Another round of vertical integration in fiber optic industry
The fiber optic industry has survived in the difficult 2019 and ushered in the hopeful 2021.
In 2019, after a decade of golden period, the optical fiber industry suffered a double strike at the supply and demand level. The demand of 4G and domestic FTTH construction is nearing its end, and the procurement volume of the three China’s major operators is reduced; the supply of new production capacity is released centrally, and optical fiber manufacturers are waiting to be fed. The result was a drop in the volume and price of optical fiber and a decline in vendor performance. The global outbreak of the epidemic has slowed the progress of deployment in overseas optical fiber marketsadding a lot of trouble of manufacturers to go abroad.
CRU, a market research firm, believes that the optical fiber industry has the possibility of M&A restructuring. Judging from the state of China's top-tier players, it's too early to tell. Fiber optic manufacturers have chosen to transform their business, moving to upstream and downstream of optical modules industry and extending into "new infrastructure" such as 5G and industrial internet. Despite the unsatisfactory pooled procurement price, the fiber industry is coming out of the bottom area and facing a vast blue sea.
Pooled procurement price blasts
In 2020, China Mobile and China Telecom organized the annual fiber optic cable pooled procurement as usual. 2020 procurement scale is basically equal to 2019, but the price dropped significantly again based on a significant drop in 2019, bringing a new round of strikes to manufacturers.
Among them, China Mobile collects 119.2 million kilometers of ordinary fiber optic cable, fiber prices fell below 20 yuan per kilometer; China Telecom collects 45.5 million kilometers of outdoor fiber optic cable. Although the price of fiber optic cable procurement is slightly higher than China Mobile, due to the specifications, resulting in increased manufacturing costs for manufacturers, the actual price is lower than China Mobile.
The price of optical fiber cable down from 60 yuan to more than 30 yuan and then down to 20 yuan within two years, fiber optic manufacturers are difficult to deal with the issue through the manufacturing process and management efficiency improvements. Accordingly, the performance of fiber optic manufacturers is generally not as good as expected. Some manufacturers cannot to execute all the procurement orders, "the more you execute, the more you lose." The most extreme example is Futong, which won 11.67% share of China Mobile's fiber optic cable procurement with the lowest bid, and then only achieved a net profit of 1.85 million yuan in the first three quarters, plunging 95.54% year-on-year.
Operators also believe that the procurement price of fiber optic cable has been pressed to the limit, and some winning bidders can only supply at a loss, which will be detrimental to the healthy ecology of the industry. It is difficult to say that in 2021 the price of fiber optic cable will reverse, and it's more likely to run at a low level. But some fiber optic manufacturers have been postponed or abandoned to increase production capacity, some manufacturers are slowly eliminated, which is conducive to the industry towards concentration.
Another round of vertical integration
Before 2011, the fiber optic industry benefited from the "broadband China strategy" and 3G network construction and entered the boom cycle. However, the "3.11 Earthquake" in Japan, which caused damage to optical fiber prefabricated rod factories and prevented supply, woke up China's optical fiber industry, which relied heavily on optical rod imports. Since then, fiber optic cable manufacturers have moved upstream to fiber optics, fiber optic manufacturers have moved upstream to optical fiber rods, as well as to manufacturing equipment and raw materials.
This round of vertical integration eventually succeeded in greatly enhancing the overall competitiveness of Chinese fiber optic manufacturers to be able to compete with foreign giants on the international stage without losing ground. In recent years, represented by YOFC, Hengtong and Zhongtian, Chinese fiber optic manufacturers have "gone global" and set up production bases and marketing outlets overseas, with notable performance. As early as the international marketing network of Fiberhome, is a model of China's fiber optic cable exports.
Since 2018, the optical fiber industry has opened a new round of vertical integration under pressure. It started from 2019 and accelerated in 2020.
First, it is moving into optical modules, such as YOFC's acquisition of SunStar, Hengtong's establishment of Hengtong silicon photonics, and SDGI's acquisition of ATOP. Second, it is to force the marine market, Hengtong acquisition of Huawei marine, ZTT plans to spin off the submarine cable subsidiary independent listing, FiberHome to build Asia's largest submarine cable manufacturing base, YOFC and Baosheng group joint venture set up Baosheng submarine cable.
In addition, some manufacturers also entered the equipment, antenna, and other market areas. This round of vertical integration is the major fiber optic manufacturers rely on the advantages accumulated in the fiber optic industry, including manufacturing process accumulation, industry operations accumulation, operator customer accumulation, etc., for the whole industry layout of optical communications.
This means that fiber optic manufacturers have broadened the runway for development. Top-level fiber optic manufacturers generally have a large scale of operation, and strong manufacturing management capabilities. They have good conditions to enter the decentralized optical module industry, and to the higher threshold of the submarine cable. The entry of optical modules and fiber optic cable can effectively complement each other to build 5G infrastructure; the entry of submarine cable is in line with China's marine power strategy to pick the "crown jewel" of the fiber optic industry.
China's companies develop from flush to strong
In 2020, China's government proposed the "new infrastructure" strategy, including 5G, industrial Internet, data centers and other seven major directions. Optical communication, as the physical foundation, can be said to be the infrastructure of the "new infrastructure" and is the base for the prosperous development of the"new infrastructure". Therefore, optical fiber manufacturers not only strive to vertically integrate and expand the advantages of the whole industry chain, but also penetrate these advantages into various fields of the "new infrastructure".
For example, YOFC has launched a "5G+all-optical network" industrial Internet solution, namely optical cloudinter connection, including various new optical fiber, optical cable and optical module products, as well as 5G cloud network solutions and platforms, providing one-stop network services for industrial customers. Henton Optronics has proposed "one core, two chains and three supports", and has reached cooperation with three China's major operators on industrial Internet with remarkable achievements.
At the same time, it can also be seen that the fiber optic industry has slowly started to differentiate from a decade of flush, towards the path of the strongest. This is a business of scale competition, competing with technology accumulation, process accumulation, customer accumulation, cost control. Small and medium-sized manufacturers are increasingly difficult to survive. A typical manufacturer example is Zhongli Group, which once claimed to build its own fiber optic prefabricated rod project, however, the financial report shows that the company's 2019 optical fiber and optical rod business revenue of only 105 million yuan, gross margin of an exaggerated -33.69%, the 2020 semi-annual report shows that the business further shrinks.
In contrast, Hengtong Photoelectric successfully non-public issue of 409 million shares this year, raising more than 5 billion yuan. Even though the fiber optic industry is in the downturn, Hengtong still won the trust of the capital market with comprehensive strength. The relevant funds will be used for two cutting-edge product operation and manufacturing projects of submarine cable and silicon optical module.
Information infrastructure construction is the critical need for the development of digital society. By 2020, the leader YOFC has delivered 600 million kilometers of optical fiber in 32 years. And the era of 5G is still the era of optical fiber. For fiber optic manufacturers, not only the performance of the fiber optic industry will gradually rebound, but also through vertical integration and layout of the "new infrastructure", to win greater development space.
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