Telecoms market
Total 5G mobile capex in the full 5G cycle will be 1.5x total 4G capex, on Citi’s estimates. China could need over 5 million 5G base stations to realize nationwide 5G coverage. And 5G wireless networks need more optical modules than 4G. Citi analysts say they expect the number of newly built 5G base transceiver stations (BTS) to remain relatively stable in the next three years in China, indicating sustained demand for optical modules to support 5G deployments.
The Chinese government’s push on gigabit optical fibre networks will, in Citi’s view, further drive demand. Fixed broadband and mobile data surge could lead to higher-than-expected optical network capex by Chinese telcos.
Data-centre market
China’s traditional data-centre market will grow to Rmb161.3bn in 2023, a 17.5% CAGR from 2020, according to zhitongcaijing.com citing IDC. Citi expects data-centre service providers in China to continue to increase data-centre related-capex with strong revenue growth. The growth of the global optical components and modules market is increasingly being driven by investments from cloud companies in mega data centres and supporting network infrastructure, with growing bandwidth demand to support cloud service adoption, and surging internet data traffic driven by mobile/fixed broadband applications and enterprise solutions.
Metaverse
Growing access to 5G can support the ongoing development of the Metaverse by providing the speed and power that make it possible for digital worlds to function. Citi researchers said they expect the Metaverse’s development will lead to an exponential increase in data traffic. The rapid data traffic growth will drive data centre and cloud computing investment, which in turn should drive demand for optical components/modules.
5G, fixed broadband growth driving optical network capex
Surging internet data traffic, driven by 5G, fixed broadband and enterprise data solution adoption, will create a major uplift in demand for optical components/modules, Citi says, as 5G and fixed broadband growth is being encouraged by regulators and supported by telcos’ aggressive network upgrades and service promotions.
5G wireless networks need more optical modules than 4G. Fixed broadband and mobile data surge could lead to higher-than-expected fibre transmission capex by Chinese telcos. This, together with capex from data centre providers, would underpin structural growth for optical components/modules.
Stronger demand for optical modules in 5G is driven by the increase in the number of BTS in the 5G era and the reconstruction of 5G RAN (radio access network). The number of BTS for the 5G era will be larger than for 4G to realize similar coverage, as telcos deploy 5G networks at high frequency bands, and the coverage area of the BTS operated at high frequency bands is comparatively smaller.
|
FTTx and High-speed Broadband Subs as % of Total Broadband Subs in China |
Access Ports with Different Technology Type as % of Internet Broadband Access Ports in China |
|
|
|
|
Note: Subs with 100Mbps bandwidth and or above in 2018, 2019, and 2020 |
|
|
Source: Citi Research, MIIT |
Source: Citi Research, MIIT |
China is the leading global 5G market
China has opened 993k 5G BTS, and the number of 5G smartphone terminal connections has exceeded 392m, Mr. Xiao Yaqing, Minister of Industry and Information Technology (MIIT), said at The 2021 World 5G Convention on Aug 31 last year in Beijing. Mr. Xiao at a press conference in Sep indicated that China’s 5G BTS deployment and 5G smartphone terminal connections accounted for more than 70% and 80% of global 5G BTS and 5G smartphone terminal connections, respectively, according to Sohu.com.
The number of 5G base stations in China reached 1.159m as of Sep 2021, adding 388k 5G BTS in 9M21. Chinese telcos in aggregate targeted over 1.4m 5G BTS in use by the end of 2021.
The MIIT issued The 14th Five-Year Plan for the Development of the Information and Communication Industry in November last year. According this, China intends to:
1) Build the world’s largest 5G SA network achieving full coverage in cities and towers, basic coverage in administrative villages, and in-depth coverage of key application scenarios;
2) Have a gigabit optical fibre network achieving basic coverage of urban and rural areas;
3) Significantly improve the intelligent resource scheduling level of the backbone network and continuously optimize the interconnection structure with IPv6 can be fully supported by network, platform, applications, and terminals;
4) Fully form a comprehensive ecosystem of mobile IoT with coordinated development of low, medium, and high speed; and
5) Develop a more balanced international communication network with significant improvements in network quality and service capabilities.
Datacom demand is a major growth driver
Globally, optical module sales to datacom companies have matched the sales to telcos, and could become the biggest growth driver for optical modules as the datacom market is growing faster than the telecoms market.
|
Annual Size of the Global Datasphere |
|
|
|
Source: Citi Research, IDC |
The growth of the global optical components and modules market is increasingly driven by growing bandwidth demand to support cloud service adoption, and rising data demand from consumers and enterprises. Much of the market growth is also driven by rising demand for high-speed interconnectivity between data centres from internet content providers and cloud companies.
IDC predicts that the global datasphere will grow from 33 Zettabytes (ZB) in 2018 to 175 ZB by 2025, for a CAGR of 61%. The increasing data traffic would drive demand for data centres globally.
The traditional data centre uses a three-tier architecture, with servers segmented into pods based on location. In this architecture, optical fibre connections account for only c.20% of all connections.
It seems clear that with government backing and ambition, China’s 5G market expansion and expanding broadband capabilities will continue to be a rich source of demand for optical components and modules. For more information on this subject, please see China Communications Equipment - Optical Components/Modules: Twin Growth Engines from Data Centres and Dual Gigabit; Metaverse a Long-Term Driver
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.