A few days ago, Iain Morris, the international editor of the well-known communication industry media Lightreading, published an in-depth observation article in the website news analysis column, analyzing the current competition pattern and changing trend of the global optical fiber access market for us. The article points out that while component costs are soaring, suppliers are pouring into the multi-billion-dollar PON equipment market, a change driven by a number of factors. The following is the latest analysis of his views:
5G mobile communication is still the focus of the telecom industry, and it is self-evident that the world's major manufacturers are competing fiercely. For some manufacturers, though, fiber-optic networks may be the next smarter investment.
Take a look at the data and you might get a glimpse: Not long ago, the communications industry leader Nokia reported stable first-quarter sales in its mobile business, but a 37% year-on-year increase in its fixed business. Overall revenue for the global passive optical network (PON) equipment market exceeded $8 billion last year, according to market research firm Omdia. It is predicted that this figure will reach $16 billion by 2027.
Investors and governments' enthusiasm for laying cables also explains why companies are flocking to an industry that has so far been dominated by a handful of suppliers, mostly Chinese. According to the survey, in 2021, Huawei, ZTE and Fiberhome will occupy 64% of the optical fiber line terminal (OLT) market. Nokia is the only large Western supplier, accounting for nearly a quarter (25%) of the OLT market.
The $8 billion optical fiber access market is experiencing shocks and mutations
However, this situation is also experiencing a sudden change. Suppliers in the Chinese market are facing a crisis, while other manufacturers have gained opportunities in the strong opposition to Chinese suppliers in most parts of the world. Not long ago, the U.K. announced a ban on fiber optic purchases from Huawei and ZTE, a blessing for fast-growing U.S. broadband equipment maker Adtran: Adtran’s revenue rose 17 percent to nearly 1.55 percent in the first quarter of this year. billion, after the company also gained market share in 2021. It is worth mentioning that in addition to the United Kingdom, India, the European Union and other countries have also initiated anti-dumping measures against the import of optical fiber and cable products.
New entrants flock to the fiber optic market
The fiber optic market has also attracted interest from companies that have never produced broadband access equipment before. Ciena is a radical example of this, the US company is known for making optical equipment for use outside the access network. Michael Genovese, an analyst at Rosenblatt Securities, estimates that the PON market is worth $3 billion, and Ciena is now a "meaningful player."
According to Michael Genovese, Ciena has the ability and confidence to sign a contract with AT&T, one of the largest operators in the United States, to supply XGS-PON-based Optical Line Terminals (OLT). XGS-PON is a higher speed alternative to the now widely used GPON standard. AT&T, which previously relied heavily on Nokia for OLT equipment purchases, plans to expand fiber to 3 million to 4 million homes by 2025, he said. Michael Genovese estimates that the AT&T deal alone could account for 2% of Ciena's revenue next year.
India's STL (formerly Sterlite) is another company entering the broadband access OLT market from optical equipment. Julie Kunstler, Omdia's principal consultant, noted that the company has developed a device that uses Tibit's pluggable OLT products. In this way, STL can run PON software on white-box equipment, attracting operators who prioritize decentralization and openness, Kunstler said in a recent report.
"The hardware will be off-the-shelf, and then all the value will be in the software," said Ankit Agarwal, managing director of STL, likening the divergence to what is happening in radio access networks. trend. "There are many benefits to applications in scalability, telemetry, and quality of experience. All of these can substantially reduce the cost of ownership and run on a native cloud platform, providing 10G services."
So, should established suppliers be concerned about this? Growth so far by smaller players and new entrants has come at the expense of Chinese players, with Nokia gaining market share last year, according to Omdia. But the figures show that even Huawei's OLT revenue will grow in 2021, as Chinese operators and smaller countries that remain friendly to Chinese suppliers are still investing in fiber rollouts.
Earlier this year, Federico Guillen, head of Nokia's networks business, said: "One of the things you have to notice in Europe is that the penetration of fibre is very low. Italy, UK, France, Countries like Germany, Belgium, the Netherlands are now deploying fiber on a large scale. Even cable operators are starting to adopt FTTH (fiber-to-the-home) networks because of the limitations of DOCSIS (a cable standard).”
Constrained supply amid Covid-19, profits slump
Yet despite the gloomy market outlook, investors remain pessimistic about most of these companies, as evidenced by their share prices and product sales: Nokia's share price has fallen by a fifth since the start of the year, Shares of Adtran fell 21%. Only 13% of Nokia's sales come from fixed access. Ciena is down 43% over the same period. STL's share price has even halved.
Sales are growing, but in many cases, not enough to offset the dramatic increase in costs. Adtran posted a first-quarter loss of $1.1 million after cost of sales rose 25 percent to $102 million. Ciena's figure rose 30% during that period to about $547 million -- though net profit fell 62% to about $39 million after the company invested heavily in research and development.
Shortages of semiconductors and other components required for optical equipment during the COVID-19 pandemic have further pushed up the cost of optical sub-assemblies, with some key optical sub-assembly suppliers unable to even meet their supply commitments. Ciena's supply chain conditions have "deteriorated significantly" in the most recent second quarter, Chief Executive Gary Smith said in this month's financial update.
"China is actually a major source of many low-value commoditized components, and our revenue has been impacted," Gary Smith noted. "There simply isn't enough components to meet demand across multiple industries and market segments."
Adtran chief executive Tom Stanton also said in the company's latest quarterly earnings report that improved parts availability would boost sales and boost profit margins. If the Chinese market is still a headache for many manufacturers, international semiconductor companies are currently investing billions of dollars to increase production capacity in the European and American markets. Some, however, warn that a glut of parts could soon replace the current urgency of shortages, as emerging OLT makers surely hope so.
