The optical fiber industry - through and beyond COVID-19

Genadiy Mihaylov
Jun 4, 2020 9:54:58 AM

The optical fiber industry - through and beyond COVID-19

Prelude 

The pandemic is still here, and uncertainty seems to be on the rise. But regional supply chains, new technologies, and changed customer behavior are proving to be the bedrock of the future fiber optics market.

  • The current economic and political climate can create ambiguity in the way Chinese manufacturing operates
  • European manufacturers of fiber optic cables are capable of filling in the gaps
  • The market for fiber optics will experience difficulties but will continue to grow.
  • Covid-19 will benefit the digital economy and, by extension, optical communications. 

The Chinese authorities informed the World Health Organisation (WHO) about pneumonia cases in Wuhan province. The unknown illness was first called 2019-nCoV and then named COVID-19. Five months later, the only places on Earth untouched by the disease are a few islands in the Pacific and few landlocked countries in Asia. The death cases around the world are currently more than 300 000. And the latest estimates from the Asian development bank for the global cost could be as high as $4.1 trillion or 5% of the world GDP

Such a severe hit could have a long-lasting impact on the manufacturing world. For example, the 2011 tsunami that hit Japan also destroyed the one plant in the world that makes just a single ingredient for car paint. It took months for the entire automotive sector to adjust to the missing piece inside the big picture.

The Covid-19 tsunami that swapped the whole world exposed the overdependence of the global supply chains. And in particular - the role of China as "the factory of the world." In an article for The Atlantic, Willy Shih, a professor at Harvard Business School, estimates that the world depends on China heavily. The figure he proposes is about half a trillion dollars in imports.

Naturally, every action has an equal and opposite reaction. In a February survey at the American Chamber of Commerce in Singapore, 28 percent of the respondents have answered that they are setting up or using alternative supply chains to those in China. The Economist Intelligence Unit (EIU) has also released a report in the first week of May, confirming this direction. According to the report, the pandemic will reverse globalization by accelerating a move towards regional supply chains. 

And the pandemic itself is not the worst enemy to business. According to the nonprofit Institute for Supply Management, "53% of businesses report having a difficult time even getting information regarding what is happening inside China." As a totalitarian country, the government has an almost full monopoly over the media and even the internet. Business executives always need constant information about their working environment. For them, the current crisis is just another example that doing business in China is not as easy as it may seem from afar. 

Governments are also joining the "leave China" trend. In April, Japan launched a record $2.2 billion stimulus package to help its manufacturers to relocate. Currently, the current US administration is officially calling for the removal of global supply chains from PRC. This move is riding on a lot of support in Washington. Even before the pandemic, there was a sound bipartisan vote on the Capitol Hill against the Chinese practices for industrial espionage. And according to an April edition of the Pew Research Center, 90% of Americans see Chinese power and influence as a threat.

The current crisis exposed another major issue with many Chinese goods: low quality and unreliability. For example, in March, the authorities in Spain, Netherlands, and Turkey revealed that thousands of testing kits and medical supplies from China are below standard or defective. The situation escalated to the point where countries are now refusing shipments of medical supplies, and EU MPs are openly calling for action

Fiber optic production and the big picture

Wuhan, the epicenter of the pandemic, is home to 50% of the global R&D and supply of fiber optic cables. But the pandemic and the "leave China train" are not the only issues at hand there.

"At the end of March, we got emails from pretty much every one we've ever done business within China," says Nick Drombosky, the co-founder of the startup “Wire” in a great article in Marketplace.org on the subject. "It was like a copied-and-pasted message saying, 'Everything's great here. The Chinese government's done an amazing job handling this epidemic, and our factory is fully reopened.' And then you would email them back saying, 'OK, can I get this?' And they'd say, 'Well, not yet.' "

The optical fiber industry was part of the trade war between China and the US even before the pandemic. The Asian country still carries out the optical fiber preform anti-dumping policy (on July 10, 2018, the Chinese government announced anti-dumping duties on optical fiber preforms from Japan and the United States for five years). Unlike European manufacturers like NBG Fiber Optics, which operate entirely on the free market, the situation is different for the Chinese companies in the sector. 

Currently, China is working on its massive Belt and Road Initiative, where the country is building ports, roads, and digital infrastructure across Eurasia and Africa. How will their policies look like in six months or a year? Will they suffer from an economic shortage, and what will happen to all these companies currently involved in those massive projects? These are all still open questions. In the meantime, business executives like Mr. Drombosky will most probably look for more reliable partners elsewhere. 

A good alternative is the European manufacturing for optical fiber cable. First, it can substitute to a high degree a potential shortage on the global market. Before the pandemic, a report to the European Commission revealed that the European manufacturers operate at about 80% overall capacity. In a statement at the end of March, Glass Fiber Europe - a major European glass fiber producers association, has assured clients and partners that manufacturing will continue. So far, most of the big plants on the continent are implementing safety measures for their workers. And the situation seems to be under control.

The other significant advantage for the European producers of optical fiber is their functional integration within the global economy. Most of the manufacturers, just like NBG Fiber Optics, are located within the EU and are OECD member states. They are stable democracies that adhere to the European Court for Human Rights. And most importantly, they conform to WTO regulations, while riding on the traditionally good relationship between the EU and the US. In many of these countries, the fiber optic cable industry is "an essential business." As such, it benefits from additional public and political support. 

Current market news and short-term situation with Covid-19

Government support will probably play a decisive role within the next few years. So far, China is likely to announce $394 billion local government infrastructure bonds, while the US is considering a $2 trillion infrastructure package. With an economic recession at large, these funds will most likely keep the optical fiber cable industry going in the short-term. So far, Europe, China, and the US have all announced delays to 5G rollouts. Still, analysts consider at least a 2% drop in the optical cable demand forecast for 2020. But there is a place for optimism as well. The white paper by Argus for the global wire and cable industry predicts that the fiber optic cable demand will increase by 24% between 2021 and 2025. 

These estimates are already proving to be consistent with what is happening on the market already. For example, the Q1 earnings for both AT&T and Verizon do feel the impact of Covid-19. But both telecoms have expressed full confidence to continue their investments in network deployments even with losses on a year-to-year basis and declined subscription base. 

Partially, their confidence lies in the customers. A good internet connection is proving to be crucial in these times. According to the Fiber Broadband Association Consumer Study, video conferencing has exploded. About 46% of respondents are using it for staying in touch with family, 24% for business, and 16% for educational purposes. A significant portion of those working from home are also heavily reliant on video conferencing. Telemedicine is also on the rise, with 12% of the respondents using it for healthcare. Both of the service providers confirm that the sharp increase in broadband demand has stabilized around mid-April, after sharp spikes around Easter. AT&T reports that core network traffic on Easter Sunday, April 12 2020, was 21% greater than on a similar day at the end of February. 

In the short term, uncertainty is overwhelming. In such times only the companies that offer flexible no-lock in contracts can stay on top. In an article for Lightwave, the senior management for both Verizon and AT&T stated that "the future impact of the coronavirus pandemic was dynamic enough to lead them to withdraw their previous revenue guidance for the year and not offer replacements."

The management of ADVA, a german optical transport platform company, has also expressed similar concerns. In an article about their Q1 statement on lightwave, they are open, that "forecasting future results is fruitless." Components manufacturing companies are considered an essential barometer about the market. The company shows a positive year-on-year revenue, but according to the management, the company lost about 10 million euros due to the pandemic.

The optical fiber market beyond 2020

How long this ambiguity will dominate the fiber optic cable industry is a challenging prediction. The short term factors - such as the travel restrictions, the precautions taken for the workers, the government-mandated shutdowns are all temporary. The long-term factors are related to the post-COVID economy. What will be the size and effect of the economic recession? How much will the demand be affected? As of this moment, the US unemployment is spiking to 23%, consumer spending is plummeting, and talks about the incoming inevitability of a recession is taking place. 

So far, in most western countries, telecoms and data centers are considered to be an essential business. They will continue to boost the demand massively. The mass change of work habits with work from home, video conferencing, and telemedicine is one of the critical areas that will boost growth. Consequently, telecoms are reaffirming their plans to invest in developing new networks. And as people are staying home, they continue to use more internet applications, such as social networks and internet gaming. The shift from classroom to internet schooling is also driving up the bandwidth requirements. 

Telecom and cloud-based technologies are also critical for the logistics of shipping and material handling. A good example is Amazon's surge of demand. Currently, all of the company fulfilment and delivery centers report being overwhelmed. In March, the company declared a massive hiring spree of around 100 000 people in full and part-time roles, followed by a second one of 75 000

The rerouting of major industrial supply chains will boost the demand for fiber optic sensing technology as well. As factories move to countries with higher standards of living, profitability will inevitably suffer. The need for cost-reduction solutions will additionally speed up the transition to new technology. Optical sensing technology can answer many of these needs.

For the past few decades, the market for fiber optics has grown faster than in other industries. The last major 2008 recession was no exception to this rule.

Innovations, changes and new leaders after the pandemic

One of the reasons behind the Korean success in battling the pandemic was IoT and the smart city technology. For example, monitoring and DAS systems can accurately predict where the pandemic will strike next. As mentioned in an article in Fotech, when imposing social distancing norms, using "track and trace" apps could be controversial and not effective. But smart cities, with their vast array of sensors and sensor technology, have proven themselves capable of enforcing mass social distancing. Public authorities around the globe will most certainly take notes from this success in the future.

They confirm the findings of the MTN consulting study, according to which the broader implications of Covid-19 will benefit the digital economy and, by extension, optical communications. Fiber systems website summarises the research well, and it is worth reading if you want to create an even more profound understanding of the market and understand some of the pressing challenges ahead of it. Such as lack of wide-scale deployments, the vendors' desire to buy market share, thus pushing the price of contracts further down, etc.

The consequences of the disruption by the pandemic will be here to stay, long after COVID-19 is gone. Adam Zuckerman, Eisenhower Fellow and emerging technology and future of work strategist, is quite blunt in a May article in Optics, that "The reality is, we're never going to go back to normal." According to him, dense offices and lack of precautions, such as wearing masks in public, are the main reason behind the current crisis. 

One thing is certain, though - fiber optic technology is a source of great potential. In May, an article by Konrad Putzier in the Wall Street Journal hailed fiber optic cables as "the railroads of the future." According to the author, investors are turning their eyes towards crucial sections of the digital infrastructure. Perhaps, Putzier speculates, significant investing portfolios with shares in optical grids and cables will soon be a reality.

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