my country's optical chip technology upgrades accelerate the proportion of optical devices to rise year by year

Optical chips and optical components are the basic elements for manufacturing optical devices, among which chips occupy the commanding heights of technology and value, and the domestic market is still weak; optical components mainly include ceramic sleeves/ferrules, optical transceiver interface components, etc. China is the world's largest production base, and the market competition is fierce; in terms of optical passive components, connectors and splitters are in fierce competition, and the threshold for wavelength division multiplexing devices is relatively high; in terms of optical active components, the technical content is high, and domestic companies have certain advantages in amplifiers and transceiver sub-modules; and optical modules are packaged from a variety of optical devices, such as light sources, detectors, etc., and the competitiveness of domestic high-speed optical modules is improving.

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Optical communications usher in a major development cycle

Due to the advantages of optical communication such as "large communication capacity, long transmission distance, resistance to electromagnetic interference, low transmission loss, and small signal crosstalk", it has become the world's most important means of information transmission.

The access network of the telecommunications market is welcoming the optical upgrade. Optical communication systems have been widely used in the development process of recent decades. The traditional application field is the telecommunications industry, including backbone networks, metropolitan area networks and access networks. At present, the backbone network and metropolitan area network have been fiber-optic, and the access network is undergoing fiber-optic upgrades. The 3G/4G and future 5G base stations of the mobile communication network will need to use optical fiber networks for data backhaul. In recent years, with the increasing popularity of heavy traffic applications such as video and live broadcast, the explosion of traffic has put forward higher requirements for the upgrade and expansion of communication networks, and optical communications have ushered in a new round of major development cycle.

The explosive application of optical communication systems in data centers, the rapid development of cloud computing, the increasing richness of applications such as big data and the Internet of Things, and the continuous growth of Internet users have promoted the accelerated construction of large-scale data centers. Data center networks require the use of optical fiber cables, optical communication equipment and devices, all of which have brought new market opportunities to the optical communication industry.

The proportion of optical devices is increasing year by year

In the market output value of the optical communication industry, optical devices generally account for 20%, optical equipment accounts for 40%, and optical fiber cables account for 40%. We predict that the proportion of optical devices in optical equipment will increase. There are two main reasons: on the one hand, the miniaturization, modularization, integration and intelligence of optical devices are gradually replacing discrete electronic components and optical components with single functions, and their performance can also replace the functions that originally needed to be realized by the system or equipment; on the other hand, the optical network architecture is changing. Previously, optical communications were mainly used in backbone networks and metropolitan area networks, but with the increase in bandwidth demand and the decrease in the cost of optical network construction, optical transmission networks have been extending to access networks. The number of nodes and terminals in the access network is much larger than that in the backbone network and metropolitan area network, and each node and terminal requires optical devices, so the use of optical devices in the access network is much larger than that in the backbone network and metropolitan area network.

As the high-speed transmission of electrical signal interconnection approaches its limit, optical interconnection has attracted attention as an urgently needed alternative technology. Optical communication will gradually extend to the user end, and eventually realize fiber to the desktop, fiber to the server, and even board optical interconnection and chip optical interconnection. At present, some personal computers, high-performance servers, mobile phones and other products have begun to use optical interfaces, which requires a large number of optical devices. We believe that as the manufacturing cost of optical interconnection continues to decline in the future, optical interfaces are expected to be applied to more products. In addition, the progress of silicon photonics technology that mixes optical paths and circuits on a single chip and the global wiring of microprocessor chips also show the possibility of using optical interconnection between chips and within chips.

Therefore, the distance between optical communication nodes is getting shorter and shorter, the number of optical devices required is increasing, the application scenarios are becoming more and more extensive, and the market size is expected to grow larger and larger.

Domestic substitution becomes a trend

With the inauguration of the new US President Trump, the risk of trade friction between China and the US has increased. Domestic optical communication equipment companies such as ZTE, Huawei, and Fiberhome will inevitably be haunted by the "ZTE incident". LightCounting also recently commented that President Trump's desire to reach a "better deal" and "fair trade" with China was mentioned many times during the campaign. There is a risk of trade friction between China and the US, which will have a significant impact on the optical communication industries of both countries.

We believe that everything has two sides. From the perspective of the game between major powers, the "ZTE incident" will undoubtedly help enhance the strategic position of my country's optical chips and high-end optical devices. The country may further increase its support and accelerate the process of import substitution. In addition, domestic substitution has two feasibility bases. First, my country's optical communication equipment market share is the world's leading. According to IHS and OVUM data, in the fourth quarter of 2015, my country's Huawei, ZTE, and FiberHome Communications accounted for 26%, 11%, and 6% of the global optical network equipment market share, respectively. Huawei ranked first and ZTE ranked fourth. In addition, from the perspective of data tracking, Huawei, ZTE, and FiberHome's global share is still increasing.

Second, the country has vigorously developed the semiconductor industry and established a nearly 140 billion yuan National Integrated Circuit Industry Investment Fund. As of October 2016, the National Integrated Circuit Industry Investment Fund had raised 138.72 billion yuan in its first phase, made 40 investments, and committed to investing nearly 70 billion yuan, of which about 60% was invested in the semiconductor manufacturing sector.

We believe that the optical chip industry, which mainly produces optical active devices such as semiconductor lasers and semiconductor detectors, also belongs to the semiconductor industry. The occurrence of the "ZTE incident" may accelerate the government's support for my country's upstream high-end optical chips and optical modules, thereby promoting the technological upgrading of my country's optical chip industry.