The demand for AI-driven optical modules has skyrocketed, who can stand on the wind?

With the development of artificial intelligence, computing power competition has become a new battlefield for technology companies. As an important part of optical fiber communication, optical modules are optoelectronic devices that realize the functions of photoelectric conversion and electro-optical conversion in the process of optical signal transmission, and their performance has a direct impact on AI systems.

Driven by AI, optical modules have become a "sweet spot" in the market. Recently, the information consulting company Liudu Think Tank received a demand, and a number of customers wanted to interview different experts in the field of optical modules to grasp the development trend of the industry.

Six Degrees Think Tank is a business information retrieval platform that provides customers with high-quality and leading-edge research decision support and expert knowledge sharing services. At present, it has achieved 50K+ overseas experts, and its business covers North America, Asia, Europe, Southeast Asia and other regions. According to the interview facilitated by the Liudu think tank, with the continuous progress of AI technology and the increasing demand for computing power, the demand for optical modules will further increase.

Standing on the tuyere, the optical module shows its skills

On November 30, 2022, ChatGPT was released, and since then, the global large model boom has swept in.

According to a report released by OpenAI, since 2012, the computing power demand of AI training applications has doubled every 3-4 months, and since 2012, AI computing power has increased by more than 300,000 times. The advantages of optical modules are undoubtedly a perfect match for the needs of AI in terms of high-performance computing performance and application expansion.

Optical modules have the characteristics of high speed and low latency, which can not only provide powerful data processing capabilities, but also ensure data transmission efficiency. In addition, the large bandwidth of the optical module means that more data can be processed at the same time. The long transmission distance enables high-speed data exchange between data centers, which helps to build distributed AI computing networks and promotes the application of AI technology in a wider range of fields.

The former project manager of Micro Whale Technology Co., Ltd. mentioned in an interview facilitated by the Liudu think tank:

"In the current network equipment market, we observe that 400G and 800G optical module products are the main shipments in the market. With the development of AI technology, there is a growing demand for high-speed optical transceivers, as AI applications tend to use these high-speed products. In particular, 800G optical modules can be adapted to GPUs according to needs, which is very critical for AI applications that need to process large amounts of data.

In addition, the advent of 1.6T optical modules provides the market with higher bandwidth and data exchange rates, which makes them ideal for high-end application scenarios. Therefore, for applications that require extremely high performance, we recommend using 1.6T optical transceivers. The development and application of these products demonstrate the continuous pursuit and innovation of high-speed transmission technology in the network equipment market. ”

According to Guosheng Securities, starting from the 100G era, optical modules have been iteratively upgraded at a generational rate of 4-5 years, and the 800G cycle has started in 2023. However, unlike in the past, the 800G-1.6T cycle is shortened to about 3 years compared to the past, and the "TB" era is expected to start by the end of 2024.

At present, Zhongji InnoLight has sent 1.6T multi-module samples to NVIDIA. 1.6T products, according to market news, are expected to start mass shipments at the end of the third quarter.

Who gets the "cake"?

Catalyzed by the wave of artificial intelligence, the performance of some domestic optical module companies has been realized to a certain extent. In 2023, Zhongji InnoLight will achieve revenue of 10.725 billion yuan, a year-on-year increase of 11.23%, and a net profit of 2.181 billion yuan, a year-on-year increase of 78.19%. In 2023, Tianfu Communication will achieve revenue of 1.939 billion yuan, a year-on-year increase of 62.07%, and a net profit of 730 million yuan, a year-on-year increase of 81.14%.

Reflected in the secondary market, since the beginning of this year, Tianfu Communication has risen by more than 64%, and Zhongji Innolight has risen by more than 36%.

In another interview facilitated by the Six Degrees Brainstorm, a senior manager of a leading optical module manufacturer in North America revealed some key developments in the market:

"In 2024, the overall size of the optical module market will be about 12 billion US dollars, of which the telecom market will account for about 4 billion US dollars to 5 billion US dollars, and it is expected to grow. In particular, the data center market is expected to see a multiple-fold increase in demand for 400G and 800G, driving the overall market shift to high growth. ”

Yole Intelligence's forecast reinforces this optimistic expectation, driven by the high demand for 800G high data rate modules from large cloud service operators and the requirements of national telecom to increase fiber network capacity, the global optical module market size will increase to $22.3 billion in 2028, with a compound annualized growth rate of up to 12% from 2022 to 2028.

When discussing the current situation and future development trend of the 800G optical module market, the former project manager of Microwhale Technology Co., Ltd. said:

"First of all, the gross profit margin of 800G optical modules has increased since the second quarter of last year, from 30% to 35%, and is expected to remain at the level of 35% to 38%. This shows that the market's acceptance of 800G optical modules is increasing, and the profitability of enterprises is also increasing.

Secondly, the possibility of a future price war is not high, because the manufacturer pattern is relatively stable. This helps maintain a healthy competitive environment in the market and may promote the continued development and innovation of technology.

From the perspective of supply and demand, the demand, supply pattern and price of 800G optical modules seem to have a clear expectation by 2024. This certainty of expectation is a positive sign for market participants, as it helps them make more informed investment and operational decisions.

In terms of price, the bidding price of 800G optical modules has dropped by about 15%. Specifically, the price of a single-mode optical module has dropped from $850 to $720, while the price of a multi-mode optical module has dropped from $500 to $430. Such price reductions have been achieved through large-scale procurement and increased production efficiency, which not only helps to cover costs, but may also lead to a slight recovery in gross margins.

In addition, this year, the market has also ushered in new 800G optical module manufacturers, including Cloud Light and Xinyisheng. The entry of these new entrants is likely to bring new impetus and competition that will drive the industry as a whole. ”

An important trend in the optical module industry is that domestic optical module manufacturers are gradually integrating into the supply chain system of the world's leading cloud service providers.

According to LightCounting, among the top ten suppliers of global optical module sales in 2010, only one domestic manufacturer was Wuhan Telecom Devices, and in 2022, the number of Chinese manufacturers on the list increased to 7, of which Zhongji InnoLight and Coherent tied for the top spot, and the share of Chinese manufacturers in the optical module and optical module market increased from 15% in 2010 to 50% in 2021.

Figure: Changes in the world's top 10 optical module suppliers, Source: Huatai Research

The former project manager of Microwhale Technology Co., Ltd. mentioned in the interview can explain the reason for this trend:

"The scale, technology and cost advantages of China's optoelectronic industry are important factors that promote the gradual transfer of cooperation to Chinese manufacturers.

Mellanox, a subsidiary of NVIDIA, is responsible for communications network equipment, including optical transceivers. In 2023, NVIDIA will carry out large-scale optical module procurement through Mellanox's channels, and among these optical modules, Mellanox's optical modules account for 15% of the total orders. These self-developed optical modules are mainly produced by Tianfu Communication. At present, Mellanox's single-mode optical transceivers are in mass production, while multi-mode optical transceivers are still in the development stage. Tianfu Communication has a great opportunity to undertake Mellanox's future multi-mode optical module OEM orders.

Judging from market information, the leading manufacturers of 800G optical modules, such as Zhongji Innolight, have product prices between $800 and $900. The price of NVIDIA's self-designed 800G optical module solution is about $1,500. This cost difference is not only due to the higher cost of design and tape-out, but also due to the higher price due to the smaller quantities of components purchased. ”

It's an opportunity, but it's also a challenge

Optical transceivers, as a key component of optical communication systems, are located in the middle of the technology supply chain, affecting many upstream and downstream industries and related enterprises.

Among them, the upstream suppliers of optical modules are mainly optical chips, electrical chips and optical devices. At this level, there are many suppliers of optical components, and the localization rate is relatively high. However, the chip process technology barriers are relatively high, the R&D cost is high, and large foreign manufacturers have occupied the majority of the market share of high-end optical chips and electrical chips, which makes domestic manufacturers face huge challenges.

In the interview, a senior manager of a leading optical module manufacturer in North America said:

"Yuanjie Technology has outstanding performance in the development of EML chips, and has sent samples to Zhongji InnoLight and Huawei for verification, and it is expected that there will be data that has passed the verification in the middle of this year. Because its shareholder relationship includes major customers such as Zhongji InnoLight and Huawei, it enjoys priority in supply chain verification, and is currently regarded as a leading enterprise in the field of optical chips in China.

Others, such as Changguang Huaxin and Accelink, have also developed EML chip technology, but there is less verification by downstream customers and their influence is relatively limited. In particular, although Source is not particularly well-known in the industry, its 100G EML chips have been used in 400G optical modules and have begun to be shipped abroad, and recently received a large order from Microsoft.

As for VCSEL chips, domestic supply is relatively tight. Although some domestic manufacturers such as Zhonghui Xingguang and Changguang Huaxin are developing 100G VCSEL products, they have not yet been mass-produced or passed downstream certification. Zhongji InnoLight 800G's multi-mode optical module core 100G VCSEL chip mainly relies on overseas supplier Broadcom. ”

The downstream of optical modules includes Internet and cloud computing enterprises, telecom operators, data communication and optical communication equipment manufacturers, etc.

A senior manager of a leading optical module manufacturer in North America said:

"In 2023, the decline in traditional business demand is in stark contrast to the AI-driven growth demand, especially in the field of 800G optical modules, due to the increase in infrastructure construction by leading AI manufacturers such as NVIDIA, Google, Microsoft, and Meta, which has led to a situation where supply exceeds demand, which in turn promotes the differentiation of performance within the optical module industry. Vendors that can supply 800G customers, such as Zhongji InnoLight and Tianfu Communications, have enjoyed significant profit growth, while other vendors have not yet shipped on a large scale in the 800G field or focused on lower-speed products, facing the challenge of declining revenue.

In 2024, the optical module industry may usher in a turning point in the development of high prosperity, and the demand is not limited to leading manufacturers, but second-tier manufacturers such as Accelink Technology and Liante Technology will also benefit from the spillover of 400G and 200G demand. ”

Demand exploded, but at present, the follow-up of production capacity is slightly weak.

Industry experts estimate that the current annual demand for 800G optical modules is about 9 million, while the demand for the 1.6T market may be between 900,000 and 1 million. However, 800G optical modules are in the critical stage of capacity ramp-up, limited by the supply of core materials, especially the shortage of VCSEL chips, it is expected that the production capacity will continue to be tight throughout the year, and may not be alleviated until the third and fourth quarters. For 1.6T optical modules, the estimated production capacity in 2024 is only between 200,000 and 300,000, which is far from meeting the strong demand of the market.

In addition, observing the technology trend, in the 400G era, traditional optical modules based on III-V optical chips have become the main force in the market. However, with the advancement of technology to high-speed scenarios of 800G and above, a turning point has also come: the multi-channel solution and stacking technology of traditional optical modules have begun to show the dual challenges of cost and energy consumption, and silicon photonic modules with many advantages such as low cost, low power consumption, and high speed have begun to show their advantages.

However, the maturity of the silicon photonics process has not yet reached the ideal level, and the design and manufacturing have not yet fully formed a clear division of labor.

Former Lumentum R&D engineer mentioned in an interview with Six Degrees Think:

"Theoretically, the silicon photonics solution has a cost advantage and should be cheaper, but in practice its production yield has become a key factor. Although silicon photonics solutions are expected to reduce costs when used on a large scale, at present, their costs are not as low as expected. ”

In addition, the former project manager of Microwhale Technology Co., Ltd. pointed out,

"In the current international trade environment, Chinese optical module manufacturers are facing the challenge of possible tariffs imposed by the United States. In the case of Zhongji InnoLight and Xinyisheng, for example, up to 85% of their revenue comes from overseas markets, and about half of them are sent to North America. ”

Synthesizing the expert opinion, the following conclusions can be drawn:

Demand for AI hardware is expected to grow, but the pace of procurement may slow due to the economic environment.

The maturity of silicon photonics technology has increased significantly in the 800G era, and silicon photonics solutions are expected to impact the market share of traditional solutions.

The 1.6T optical module market is expected to see some growth in 2024, and the main demand is expected to come from AI vendors, compared to traditional cloud computing service providers, such as Google Cloud and AWS Cloud, the demand for 1.6T optical modules is not particularly strong.