A day after the U.S. Department of Commerce activated a previously suspended seven-year ban on U.S. component sales to ZTE (see "U.S. Commerce Dept. finds ZTE violated export disciplinary agreement, bans U.S. component supply"), the optical community is still evaluating the fallout. Questions remain about where ZTE will turn to replace the U.S. optical communications devices that play important roles in ZTE's systems, as well as how ZTE's U.S. suppliers will deal with the sudden loss of a customer.
ZTE says it is taking stock of the situation. "ZTE is aware of the denial order activated by the United States Department of Commerce," the company posted on its website. "At present, the company is assessing the full range of potential implications that this event has on the company and is communicating with relevant parties proactively in order to respond accordingly."
As it is unknown whether ZTE can appeal the Commerce Dept. action, observers have begun speculating about where ZTE might find alternative sources of coherent DSPs and other semiconductors, optical modules, and optical components. Whereas several optical components companies reported last year that sales to China declined due to excess inventory at Chinese systems house, that excess is believed to be gone or nearly so. Meanwhile, while the Chinese government has launched an initiative to lessen the reliance of the country's systems manufacturers on foreign components (see "New 5-Year Optical Component Plan from China’s MIIT spells trouble for foreign suppliers: Cignal AI"), that effort is still in its early stages. Thus, observers believe ZTE may face an acute situation.
"I don't think there is anywhere they can go for critical components," wrote Andrew Schmitt, founder and lead analyst at Cignal AI, in response to a Lightwave email query. "The only other suppliers for some of the devices are in Japan and it isn't clear at this point what direction they will take with ZTE. Even then, there are components like WSS modules and tunable lasers that have no non-U.S. sources. The situation is the same for other businesses – control plane processors, software, FPGAs, Qualcomm chips for mobile phones. The Dept. of Commerce effectively signed a death warrant for ZTE."
In a note issued today, Vladimir Kozlov, founder and principal analyst at LightCounting, noted that the components and modules in question include coherent DCO optical transceivers and coherent DSPs from Acacia Communications as well as 100 Gigabit Ethernet optical modules from the likes of Lumentum and Oclaro. Broadcom, Intel, MACOM, Semtech, and other U.S.-based semiconductor vendors supply related silicon, says LightCounting, which leaves ZTE with a lot of ground to cover.
Japanese vendors such as NEL could supply coherent DSPs, Kozlov points out; HiSilicon, a subsidiary of Huawei, also makes such devices but may not want to supply them to a competitor of its parent company. Meanwhile, while Chinese and Japanese optical module vendors could offer 100 Gigabit Ethernet modules, many if not all of them leverage U.S.-sourced components that could be subject to the ban, Kozlov states.
Meanwhile, some of the publicly traded among the U.S. component and module suppliers to ZTE are disclosing the potential toll to their revenues. As reported yesterday, Acacia Communications acknowledged the ban and stated the company was "assessing the impact of these developments." NeoPhotonics issued a statement today in which it reported that sales to ZTE accounted for 1% of revenues in fiscal 2017. However, it supplied components to ZTE supply chain partners that represented 3% of total 2017 revenues. The company noted the expected uptick in demand from Chinese companies such as ZTE in 2018 and said it had anticipated sales to the systems house and its supply chain partners would account for 5% of revenues. Meanwhile, NeoPhotonics held as of March 31, 2018, approximately $1.5 million worth of products in inventory destined for ZTE that it plans to write off in the first quarter. Oclaro and Lumentum have yet to make public statements.
On the semiconductor side, MACOM announced that sales either directly to ZTE or through distribution channels during the recently concluded second fiscal quarter amounted to approximately $1.6 million, an amount MACOM described as "immaterial to MACOM's second fiscal quarter revenue as a whole."
Wall Street isn't waiting for a total accounting before it acts. Bank of America Merrill Lynch downgraded Acacia's stock from "Buy" to "Neutral" and dropped the stock's target price from $46 to $28. However, after losing 35.97% of its value yesterday, the company's stock has rebounded, trading at $26.23, a gain of 2.34%, as of approximately 2:45 PM Eastern this afternoon.
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