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LightCounting's (LC) latest analysis pointed out that cloud applications will save the global optical device market in 2017 and may again become the main driver of the market in 2018. Demand for 100GbE transceivers from large U.S. data center operators remains strong, and China’s cloud companies have begun deploying the technology. LC expects that the cloud application optical module market (including China) will grow from about 2 billion U.S. dollars in 2017 to more than 6 billion U.S. dollars in 2023 under the stimulus of 400GbE optical sales.
In 2017, the demand for optical devices and modules in other application markets shrunk. LC believes that this is mainly due to weaker-than-expected demand for optical devices from Huawei ZTE and optical device deployment requirements in the Chinese market (such as the telecommunications applications in the Chinese market as shown in the above figure). As early as March 2017, suppliers of optical components and modules reported a significant drop in sales to these customers, which was related to the excess inventory that Huawei ZTE accumulated in 2016. By the end of 2017, most of the excess inventory had been exhausted, but suppliers’ financial reports showed that the demand of these Chinese customers was still slower than expected. In addition, the United States recently banned the sale of U.S.-manufactured products to ZTE, and the US Department of Justice’s criminal investigation into Huawei has made the market even more confusing.
If ZTE’s ban can be lifted within a few weeks, the market will return to normal. If this is a long-term trade war, then the sales of ZTE and Huawei to U.S. optical device and module vendors will drop sharply in 2018, which will cause far more damage to U.S. suppliers than Huawei ZTE. LC believes that the Chinese government will certainly help Huawei ZTE to maintain its business while handling supply chain disruptions, but US optical device and module suppliers have not yet reached the "Too Big to Fail" scale.
Huawei and ZTE occupy approximately 50% of the global market for telecommunication optical network equipment. In the above figure, LC's prediction of the demand for optical devices in the Chinese market in 2018 is based on the best situation that Huawei and ZTE can solve. Needless to say, in the long-term trade war situation, many projects will be postponed, and sales of telecom optical components in the Chinese market will also drop sharply in 2018.
LC said it is unlikely to change long-term market forecasts. A few years ago, Huawei and ZTE began a long-term strategy to reduce their dependence on Western optical suppliers. This strategy was promoted to the government level in 2017 and early 2018. The latest escalation of the U.S. government’s trade disputes further exacerbated this shift.
Huawei has already manufactured a lot of optical products internally, and ZTE has begun to catch up. In the 2019-2023 forecast, LC assumes that these companies will manufacture most of the high-end optical devices (including DWDM devices and modules) internally. However, in the future products such as 400ZR, DWDM module suppliers will still have the opportunity to conduct business with Huawei ZTE. LC predicts that by 2022, 400ZR product shipments will exceed 100,000 - far more than any other coherent DWDM product on the market. LC believes that in terms of large-scale and low-cost, the products of module suppliers that can be shipped in such large quantities should be superior to the internal manufacturing of large companies such as Huawei.