The recently published Ovum report, China Is Hotbed for OC Industry Change, highlights Chinese optical component supplier growth, the drivers leading to their ascension, and the problems transceiver vendors are facing.
The analysis identifies Accelink (WTD), Hisense, and Innolight as the highest-rated Chinese transceiver vendors. Although they were rated below global leaders, Ovum believes they can disrupt the status quo. Single-mode transceivers for data centers represent the next big opportunity; we estimate the market will reach about $2 billion by 2018, gaining at a 20%-plus compound annual growth rate from 2012.
The expansion is being led by demand for single-mode laser arrays at 10Gbps and above, a product that requires innovation to deliver high-volume, low-cost solutions. These vendors have the toolkit to pursue the opportunity, but their challenge is to take leadership technology positions as this market emerges.
Transceiver vendors seeking new opportunities
Ovum estimates that China’s huge passive optical network (PON) buildout peaked in 2012; while the total PON transceiver market posted 2012 revenues around $800 million, it will decline going forward. There are no other economies as large as China to support the volumes experienced during the buildout, so vendors that supplied deployments in China are seeking new opportunities. This includes Accelink and Hisense, two of China’s leading transceiver vendors.
The China PON buildout delivered a significant single-mode laser accomplishment that prepares the vendors to attack other markets: It drove the annual volume of single-mode lasers above multimode volume and it brought the price of single-mode transceivers below that of multimode transceivers. A robust ecosystem developed to support the deployment of tens of millions of single-mode transceivers annually, while the suppliers delivered double-digit annual price reductions on ONT/ONU transceivers.
The results are surprising because they are counter to industry conventional wisdom. It is well accepted that the highest volume and the cheapest optical communication transceivers are multimode. They are primarily used in data centers to connect switches, servers, and storage devices. Their low cost is a consequence of the high volumes and a mature supply chain. Thanks to PON, there are now equivalent single-mode transceiver suppliers.
Attacking the data center is a next logical step
Accelink and Hisense already have parts to compete in the data center market as they can deliver GbE transceivers. They are identified as transceiver vendors to watch partly because of their contribution to the China PON buildout. Each has laser design capabilities, and Accelink manufactures its own lasers (see China Is Hotbed for OC Industry Change for brief company profiles). Both manufacture transceivers and have experience delivering high volume and low cost. But they need to look for bigger opportunities that utilize their single-mode manufacturing expertise, because GbE is a mature market with established suppliers so the competition will be fierce and the opportunity limited.
The market trend is for larger data centers and higher data rates; each factor contributes to single-mode transceiver demand. Ovum believes transceivers for 40 and 100G should be the product target because they represent over 60% of the datacom single-mode transceiver market after 2015, but 10Gbps should not be ignored because it is more than 50% of the market today. The data center is moving to a new platform where 10Gbps is the new foundation data rate. Servers with 10G ports are shipping today, which means high demand for transceivers at 10G and above. 40 and 100G transceivers built by co-packaging 10G lasers are shipping now, and we believe this represents a long-term opportunity.
The parallel single-mode laser is a key element. Suppliers who are able to design, manufacture, and deliver these lasers in high volumes stand to do well in this market. Suppliers are trying to deliver high volume products today. 40G using four lasers at 10Gbps is progressing well, but four lasers at 25Gbps for the 100G transceiver is proving to be more challenging.
Strategy is key tool needed
Strategy rises to the top of the tools list because Chinese transceiver vendors do not typically lead the market in technology development, but enter once high volumes are achieved and a mature product established. Innolight is bucking this trend; it is already focused on the data center opportunity and developing 10, 40, and 100Gbps transceivers.
It is attacking the market through packaging, a good idea because this is one of the most expensive parts of the transceiver. Accelink has a history of introducing high-data-rate products but not delivering high volumes for these products. Hisense has internal laser design capabilities through its Archcom acquisition and a vertical integration strategy. Both Accelink and Hisense need to decide and proactively attack this market – notwithstanding the challenges, they need to be mindful that the data center opportunity is the largest one for single-mode transceivers.