Rapid growth in Asia-Pacific's optical transport market in 2000 is just the beginning.
MATT WALKER, RHK Inc.
The optical revolution begun in the United States is spreading across the Asia-Pacific region rapidly. It's bringing great business opportunities for vendors, but also challenges to the businesses of incumbent operators.
The Asia-Pacific SDH and WDM optical transport market, worth $3.5 billion in 2000, grew 63% above the 1999 market of $2.2 billion. And that's just the tip of the iceberg. RHK expects the Asia-Pacific combined SDH and WDM market to grow to about $17.2 billion in 2004 (see Figure 1).The 2000-04 compound annual growth rate (CAGR) of nearly 50% will push the Asia-Pacific region's optical market into third place worldwide, behind North America ($45.4 billion in 2004) and undersea ($36.4 billion). As investors worry about slowing optical growth rates in the United States and Europe, Asian growth is far from its peak.
Driving this growth are Internet-driven traffic explosions in backbone and metropolitan networks as well as new network construction spurred on by market liberalization.
Traffic jams. Typical backbone-traffic growth rates for Internet Protocol (IP) traffic on large incumbent networks in the Asia-Pacific region range between 100% and 300% per year. Traffic growth is also strong in metro networks, partly due to a rapid rise in mobile traffic. With the arrival of broadband access, and "2.5/3rd-generation" wireless services, the prospects are strong for continued growth, particularly at the network's edge.
New networks. In nearly every Asia-Pacific market, new networks are being constructed (see Table 1), challenging incumbents' old ways of doing business. Usually, the driver is increasing market liberalization. Though the process differs vastly across markets, policymakers throughout Asia-China, Japan, Taiwan, and even India-seem committed to opening up markets. And with deregulation, incumbents are forced to build out their networks faster and enter new markets in search of incremental revenue streams. Concurrently, another factor driving network construction is the continual progress of technology, WDM in particular. That convinces new carriers such as Crosswave Communications in Japan, that their networks will deliver services more cheaply than the incumbents.
Regionally, Lucent Technologies and Fujitsu had the strongest market shares in Asia-Pacific optical transport in 2000, largely due to Lucent's strength in China and Fujitsu's in Japan. NEC of Japan and Shenzhen, China-based Huawei are also strong, due to strength in their home markets. After these top four companies, the picture clouds. Traditional large vendors like Siemens, Nortel Networks, Alcatel, and Marconi are players on the market-share map. But a growing crop of regional vendors (ZTE Corp. and FiberHome in China and LGIC and Samsung in Korea) is also relevant. In the area of pure-play optical suppliers, Ciena is already well established in Japan and emerging in Korea, but there are a number of smaller suppliers becoming active: ONI, Sycamore Networks, Zaffire, LuxN, and others. One thing is sure, the Asia-Pacific market has plenty of room for new entrants.
RHK estimates the SDH and WDM optical transport market in China grew more than 80% in 2000, from $685 million in 1999 to $1.25 billion last year. That has meant booming optical sales for China's top two optical vendors, Lucent and Huawei. It's also benefiting other foreign vendors such as Nortel, Alcatel, NEC, Marconi, and Fujitsu and fostering the growth of China's domestic equipment industry (see sidebar, "China's local vendor scene"). To penetrate the market, foreign vendors are making significant investments on the ground in sales, manufacturing, and research facilities throughout China. RHK expects continued strong growth in China (see Figure 2).
In addition to China Telecom, five of China's six other licensed carriers are current or prospective big optical spenders:
- China Unicom, China Netcom, and China Railcom are already building vast backbones, and the first two carriers are also building metro-access networks in key cities.
- Jitong's proposed nationwide (32,000-route-km) network awaits funding, as the carrier chooses the right time for its IPO.
- China Mobile is installing WDM and SDH-initially in places like downtown Shanghai-and is contemplating a national backbone.
Broadband access another potential driver. Broadband-access adoption will have strong upstream demands on China's transport networks. Though this industry is nascent now, the potential is there. Already, xDSL has a niche market that is growing. Beyond this area, China has the advantage of the world's largest (by some measures) cable-TV network, administered by the State Administration of Radio, Film, and Television (SARFT), some of whose operating affiliates already are being allowed to provide telecommunications services, with a fair degree of market success. Obstacles certainly exist: Most of SARFT's cable plant is one-way and needs lots of upgrades before being truly broadband. But SARFT has begun linking its disparate franchises with an intercity backbone. Growth in traffic requirements at the edge will drive optical transport demand at the metro and long-haul core.
Restructuring making fast progress. China's telecom sector began a sweeping restructuring in 1998, spurred by the government's commitment to aggressively develop the sector. Prior to 1998, this development was almost entirely through China Telecom, the state-run operator then run directly by the Ministry of Posts and Telecommunications (MPT). But 1998 was a turning point:
- First, China Telecom was spun off from the MPT, and MPT was transformed into a relatively independent regulator, the Ministry of Information Industries (MII).
- Second, in 1999-2000, the government began to strengthen China Unicom as a competitor to China Telecom. Unicom, created in 1994, floundered in the early years. Now, with preferential MII treatment, the paging assets of China Telecom, and a successful multibillion-dollar IPO completed, Unicom is a credible competitor, mainly in wireless services.
- Third, China Telecom is being cut down in size and power. In May 2000, its mobile and satellite arms were divested into two separate companies, both of which hold operating licenses. China Mobile is already developing transmission assets of its own.
- Fourth, several other competitors are either in operation or on the horizon. Most important is China Netcom, a national IP-centric provider founded by AsiaInfo Holdings' founder Edward Tian.
The list of licensed carriers in China is now up to seven (see Table 2). In addition, there are a number of companies with networks but without telecom operating licenses; CITIC Pacific is just one member of this group.
Strong local suppliers in China. Lucent and Huawei have nearly equal shares of China's optical market. Huawei is not the only local supplier around, though. ZTE has growing strength in provincial networks. FiberHome, a spinoff from the Wuhan Research Institute, has won a couple of high-profile, though small, tenders. Datang Telecom, already a strong player outside of optical, has allied with Marconi to expand its product portfolio. And there is growing startup activity, leveraging China's strong optical research institutes/labs.
Japan's optical market, defined to include SDH, digital crossconnects, and WDM, grew from $874 million in 1999 to $1.32 billion in 2000, a 51% increase. RHK expects this market to grow to roughly $6.1 billion by 2004. Though a late starter in the WDM field, Japan's carriers will aggressively deploy WDM in the coming years: Japan's WDM segment alone is expected to reach $2.65 billion in 2004, nearly 20% of which will be for metro systems.
Most important to this growth is Japan's proverbial "800-pound gorilla"-NTT. This carrier, the world's largest, is quickly scaling its WDM deployments while continuing with prefecture-level SDH upgrades. Currently, its WDM deployment is limited to point-to-point backbone routes, using gear from Fujitsu, Lucent, and NEC. Its researchers, though, have concrete visions for evolving to all-optical networking in the next 3-5 years, as mapped out in Figure 4.
NTT's established competitors-particularly KDDI and Japan Telecom, but also PowerNets Japan and Crosswave-are busily upgrading their backbones with SDH and WDM and expanding metro-access networks into NTT's last miles. Cable & Wireless IDC has begun construction on a new domestic backbone, which may extend into cities. Part of Japan's metro-access capacity expansion-by both NTT and its competition-will provide an infrastructure to support Japan's rapid-growth wireless data and emerging xDSL services traffic. Exploding IP traffic is burdening backbones, but loop unbundling and 3G wireless services will have a large impact on metro-network infrastructure.
While Japan's mobile handset market is larger, the country's 32 million PCs also represent a nice target market. Either way, optical equipment makers benefit, both the local powerhouses (NEC and Fujitsu) and successful foreign vendors (Lucent, Ciena, and Nortel).
Japan's optical growth comes amidst a broader industry transformation:
- NTT, the biggest service provider in the world, with annual revenues of about $100 billion, began splitting into different divisions in July 1999. Though still held together by a holding company-which also runs the research labs-NTT's group companies are going in very different directions and on the verge of directly competing with each other.
- KDDI became Japan's second-largest carrier when KDD and DDI merged in 2000.
Japan Telecom remains strong as the third-largest carrier, but a new generation of common carriers (NCCs) is appearing:
- Crosswave, founded by Sony, Toyota, and Internet Initiative Japan, is building a national fiber network and deploying high-speed data services, with a heavy emphasis on Ethernet.
- PowerNets Japan, a loose consortium of utility-based carriers like TTNet and Osaka Media Port, is building a backbone to link their networks. Japan's utility carriers are also pushing forward in the local telephony market, trying to build on TTNet's capture of about 15% of this market in the Tokyo area.
- New data-focused local-exchange carriers (DLECs), led by Tokyo Metallic Communications and eAccess, have kick-started the broadband access market. Now, nearly every major Internet service provider is offering-directly or by partnership-affordable (less than $50 per month, plus installation charges, for downstream speeds of several hundred kilobits per second) xDSL aimed at Japan's consumer market.
WDM leveling the playing field. Japan's SDH market has been difficult for non-Japanese vendors to penetrate. The main reason is NTT's use of a slightly different version of SDH than the standard (with different timing and restoration rules). Lucent is the only foreign company to have SDH success, beyond domestic entities Fujitsu and NEC. Nortel has had some sales, but with SONET. This problem is disappearing, though, as WDM is deployed: If you're using open, transponder-based WDM, it doesn't matter what country you're in. That's one reason why Ciena had such quick and seemingly easy success in Japan, starting in 1997. Now, the rise of WDM and ultimately all-optical networks in Japan helps to level the playing field for new entrants.
The Korean optical market, the region's third largest, is surging, as broadband access and wireless users place huge traffic demands on the network. At year-end 2000, broadband users-xDSL, cable modems, and fixed wireless-amounted to approximately four million. Already then, roughly 18% of Korea's 22 million local fixed-line subscribers regularly surf the Web at downstream rates of at least several hundred kilobits per second. That is forcing carriers to upgrade backbone and metro-area networks and causing strains on old business models. While Korea Telecom is the market's biggest spender, several other carriers are significant: The first tier includes Dacom, Hanaro, and Thrunet, followed by a second tier comprising GNG, Dreamline, and PowerComm.
RHK estimates Korea's SDH market was worth just under $400 million in 2000, making it about 34% of the rest of Asia-Pacific, excluding China and Japan. Looking ahead, Korea will become even more important in the WDM world because of faster relative adoption rates. RHK expects Korea will represent about 45% of the $3.4 billion 2000-04 WDM market in the rest of the Asia-Pacific region (see Figure 5).
As Figure 5 suggests, after China, Japan, and Korea, the Asia-Pacific optical market is flat, comprising lots of small markets. Australia and Taiwan stand out, though. Australia is wealthy and competitive and has good prospects for broadband Internet and third-generation wireless growth. Taiwan is significant for similar reasons, but competition is newer: In March 2000, three new carriers were licensed to build fixed networks island-wide. These carriers, which collectively have several billion U.S. dollars in the bank, are causing a nice upward blip in growth prospects for Taiwan's optical market.
Table 3 summarizes optical deployment in rest of the Asia-Pacific's key areas. The second column provides a rough estimate of capital spending, which serves to size the market and suggest the importance of optical gear in various markets. The third and fourth columns provide RHK's estimates of optical market sizes for 2000-04. As shown, RHK's forecast is relatively bearish in some of these markets due to regulatory and economic uncertainties, but there always could be upside surprises.
Matt Walker is regional director for Asia-Pacific research, focusing on optical transport networks at RHK Inc., a telecommunications market-research firm based in South San Francisco. He can be reached at [email protected]. RHK's Asia-Pacific optical-market analysis and forecast is based on ongoing interviews with regional carriers and vendors. In 2000, this research included roughly 50 carrier interviews and 12-15 vendor interviews. In 2001, these figures will be closer to 100 and 20 for carriers and vendors, respectively.
By MIN YI, RHK Inc.
During the past few years, the rapid growth of local suppliers in China's increasingly robust telecommunications market has depended partly on the support of China's government. In an effort to grow its telecom sector, the government has provided vendor financing and export credit guarantees to the domestic vendors. This financing is helping local vendors enter the global market. The government has also set some local purchase policies to favor local vendors. Chinese operators are inclined to buy from a local vendor when its technology is comparable to that of a foreign vendor, even if the price is a little bit higher.
There are three major telecom-equipment vendors in China:
- Huawei Technologies, based in Shenzhen, is a private company with a broad range of products, including switching, SDH/DWDM transmission, optical access networks, mobile and wireless communications, ATM, and data communications. In the optical space, Huawei has the biggest market share among Chinese suppliers and is in a close race with Lucent Technologies for the top spot overall. About 10% of Huawei's sales comes from such overseas markets as Southeast Asia, Russia, and Latin America. Huawei is also building research and development centers in India and the United States.
- ZTE Corp., also based in Shenzhen, is a publicly held company majority-owned by the Chinese government. ZTE's products cover 17 categories, including optical-fiber transmission systems. ZTE is the second-strongest local supplier of optical equipment. About 40% of its sales come from overseas, mostly developing countries. To penetrate new markets, ZTE is building joint ventures in some overseas markets.
- Datang Telecom Technology (Beijing, China) is a publicly held company majority-owned by China's Ministry of Information Industry Telecommunications Science & Technology Institute. Datang's products include switching, SDH/DWDM transmission, access networks, mobile and wireless communications, microwave, and data networking. Most of Datang's sales come from the domestic market. But Datang has entered into some agreements with foreign vendors such as Motorola and Marconi to develop and sell their product jointly.
Some other relatively small local vendors play in the optical space, including FiberHome and Eastern Communications Co. FiberHome is the commercial arm of Wuhan Research Institute, which began as China's primary optical-research institute. Eastern Communications has supplied some optical systems to China's special networks, such as that owned by China Railcom.
In addition, China has an emerging, though small, group of startup vendors, some of which are developing optical-system products (e.g., metro WDM). Most of these companies have strong support from local Chinese governments or institutes.
In China, local vendors are still behind in some technical areas, but in most areas, these companies are already competitive or catching up quickly with foreign vendors. To catch up, most local vendors spend more than 10% of annual revenue on research and development. At the same time, local vendors aim to differentiate their companies by offering more comprehensive customer service.
Outside China, local vendors have already made strides, mainly in developing countries. After China enters the World Trade Organization, local vendors should gain more opportunities, strengthening their prospects for growth in the global arena.
Min Yi is an analyst at RHK (South San Francisco), focusing on Asia-Pacific optical transport networks. She can be reached at [email protected].