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The announced acquisition of WTD by Accelink will create an all-Chinese optical component (OC) vendor that ranks just behind Oclaro and Opnext globally. It also brings together the elements for integrated components needed to compete for next-generation leadership. The deal would have been bigger news had it gone through when first posited a year ago. Several deals since – including Oclaro’s acquisition of Opnext – have raised the bar for integrated capability as well as consolidation. Still Accelink/WTD ranks sixth even accounting for the announced deals (see Market Share Alert: 1Q12 Global OC, June 2012). The challenge for the company will be to exploit new synergies as the market moves rapidly to integrated 100G/400G client- and line-side interfaces. The news spotlights the potential for Chinese optical component vendors as they seek to shake off lagging perceptions as low-cost suppliers.

Next-generation optical components are the hurdle for Chinese vendors

What does the term “Chinese architecture” call to mind? Perhaps it conjures images of the Forbidden City or Shanghai skyscrapers. Now, what comes to mind for “Chinese optical component company”?

Many OC suppliers manufacture their products in China, but as a headquarters and development hub the country still lags. Many Chinese vendors show up at international trade shows, but ironically, these large numbers have only reinforced the stereotype of Chinese vendors as opportunistic resellers of passives and low-end transceivers.

What about technical leadership from Chinese transport optics companies? The combination of the two largest Chinese OC vendors is timely. Chinese carriers and system vendors have taken increasing prominence in the global telecom market. We have recently seen Chinese companies take the lead in non-transport optical communications segments.

Accelink’s and WTD’s heritage count, especially in the chip business

Accelink and WTD defy the unfortunate stereotypes in product type and company history.  Accelink is a public company, competing in fourth place in transport components (amplifiers and DWDM line optics) behind JDSU, Oclaro, and Oplink. WTD is currently the seventh-place transceiver supplier but has additional business in other segments. The deal creates a truly world-class competitor not only in size but span of telecom products.

For semiconductor fabs, process maturity and scale are irreplaceable competitive advantages.  Far from opportunistic, WTD has been making lasers since 1980, a similar vintage to other major telecom laser fabs around the world such as 3S Photonics, CyOptics, Sumitomo, and Mitsubishi.

The challenge will be to move fast in an accelerating market

What might look on the outside like a romance is actually a marriage of cousins within an old family. We hope this deal has more strategic intent beyond consolidation in response to margin pressures afflicting the global OC market, including Chinese suppliers. Accelink and WTD are both under the ownership of parent FiberHome Technologies Group, which evolved from a government ministry. They, along with optical system vendor Fiberhome Telecommunication Technologies, also within the holding company, have collaborated for years. The good news is the danger of cultural incompatibility is minimal. The risk is that there isn’t enough “new blood” to drive a step up to the next level of innovation and risk-taking.   

Relationship creates unique opportunity for new optical integration business model

Aside from margins, component vendors are further at risk of having system vendors take over the most valuable components entirely. Huawei recently stated it see value moving increasingly to chips and software. It acquired CIP (the Center for Integrated Photonics) in the UK in 2011. Infinera has always differentiated through its own optics; Cisco acquired Lightwire in 2011.

Silicon photonics vendors and industry roadmappers are advocating a more efficient supply chain such as the IC model of fabless design shops (including OEM ASIC teams) relying on technology support from design tools, IP houses, and foundries. But this business model is not restricted to silicon.   

Accelink and WTD, along with sister company Fiberhome, constitute a microcosm of the optical supply chain from chip foundry to system OEM. We don’t know if they have plans to do so, but we suggest the vendors should exploit this unique opportunity to define a new industry structure with roles and, more critically, cost and profit sharing along the lines suggested by the IC example.