At present, China has built the world's largest information and communication network, with 93% of fiber optic access users, ranking first in the world. High-quality network facilities provide strong support for China's science and technology power strategy, driving the rapid development of domestic smart cities, smart manufacturing, smart grids, smart offices and other applications, which in turn put forward higher requirements for the construction of a new generation of network infrastructure. F5G can effectively support the intelligence and digitalization of many industries due to its high bandwidth, low latency, stable transmission, and anti-interference characteristics. It is therefore ushering in a period of rapid development.
Ye Liang, a strategic and transactional advisory partner at Ernst & Young, said F5G is the backbone and important support for digitalization and the "digital base" of the new infrastructure. "If emerging technologies such as cloud and AI are the flower of human civilization, F5G is the root of the flower, supporting its development, driving its progress and providing the possibility of landing many emerging scenarios.” Ye Liang said.
Leverage the trillion-level market
In the white paper, Ernst & Young expects the revenue of optical communication downstream market to reach RMB 1.4 trillion in 2020 and will maintain high growth at a CAGR of 18% in the future. Meanwhile, revenue growth from the enterprise market is slightly higher than the consumer market due to factors such as campus optical network upgrades and continued growth in data center and edge computing investments. Among them, the downstream revenue from the enterprise optical communication market mainly comes from the construction investment of private wire network, traditional network and passive optical network, while passive optical network has the fastest growth rate, which is expected to increase from 310 billion in 2020 to 920 billion in 2025.
Passive optical network shows rapid growth mainly because the technology and products are becoming mature, while user awareness is gradually in place. So far, China's passive optical network market is the fastest growing, and the market size is expected to maintain high growth at a compound annual growth rate of more than 80% in the next five years.
Moreover, emerging application scenarios are also clearly driving the growth of the consumer optical communications market in 2020, with EY expecting the revenue contributed by pan-entertainment applications to continue to grow as a percentage of total optical communications revenue over the next five years, from 48% in 2020 to 55% in 2025. User demand for pan-entertainment such as ultra-HD video is strong. In terms of growth, VR/AR, live streaming, and cloud gaming are growing at a faster rate. In scenarios such as life and business, national policies have been actively encouraging the development of smart education and smart healthcare, so these scenarios have relatively higher growth rates.
Capital to help the development of optical communications industry
With the rapid development of F5G/5G, the fields of optical chips, optical modules, and optical communication equipment are attracting more and more capital, and the capital has become a booster for the industry to continue its rapid development. A clear trend is the frequency of mergers and acquisitions in the global optical communication industry, and leading Chinese companies are continuing to acquire key assets globally. According to statistics, the overall M&A in the optical communications industry in 2019 is down by more than 50% compared to 2018, although 2020 shows a clear pick-up trend, with the M&A scale expected to surpass that of 2018.
From the perspective of the M&A occurs, the downstream M&A in the optical communication industry is large but unstable, the upstream has been maintaining a high level of fervor, and the midstream has been influenced by increased investment in fiber optics, with a significant upward trend in M&A scale. Driven by M&A, the concentration of the optical communication market has further increased, and the number of transactions has decreased but the amount has increased significantly. At the same time, a number of financial institutions to accelerate the layout of the optical communications industry, the industry outlook is optimistic and positive as a whole.
In the white paper, Ernst & Young pointed out that in 2020, despite the global impact of the epidemic, optical communications M&A has picked up, with more and more financial institutions entering the optical communications industry. In terms of transaction value, the total annual investment in the optical communications industry in 2018 was $450 million, increasing to $650 million in 2019, with 45% year-on-year growth; in 2020, as of September, the investment scale has reached about $810 million, exceeding the full-year figure of 2019. Thus, it can be seen that the optical communication industry will be volatile in the short term, but it seems to have good investment prospects in the long term.
The industry still need national strategic support
In the global optical communications landscape, China has developed into a force to be reckoned with. It is the regulation and guidance of national policies, coupled with the escalating demand from individual and enterprise users, that has led to the booming Chinese optical communication market.
In the white paper, Ernst & Young pointed out that, as one of the core of the "new infrastructure", China's optical communication industry has received a lot of support from the national policy, but because the industry standards, ecology and other aspects still face many challenges, so in the next few years still need the state to give strategic support. Of course, the national policy should be to provide a good environment, rather than to become the dominant market, after all, the industry's growth needs to be close collaboration between enterprises, institutions, research institutions and capital, to empower the industry, support the development of the whole industry.
At present, the ecology of China's optical communication industry still has many weaknesses, especially the cooperation system of capital, industry, academia, and research has not yet been formed. This is on the one hand because of the high difficulty in transforming academic and research achievements and the distance from commercialization, and on the other hand because of the weak cashability of F5G and the low capital attention. Therefore, Ye Liang suggests that an integrated eco-system of capital, industry, academia and research be established in China as soon as possible to accelerate the rapid transformation of technical achievements and the landing of commercial scenarios, so as to drive the rapid growth of China's optical communication industry.