The optical supply chain will not experience any lasting damage as a result of the COVID-19 pandemic. So argues LightCounting in a research note.
John LivelyThe market research company notes how the experience of the Coronavirus pandemic has highlighted the many benefits of the digital economy.
And the jolt the world is experiencing will if anything, strengthen it.
“All kind of things are happening as a result of the pandemic,” says John Lively, principal analyst at LightCounting and author of the research note. “Telecommuting, telelearning and telemedicine have all been used before, but never on a scale like this.”
Pandemic toll
Given how governments have shut down activities to contain the spread of the virus, it comes as no surprise the severity with which the world’s economy has been hit during the first quarter of 2020.
LightCounting cites startling figures concerning the world’s two largest economies.
Some 6.6 million Americans filed unemployment claims in the week ending April 1st, double the previous record that was set just a week earlier. And up to 47 million jobs could be lost, a third of the total US workforce, according to the US Federal Reserve Bank.
Meanwhile, in China, the gross domestic product (GDP) in the first quarter is expected to plummet 9 per cent, the first decline in three decades.
Looking more closely at the telecom and datacom industries, LightCounting highlights four developments that overall give cause for optimism.
Returning to work
First, China is returning to work. LightCounting cites figures from China that claim that factories are now staffed at 80-90 per cent of their full production levels. However, figures published by the American Chamber of Commerce in China are less rosy. Of the 120 member companies it surveyed, a quarter said all their staff continued to work from home (as of March 13th).
Talking to Chinese optical component companies, LightCounting says each firm has gone through a process with their local governments to reopen such as meeting the various hygiene protocols and ensuring a suitable distance between staff.
The second development is notable growth in network traffic as a result of people working from home and families being in lockdown.
The growth in the use of the videoconferencing tool, Zoom, is well documented, but strong growth has been witnessed elsewhere. Microsoft’s Teams collaboration application reached 44 million daily users, up 12 million in a week, while the use of its Windows Virtual Desktop has tripled.
In turn, AT&T and Verizon have reported double-digit growth in viewers of their TV and streaming demand content, while Netflix, YouTube and Disney have cut by a quarter their streaming video quality in Europe to lessen the network burden.
Spending on infrastructure by the operators, the third pointer highlighted by LightCounting, promises encouraging growth. The main three Chinese operators plan to increase their 5G spending in 2020. China Mobile, for example, is spending 100 billion yuan on 5G infrastructure, 4x what it spent on 5G in 2019.
Lastly, telecom equipment and component sales are expected to be down in the first quarter, with five companies - Ciena, Infinera, Lumentum, II-VI and NeoPhotonics - issuing guidance warnings.
These range from Ciena which lowered its previous guidance by 3 per cent to NeoPhotonics which expects a 10 per cent drop in the first quarter.
The responses of Chinese optical component players range from not expecting sales to be hit at all to a 15 per cent decline in 2020. LightCounting also noted that companies with sales predominantly outside China were more worried about demand in the coming two quarters.
Punctuated Equilibrium
LightCounting cites a concept coined by Stephen J. Gould, the late evolutionary biologist, of punctuated equilibrium which argues that species do not evolve at a constant rate. Rather, they experience long periods of stability followed by rapid bursts of change due to significant disturbances in their environment.
“The same applies to societies and economies,” says Lively.
This explains why LightCounting believes the coronavirus of 2020-21 will accelerate trends that promote the digital economy.
Lively cites the tens of millions of US students and adult workers now operating from home. “Once the genie is out of the bottle it may prove difficult to put back,” says Lively who, as an analyst, has worked from home for over two decades.
In turn, the need for social hygiene and new habits such as touch-free shopping will boost adoption of digital wallet technology.
Current events also highlight the importance of broadband and the disparity in the quality of service being delivered, especially in rural areas. This too will cause change.
The hyperscalers - Alphabet (Google), Amazon, Apple, Facebook and Microsoft - are well-positioned to weather the storm, being providers of the hubs of the digital economy and having deep pockets. Malls and other brick-and-mortar retailers, in contrast, will suffer greatly.
Lively stresses that it is early days and that the analysis is speculative. It also assumes that massive damage won’t be done to huge swathes of the global economy.
But he is confident that the optical industry will not be badly damaged, and nowhere near the scale of the bursting of the dotcom bubble in 2000 that then crashed the optical industry.
“The oversupply of bandwidth [which developed during the dotcom boom] resulted in a drastic cutback in demand, and that hit our industry directly,” he says. Revenues shrank 30 per cent in 2001 and 30 per cent again in 2002.
“It took years to recover and many companies went out of business including hundreds of start-ups,” says Lively. “But the big players remain, even if some have changed their names.”
Current events will not be as severe as two decades ago since the epic oversupply of bandwidth directly impacted the optical industry, says Lively.
He also ends on a positive note: “It is difficult to think of another industry we would rather be in as we ride this storm.”