The latest issue of the LightCounting Post focuses on the optical communications industry chain, noting that the optical device and module suppliers' profit margins have been the lowest in the entire industry chain over the past 15 years. This seems to be inconsistent with the chip and device level in the current trade war. In 2018, the average profit margin in this area was less than 4%, although the industry boom period of a year ago reached 9%. What is the cause of this result?
LightCounting believes that the proportion of optical devices in the entire communications industry is too small. The entire ICP and CSP (commercial service provider) industry is worth $1.8 trillion, including $300 billion and $200 billion in network equipment and semiconductor chip industries, respectively, and sales of all listed optical components and modules. Adding up to $7.2 billion in 2018, the profit is only $270 million. In contrast, the size of the entire CSP industry reached $111.0 billion in 2018. It is the difference in scale that causes optical device manufacturers to have no pricing power in front of Big Mac customers. Take the 100GbE module as an example. Last year, the shipment of this product more than doubled, exceeding 6 million, but sales only increased by 14%. If we look at the growth of the 100GbE module market earlier (150% in 2016 and 45% in 2017), we will have a deeper impression of the price decline. In 2016, there are not many good manufacturers who can develop 100GbE modules, and a few pioneers can maintain profit levels. However, with the maturity and proliferation of development technologies, manufacturers are swarming in, and the price decline is inevitable. In particular, customers are often stocking up in advance because they are worried about shortages. And once the supply improves, inventory adjustments are inevitable. This situation is not uncommon in the history of the optical device industry. The good days for manufacturers who are investing in new technologies are only a couple of years, and sometimes they have to rely on luck.
Comparison of profit rate trends in various fields of optical communication industry chain
In other industries, patents often become an important tool for leading manufacturers to protect profit margins. However, in the optical device industry, there is a great controversy about whether leading manufacturers have core patents and how patents are protected. On the one hand, MSA and customized products are emerging one after another, making technical protection difficult.
For the optical device industry, the greater risk now comes from the fierce ongoing trade war. Companies like Suntech that rely on Huawei for half of their sales are now in real danger.
All in all, customers who are overbearing (using the word demanding is a bit weak), the ever-shrinking development cycle and the increasing investment in developing new products are huge challenges for today's optical device companies. The important means by which newcomers can challenge traditional leaders will be new technologies, such as silicon-based optoelectronics. In the next few years, the profitability of existing leaders will remain. Lumentum/Oclaro, these companies are trying to adjust the product structure (such as Lumentum sell module business to Cambridge), and newcomers such as Acacia and Xuchuang hope to reduce costs by outsourcing and introducing new package integration test technology. The Super 100G field is still a market targeted by start-ups and latecomers, but there are still significant risks.
The history of major equipment companies developing their own devices more than 20 years ago is repeating itself. Cisco has successively acquired Silicon Light's Lightwire and Luxtera, and Intel has invested heavily in optical modules. Arista's founder Andy Bechtolsheim pointed out that optical devices are currently the weakest part of his business and put a lot of effort into it. Optical devices, the increasingly important position of optical integration in the future industry has attracted large manufacturers to enter.
This is not the first time LightCounging has talked about the low profit margin of the optical device industry. More from the perspective of US companies, the solution they seem to appear seems to be continuous product line adjustments and the introduction of new technologies, such as the sale of Lumentum/Finisar and silicon technology. But for our Chinese companies, we need more ideas.
In the face of scale and strength to crush their own customers, continuous price war is not the best way. Our suggestion is that optical device manufacturers should enhance their own strength and bargaining weight through mergers and acquisitions, technical cooperation, brand building, etc. On the one hand, they should strive to find new ways and seek new market opportunities, such as the current operator lighting module. Such as the Belt and Road market.
The megatrend of open source decoupling across the communications network is providing optical device companies with new market opportunities. If we can't do too much work at the chip level for the time being, can we do more work at the subsystem level?