Chinese optical component vendors set for change
Thursday, April 14, 2011 at 8:58AM China’s optical component firms must adapt if they are to match their Western counterparts in market reach, company ambition and technology portfolios. These are the findings of a report - China: The New Land of Opportunity - on the local optical component (OC) industry by market research firm, LightCounting.
“If [Chinese optical component] companies get $100m from an IPO, they have the resources to really do things”
Vladimir Kozlov, LightCounting
The local OC players have benefitted from the prolonged growth of China’s economy, the rise of global telecom system vendors Huawei and ZTE, and the significant expansion in Chinese operators’ networks. But such domestic growth will not continue and will likely lead to a shake-up of the local OC firms.
“They [Chinese OC players] all have the same industry pitch: they all have huge capacity, they have tons of people and they are growing fast but when you research that, you uncover different approaches to doing business,” says Vladimir Kozlov, CEO at LightCounting.
The market research firm has identified several classes of OC player. There are quite a few mid-size companies that focus on niche local opportunities. “Very few of them have an ambition of becoming a global player,” says Kozlov. “They have been set up with local government support, primarily with the aim of employing local people and being involved in local telecom projects.”
But there are other players with broader ambitions and resources. Companies such as HiSense Broadband and HG Genuine, acknowledged manufacturers of electronics and consumer products, have formed OC business units recognising the growth potential of optical communications.
Another category that Western firms will do well to note, says Kozlov, is the Chinese OC players with a long history such as WTD and Accelink. “WTD is 30-years-old and grew from the Wuhan Research Institute that is also a founding body for Chinese system vendor FiberHome,” says Kozlov. WTD has been growing steadily and the pace has accelerated in the last two years. “WTD is becoming more aggressive and is gaining market share while Accelink has a successful IPO that brought in $100m,” he says.
Other companies will likely follow Accelink’s example and raise money through IPOs. But what will be interesting is whether such companies continue to focus on the Chinese market or start addressing issues such as what technologies they are missing and even make acquisitions, he says.
“A lot more companies will have access to financial markets as the regulation that limits how many companies can become public is relaxed,” says Kozlov. “If [Chinese OC] companies get [US] $100m from an IPO, they have the resources to really do things.”
“It is unlikely that Huawei will keep on growing as fast as it did over recent years and continue to take market share from Alcatel-Lucent, Ericsson and others for much longer”
Yet another Chinese OC player segment is start-ups funded by venture capitalists (VCs). One example is Innolight which has received funding from local VCs and a Western company. “VCs will push firms to be as ambitious as possible as they are after returns,” says Kozlov. Interest among the financial investment community is also growing given the rise of the stock price of the OC industry’s leading firms in the last year. Such interest will likely lead to investment and restructuring of local Chinese firms, he says.
Chinese OC vendors have been helped by the rise of the system vendors Huawei and ZTE. The Chinese equipment makers have been disruptive in adopting technology quickly while reducing their costs. But having become global players, Huawei and ZTE now face their own challenges.
“Both [system vendors] companies have caught up on the technology and the next step for them is to see whether they can become leaders in technology and stay ahead of an Alcatel-Lucent or a Ciena,” says Kozlov. “They have the ambition but can they do it?” Kozlov notes that Chinese companies are now highly active with patent applications: “Chinese firms recognise that this is how they will achieve a longer-term advantage and protect their own technologies.”
Another challenge facing the system vendors, common to many technology industries, is that no one player dominates a market. “Usually three global companies share the dominance; the same if it is a local market,” says Kozlov. “It is therefore unlikely that Huawei will keep on growing as fast as it did over recent years and continue to take market share from Alcatel-Lucent, Ericsson and others for much longer.”
This will require Huawei and ZTE to adapt to more moderate growth in future. Meanwhile North American and European system vendors have long responded to the competitive threat, moving their manufacturing to Asia Pacific - and China in particular - to benefit from reduced operating costs. For the Chinese OC vendors, yet to become global players, the chance to be as disruptive as the Chinese system vendors has gone since leading OC vendors have established local manufacturing.
Can Western companies learn from the experience of Chinese system and OC vendors? Kozlov is not so sure.
The Chinese have proved adept at learning the business and mastering new technologies. The examples of Huawei and ZTE that have disrupted the market by being as efficient as possible have proved a wake-up call for Western companies. “I don’t see anything beyond that that Western companies can learn; it is still the Chinese that are learning from Western companies,” says Kozlov. “This does not mean that the Western companies have nothing to worry about; there is plenty of room for improvement in the industry supply chain.”
Looking at the decade ahead, Kozlov expects Huawei to have a much greater penetration in the North American telecom market. “And as it [Huawei] builds up its own intellectual property, it will be better able to compete with Cisco Systems and H-P in the datacom market,” says Kozlov. And as Chinese companies get access to greater finance he also expects they will start acquiring Western firms to gain expertise and greater access to markets.
Reader Comments (1)
Via LinkedIn's Optical Networking Group
Many of my suppliers told me that, for the optical component market, the amount of mainland [China] sales is much bigger than the foreign market. My office is using fiber now, it's good and for the fiber internet in China, it is still just a beginning.
Chinese people like to enjoy new stuff. I believe in the next couple of years, fiber optic components can still be a very hot merchandise in China.
Posted by LUCY KING