houses engaging with alternative component, subsystem sources: LightCounting

Several Western component and subsystems vendors have cited reduced demand from Chinese systems houses such as Huawei and ZTE for revenue declines in 2017. One reason for the slowdown is the fact that these systems houses have begun looking for more local optical technology sources, LightCounting Founder and CEO Vladimir Kozlov reported during a webcast December 20.

Kozlov noted that, in addition to doing more development work in-house (particularly in the case of Huawei), the two Chinese systems vendors have begun to work more closely with Chinese companies such as Accelink, Hisense, and HiSilicon as well as Japanese vendors such as Sumitomo. One reason for the change could be ZTE's experience when it ran afoul of U.S. export restrictions. The U.S. Department of Commerce charged that the company had sold systems containing U.S. components to Iran between 2010 and 2016; Iran was under a U.S. technology export embargo at the time. ZTE settled the charges this past March and paid a fine of $1.19 billion (see "ZTE admits guilt, settles export squabble"). However, it faced the possibility of having its access to U.S. component technology shut off, which led it to explore alternatives.

Thus, while Kozlov expects Huawei and ZTE to pick up purchases of optical components and subsystems in 2018 as their systems sales improve and component inventories dwindle, Western firms (particularly in the U.S.) may not see their Chinese orders return to previous levels. Overall, Kozlov expects 2017 optics sales to be flat versus 2016 at approximately $7 billion; he predicted 2018 revenues will exceed $8 billion.

Much of this growth will derive from internet content providers and other mega data center operators, whose purchases of optical technology are beginning to rival those of traditional service providers, Kozlov remarked (see "Third quarter 2017 follows year-long theme for optical communications: LightCounting"). He noted that Microsoft's Quincy, WA, campus features six data centers with 1-Tbps connectivity among them. Should other operators require similar connectivity, particularly within the context of an evolution toward distributed data centers and edge data center construction, demand for high-speed optical connectivity should remain robust.

One key for both optical component/subsystem vendors and their systems provider customers is pricing. Kozlov noted that telecom equipment sales, measured in 100-Gbps port counts, rose in 2017. But 100G price declines wiped out any revenue gains such growth should have created. Telecom equipment sales revenues appear set to decline this year, he stated.

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