Robert V. Steele and Eric A. Bergles
As North America and Europe continue to experience a prolonged slump in the market for optical communications equipment and components, China has emerged as one of the few bright spots in an otherwise dismal market environment. During the severe downturn of 2001 that saw worldwide optical equipment and component revenues decline by 34%, the Chinese market grew by 70% to $1.9 billion.
As a result of telecom infrastructure projects planned as part of China's Tenth Five-Year Plan (2001–2005), as well as special regional projects related to the Beijing 2008 Olympics and Shanghai World Expo 2010, additional robust growth will be realized, with China generating an increasing share of the world's fiberoptic equipment and component revenues.
China is one of the world's largest and fastest growing telecommunications markets. In 2002, China added 46 million new wireline telephone subscribers, for a total of 215 million—the largest in the world. Total mobile telephone subscribers were 205 million, with 67 million added in 2002. Cable TV has been deployed throughout China, with more than 100 million subscribers (see Fig. 1).
In 2001, China's major network operator, China Telecom, announced a massive restructuring of its operations along with the reorganization of China's five other telecom service providers. While general telecom spending in 2002 was flat, the new telecom service structure is an attempt to make China's domestic service providers stronger in light of new World Trade Organization (WTO)-induced competition in this sector, which will fully take effect in 2004. Already, toll and international direct-dial rates have been dropping as much as 50% per annum, further fueling subscriber usage.
Under the new restructuring, there will be two major telecom service providers: China Telecom, covering the southern provinces, and China Netcom, covering the northern provinces. China Telecom will include the former China Telecom South and China Unicom (fixed lines only). China NetCom will include the former China Telecom North, China Netcom, and China Jitong.
After the restructuring, as of May 2002, China Netcom had 37% market share in fixed telephone customers (much of it was inherited from China Telecom). Since mid-May, Netcom has been granted permission to operate in 10 provinces (including Beijing) in north China, while China Telecom takes 21 provinces in the south. China Telecom still holds the lion's share of the fixed telephone market (62%), China Unicom and China Railcom take the remaining 1%. China Railcom has made aggressive infrastructure investments in recent years, but subscriber growth has not followed, with rumors circulating that it might be part of future industry consolidation.
The number of Chinese Internet subscribers has increased by more than 100% annually, reaching a total of 50 million users at the end of 2002. Broadband services were introduced throughout China in 2000-2001, and subscriber growth has been robust, reaching 3 million at the end of 2002.
With a teledensity of only 16%, China's communications infrastructure will undoubtedly require significant last mile buildouts. In the recent long-haul buildout, China favored leap-frogging into 10-Gbit/s data-optimized networks. It is likely China will continue to adopt next-generation platforms in the metro/access area as well as the drops to the home/office. A recent announcement confirms that assumption—China Telecom announced its 2002 target for Ethernet network rollouts was 1.8 million subscribers, far higher than the 300,000 equivalent for digital subscriber line.
Through 2005, the Chinese government plans to add or replace more than 150 million access lines, driven primarily by the rapid buildout of broadband services. China Telecom's blueprint calls for 20 million broadband subscribers by 2005, while broadband provider Great Wall Broadband Networks is projecting 6 million users by 2005, 1 million of which were to have signed up by the end of 2001.
At the end of 2002, there were nearly 3 million broadband subscribers, up from 500,000 the year before. Eighty percent used very high-speed asymmetric digital subscriber line (ADSL), while the remainder used fiber/Ethernet and cable access. However, it seems likely that broadband will grow more slowly than the broad predictions stated above, partly due to the recent restructuring and also the higher costs associated with broadband subscriptions.
China plans to spend 1.25 trillion yuan (US$151 billion) on its telecommunications infrastructure by 2005, according to a summary of the 10th Five Year Plan (2001–2005) published by the Ministry of Information Industries (MII). Of particular emphasis are plans to develop the interior of China, which has been caught in a growing digital divide with the richer Eastern provinces. Historically, only 16% of government investment went to the Inland Provinces. Although 66% of China's population is located in the Inland Provinces, this region contributes only 47% of the country's GDP.
On Nov. 11, 2001, in Doha, Qatar, the WTO officially invited China to join the organization, ending 15 years of arduous negotiations. The final accession package is a consolidation of China's market-access commitments to the United States and other WTO members, as well as detailed commitments on how China will reform its trading system to comply with WTO rules. China ratified its WTO membership and became the organization's 143rd full member on Dec. 11, 2001.
The telecommunications market has long been controlled by the Chinese government and was one of the last global frontiers for liberalization. China now has to specifically derive its regulatory principles and requirements based on WTO standards for opening the telecom services market on both domestic and multilateral dimensions in regard to:
- Pro-competitive environment of policies and regulations
- Network interconnection and licensing criteria
- Independent and transparent regulatory regime
- Foreign equity ownership and management control of network and communication facilities
- Market access for competing players in telecom services and equipment supplies
- National (nondiscriminatory) treatment for foreign firms.
MII and China's IT industry believe there are two major advantages of WTO membership to the Chinese telecommunications equipment manufacturers. First, the decrease of the current 12%.tariff on imported components and parts—on which the Chinese firms depend for production—to 3% or less, which will result in significantly lower equipment cost and sales prices. And second, the removal of some of the foreign obstacles that have prevented Chinese firms from marketing products outside China.
However, domestic suppliers could face a more level playing field when China implements the WTO requirement that import tariffs on telecommunications and IT equipment be eliminated by 2005. At this time, telecommunications equipment purchases will be made on more technology-neutral and nondiscriminatory terms.
China's telecom equipment market is one of the most competitive in the world. All major telecom equipment manufacturers have a presence where price points are typically the lowest in the world. Technology adoption is practiced with a preference toward leapfrog technologies. This was exemplified by Luminous Networks' recent multi-protocol label switching (MPLS) design win at China Netcom in cooperation with Photonic Bridges, a systems integrator. Today in China, there are almost no new 2.5-Gbit/s networks, with 10-Gbit/s technology having been procured almost exclusively over the last three years. Several industry observers have commented that the first commercial installation of a 40-Gbit/s network will be in China.
Competition between domestic and foreign equipment manufacturers continues to accelerate. China's domestic suppliers long ago set up offices in Silicon Valley and throughout the world, both looking for next-generation technologies to adopt, as well as to establish sales channels to the international market. For example, Huawei Technologies, China's largest domestic telecom equipment supplier, has seen international sales revenue climb more than 100% in each of the last three years, thanks to strong growth in the developing world and in Germany, with international sales expected to contribute 20% of Huawei's revenues in 2002.
As implied by our discussion, the Chinese market for optical networking equipment and components has undergone rapid growth in recent years, and additional growth is projected for the coming years. Optical networking equipment includes synchronous digital hierarchy (SDH), dense wavelength-division multiplexing (DWDM), and cable TV (CATV) equipment. Optical components include both discrete and module, and active and passive. Both segments have undergone rapid growth in recent years, despite the setback in 2002, to reach a total of $1.65 billion in 2002 (see Fig. 2).
In 2002, the market experienced its first negative growth, which is attributed to the restructuring of China Telecom to comply with the WTO requirements. The restructuring efforts have taken up a significant amount of time and resources among China's national carriers, and a number of projects have been postponed. Growth is expected to resume in 2003. The compound annual growth rates (CAGR) for both the equipment and component segments are expected to be lower in the next three years compared to the pre-2002 period because much of the network buildout in China has already taken place. For the equipment segment the CAGR is forecast at 21.6% from 2002 to 2005, while the CAGR for components is higher at 29.0%. The overall optical transport equipment and components market is forecast to reach $3.1 billion in 2005.
DWDM equipment is expected to capture the largest share of China's optical transport equipment market over the forecast period, supplanting SDH systems. The reason for this is that the growth of data traffic is expected to be much more than the growth in voice traffic. Consequently, DWDM systems that are an economical solution for transmitting data will be deployed more than SDH systems that are used primarily to transmit voice. Cable TV systems will continue to see strong demand throughout the forecast as upgrades are made for digital hybrid fiber-coax (HFC) systems.
China's rapid growth in the telecom sector has attracted many of the world's leading optical networking equipment manufacturers. In 1994, Lucent Technologies installed the first SDH network, and China has subsequently played host to an ever-increasing list of new entrants.
Lucent is still a major player; however, domestic suppliers Huawei Technologies, ZTE, and FiberHome have gained market share over the past four years. Nortel Networks' and Siemens' strong 10 Gbit/s DWDM offerings have propelled these companies into the top tier as well. Approximately 20 equipment makers accounted for the vast majority of the Chinese market in 2002. Domestic Chinese and foreign manufacturers each accounted for 50% of the market. The Chinese market accounted for about 8% of the world total in 2002.
China has represented a relatively small market for optical components with an estimated 6% of the world market in 2001. However, this percentage is growing rapidly, with China accounting for an estimated 16% of the world market in 2002, supported by the relative strength of China-based equipment companies and foreign interest joint ventures, while the components market in the rest of the world has been shrinking dramatically.
China continues to attract inward investment for components manufacturing from many of the world's leading suppliers. In addition, a number of domestic Chinese suppliers are emerging on the world scene and claiming significant market share, such as Shenzhen Photon, Accelink, Browave, Koncent, and Wuhan Telecommunication Devices.
All together, some 30 companies accounted for over 90% of China's optical component market in 2002. The components market was shared by domestic companies (Chinese ownership) and foreign companies that either imported products into China or produced them locally. Both of these played a significant role in the market. In 2002, domestic component suppliers accounted for approximately 40% of the market, while foreign suppliers accounted for 60%.
As China moves ahead with its ambitious plans for modernizing its telecommunications infrastructure, it will continue to provide strong market opportunities for equipment and component suppliers, both domestic and foreign. Moreover, as it implements the requirements of the WTO, the competitive situation will become even more open than it has been in the past.
Although the Chinese telecommunications market presents a variety of opportunities, there are also risks and uncertainties associated with it. For example, during the last few years, hundreds of startups were funded in China to address the booming market of the late 1990s. Today, many of these promising enterprises are operating at severely lowered expectations if not already bankrupt. Over-investment and a lack of mature venture capital firms in the fiberoptics space have already left tens of thousands of staff unemployed or underemployed.
Larger socio-economic issues have led some observers and critics of the Chinese scene to speculate about potential economic collapse, brought on by insolvent banks, natural resource depletion, bankrupt state enterprises, and rising unemployment in the urban areas. While this is unlikely in the near term, it remains a fact that China is a highly complex, rapidly evolving society, and that companies wishing to participate in its expanding markets need to be aware of potential pitfalls that are not present in the more mature economies of the world.
This article is based on a recently published Strategies Unlimited report China Optical Communications Market Review and Forecast—2002 (Systems, Modules and Components).
Robert V. Steele is director of optoelectronics at Strategies Unlimited, 201 San Antonio Circle, Suite 205, Mountain View, CA 94040. He can be contacted at email@example.com. Eric A. Bergles is vice president of sales and marketing at BaySpec, 101 Hammond Ave., Fremont, CA 94539. He can be contacted at firstname.lastname@example.org.