TRENDS
By KATHLEEN RICHARDS
China is on a buying spree. As the telecommunications sector takes a beating in most regions of the world, the optical technology market in China during the first six months of 2001 surpassed its total consumption in 2000.
The market in China for WDM, SDH, and digital crossconnects (DCS) reached $1.1 billion for the first six months of 2001, according to Matt Walker, regional director of the Asia Pacific program at RHK (South San Francisco). The total market for the year 2000 was $1.2 billion. "The optical market is on track to hit our 2001 forecast of $1.9 billion," says Walker "and will probably exceed it."
As the country's central government intended, deregulation is spurring competition. Carriers such as China Telecom, China Unicom, China Netcom, China Railway Communication Co., Ltd. (China Railcom), China Mobile, and Jitong Networks Communications are building out their nationwide backbones and metro and local networks are being deployed by regional telecom branches serving various provinces. These network installations in turn are driving demand for DWDM, SDH, and other optical networking technologies in China.
Domestic companies are also ramping up and developing technology that meets market standards. Local vendors represented about 50% of the DWDM, SDH, and DCS market in the first half of this year, up from 40% in 2000 according to RHK research. Domestic vendor Huawei had a 32% share, followed by Nortel with 18%, local company ZTE with 12%, Lucent with 9%, and many other companies in the single digits.
The demand for optical technology is not limited to systems. "Based on the feedback that we've gotten from some sources in China, the demand there is a lot stronger than what we had forecast a couple of months ago," says Patrick Fay, fiber and cable analyst at KMI Corp. (Providence). "We had forecast consumption of fiber and cable for this year at about 9 million km and now it's closer to 12 million km."
A large majority of the fiber that is getting installed is still the conventional singlemode fiber, believes Fay. Although Corning is starting to mention other markets such as China and South America as outlets for nonzero dispersion-shifted fiber, the demand in these markets is not going to replace the demand for fiber that has gone away in North America.
Corning is selling a lot of fiber into China, however. Already this year, Corning won contracts with three major carriers: China Netcom, China Unicom, and China Telecom. Corning will supply each carrier with several hundred thousand km of its nonzero dispersion-shifted LEAF fiber.
In July, Corning reached an agreement with Lucent to acquire its controlling interests in Lucent Technologies Shanghai Fiber Optic Co. Ltd. and Lucent Technologies Beijing Optic Cable Co. Ltd. for $225 million in cash, pending government and shareholders' approvals.
"There is an ability for newer telecom operators to build out networks, which wasn't the case a few years ago when it was basically just China Telecom and China Netcom," says Fay. "I've heard that the fiber counts are quite a bit higher now on backbone construction and in metro networks. Just like here in North America and Europe, you have more network operators with larger footprints putting in higher fiber counts, which is helping to drive the demand for fiber in China right now."
The continued network expansion is fueling high growth in DWDM and SDH technology in the region. In the first half of 2001, local vendor Huawei accounted for 39% of the SDH market, followed by ZTE with 15%, Nortel with 11%, and several other companies in the single digits, according to RHK research. For WDM technology, Nortel represented 43% of the market, followed by Huawei with 20%, and Lucent with 9%.
China is currently one of few bright spots for DWDM technology. "There's been an uptick in activity in China," says Neil Dunay, senior analyst at KMI. "Asia Pacific is one of the strong growth areas for DWDM in a year that is going to be really bad for the business."
While the DWDM market overall is forecast by KMI to contract about 15% this year, dropping to $7.1 billion from $8.3 billion in 2000-primarily due to a lull in the North American long-distance market-the market is expected to almost double in the Asia Pacific region, where it is forecast to reach $800 million, up from $415 million last year. China represents a hefty part of that market.
In the first half of this year, at least 10 DWDM contracts in China were announced, compared to 14 DWDM contracts total in 2000. Nortel Networks has announced a significant number of 10-Gbit/sec DWDM contracts this year. One, announced in February, is with China Telecom to equip and install a 15,000-km terrestrial network (including other optical infrastructure equipment), which is valued at $101 million over a 12-month period. To date, Nortel has publicized approximately 30 contracts in China for 10-Gbit/sec and DWDM optical solutions, many with China Telecom, China Railcom, and Jitong, as well as their provincial telecommunications branches.
Lucent Technologies and Huawei also inked several DWDM contracts in the first half of 2001. "The input that I've gotten from other vendors is that Lucent is doing a lot in China that is not reflected in the publicly announced contracts," says Dunay.
"The thing that is interesting about China is that it is a highly competitive market where price is really a large factor. Price is a factor everywhere, but in North America there are qualitative things that the carrier will consider in terms of being able to upgrade a system or what the total capacity is," says Dunay.
The worldwide market is expected to recover and is forecast by KMI to reach $10 billion in 2002. "Carriers will want to start looking at deploying new systems again in the middle part of 2002, and that's based on what type of systems were deployed in 1999 and 2000 and how quickly they are filling up channel card slots," asserts Dunay.
Some analysts and vendors are approaching the strength of the optical market in China cautiously. The surge in activity during the first half of this year is partly due to a delay in some investments and in the signing of contracts in 2000 as the dominant carrier China Telecom dealt with restructuring and branch management issues, says Dr. Hui Pan, chief economist, Information Gatekeepers (Boston).
"There are a lot of contracts announced in Q1/Q2, but actual spending [sending money to vendors so they can book revenues] is much more consistent," says RHK's Walker. "When China Telecom's centrally managed spending dominated the market, spending was a bit more imbalanced. Now it's more chaotic, as lots of carriers are building out their networks and are driven more by market aspirations than the plan."
The high growth in the market is likely to continue. The Chinese government will spend $151 billion on its telecommunications infrastructure by 2005, according to China's tenth five-year plan. Another $3.6 billion will be used to build the information technology systems needed for the 2008 Olympic games scheduled to take place in Beijing in 2008.
"When you consider how big China and its networks are, how fast macro growth is, these carriers are just getting started," says Walker. "Our forecast has China's optical technology sector at roughly $5.5 billion by 2004."