Optical module: data transmission optoelectronic conversion node, continuously transforming the industry around speed upgrading

Function and structure of optical modules

The optical module undertakes the task of photoelectric signal conversion in network connections, responsible for converting electrical signals into optical signals at the sending end, transmitting them through optical fibers, and then converting optical signals into electrical signals at the receiving end. It is mainly packaged by optoelectronic devices such as TOSA/ROSA, functional circuits, and optoelectronic interface components. Among them, the optical transceiver module TOSA/ROSA is the core part of the optical module. The optical emission component TOSA is responsible for processing the received electrical signal at a certain bit rate through an internal driving chip, and then driving a semiconductor laser (LD) or light-emitting diode (LED) to emit a modulated optical signal at the corresponding rate. The optical receiving component ROSA is responsible for inputting a certain bit rate optical signal into the module, which is then converted into an electrical signal by a photodetector diode, and output the corresponding bit rate electrical signal through a preamplifier.

Cost composition of optical modules

The BOM cost of optical modules mainly includes optical devices, circuit chips, PCBs, and structural components. Among them, optical devices account for over 70% of the cost of optical modules. Specifically, when it comes to optical devices, emitting components mainly composed of lasers account for nearly half of the cost of optical devices, while receiving components mainly composed of detectors account for 32%. The total cost of optical devices is 80%. In 2021, the total market space for optical modules is 9.2 billion US dollars, the market space for optical chips is 3.5 billion US dollars, the market space for electronic chips is 2.4 billion US dollars, the market space for optical devices is 1.3 billion US dollars, and the market space for optical components is 800 million US dollars.

Industry development trends: high speed, low cost, and low power consumption

The upgrade of high-speed digital optical modules and the release of new switches complement each other. The constantly increasing speed requirements of data centers are the main reason for high-frequency upgrades of optical modules. With the development and improvement of integration of optoelectronic devices, their performance and transmission bandwidth have increased. Optical modules adapt to different usage scenarios with higher transmission rates and smaller sizes, and packaging methods continue to evolve. Smaller packaging and power consumption mean that optical modules have higher port density on the switch, and the same power can drive more optical modules.

The method for upgrading the speed of optical modules: 1. Increase the bit rate of a single channel; 2. Increase the number of channels; There are two ways to increase the bit rate: 1a. Directly increase the baud rate, 1b. Keep the baud rate constant and use a higher modulation encoding format. Traditional optical module modulation is mainly based on NRZ (not return to zero), and the high/low power of the laser corresponds to binary 1 and 0 signals, respectively. The determination of PAM4 optical signal power is divided into four thresholds: 00 for values below the minimum threshold, 01 for values between the minimum and middle thresholds, 10 for values between the middle and high thresholds, and 11 for values above the high threshold.

Upgrade of data center architecture, driving the simultaneous increase in quantity and price of optical modules

The data center optical modules are constantly upgrading and moving towards 800G. The rapid growth of traffic data is constantly driving the upgrading of data center architecture. Currently, data center optical modules are rapidly transitioning to 200G/400G speeds, with 400G being the latest standard for high-speed Ethernet client interfaces. With the upcoming large-scale deployment of 400G optical modules and the accelerating demand for network bandwidth and performance, data center interconnection of 800G will also become a new demand, which will be applied in ultra large scale data centers, cloud computing, and artificial intelligence computing centers in the future.

Short distance transmission with active copper cables or competitive advantages

Active copper cables refer to copper cables that utilize external energy sources to enhance signal transmission distance. DAC passive copper cables have short transmission distances, while AOC active optical cables have high power consumption and cost. Active copper cables have long application distances, good robustness, lower costs, and lower power consumption, which is very suitable for the urgent needs of green energy conservation and cost control in large data centers. There are currently two types of active copper cables on the market: ACC and AEC. ACC (Active Copper Cable) is an active copper cable that uses the Redriver chip architecture to balance and adjust gain through CTLE at the Rx end. Simply put, it is more like an active cable that amplifies analog signals. AEC (Active Electrical Cable) is a more novel active copper cable that uses Retimer chip structure. This active copper cable not only amplifies and balances the Tx and Rx ends, but also undergoes signal shaping at the Rx end.

NVIDIA is willing to adopt an active copper cable solution

NVIDIA Mellanox LinkX Ethernet DAC copper cable is the lowest cost way to create high-speed 100G400G links in Ethernet switched networks and NVIDIA GPU based systems. Widely used in data centers, it is used to connect servers and GPU computing systems to top of rack (TOR) switches, and to connect Spine to Superspine switches inside the rack through short cables. DAC copper cables do not contain electronic components, are highly reliable, have zero power consumption, extremely low latency and insertion losses, and are the lowest cost high-speed interconnection solution. In the NVIDIA DGX A100 GPU system, DAC copper cables connect the GPU to network switches and create an Ethernet storage structure (ESF) with hard disk drives (HDDs) and flash subsystems.

Industry: The market space continues to grow rapidly, and domestic manufacturers have significant competitive advantages

Market size of optical modules

According to LightCounting's forecast, the optical module market is expected to reach $13 billion in 2022 after reaching $11 billion in 2021. It is expected to slow down growth in 2023 and recover in 2024-2025. The rapid growth of the optical module market in 2020 and 2021 was driven by the network demand for home learning and office work during the pandemic.

Market structure of optical modules: Market demand is concentrated towards cloud giants

Cloud vendors are the main customers in the data communication market, accounting for about 60% of the market. The growth rate of demand in the data communication market is expected to continue to be higher than that in the telecommunications market, and the market share is expected to continue to increase. The demand is concentrated towards top customers, with the top five global cloud vendors occupying the main market share. According to LightCounting's forecast, the total share of the top five cloud vendors is expected to exceed 3 billion US dollars by 2023.

The competitive landscape of the optical module market

Chinese optical module manufacturers are rapidly expanding their market share. According to LightCounting, the total sales revenue of top optical component suppliers was approximately 2.8 billion in 2010, increasing to 8.7 billion US dollars in 2021. Domestic manufacturers have a market share of over 50%. Among the top ten global optical module manufacturers in 2021, the number of Chinese manufacturers has risen to the 5th place. Looking back at the development history of the optical module industry over the past 10 years, the share of domestic manufacturers has continued to increase.

From the perspective of the scale of mainstream optical module manufacturers in 2021, American companies II-VI (Finisar) ranked first in the global market, with optical module business revenue reaching approximately RMB 12.3 billion, accounting for 17% of the market share; Zhongji Xuchuang ranks first in the domestic market, with optical module revenue reaching approximately 7.3 billion yuan, followed by Guangxun Technology, Huagong Technology, New Yisheng, Bochuang Technology, and Cambridge Technology. Overall, domestic optical module manufacturers have already occupied a place in the global market share, but there is still a significant gap in the strength of major domestic manufacturers.

From the comparison of gross profit margins among various optical module manufacturers in 2021, it can be seen that the gross profit margins of optical module manufacturers are not significantly different, but generally high, with an average level of about 25%. Domestic manufacturer Xinyi Sheng is even more than 30%. The gross profit margin of optical modules is closely related to the self-sufficiency of upstream optical chips. As the self-sufficiency rate of optical chips increases among major manufacturers, the overall gross profit margin will also increase.

Demand elasticity: AI drives high computing power transmission demand, 800G demand elasticity calculation

Growth Elasticity of Optical Module Market

Due to significant differences in the topology architecture of different AI data centers, we will calculate the demand for optical modules by AI based on a typical scenario. When the number of GPT applications reaches 1 billion monthly active users, we estimate that 69.4 A100 is needed. Assuming that one A100 corresponds to the demand for 3 optical modules, it corresponds to the demand for approximately 2 million 800G optical modules.

Key company analysis

Zhongji Xuchuang: Global leader in the field of optical modules

High growth in performance throughout the year, with an increase in the proportion of high-end products. Benefiting from the growth of data center traffic and the continuous investment of overseas customer capital expenditures, the demand for high-speed data communication optical modules such as 400G and 200G has rapidly increased, and the company's profitability has continued to improve. At the same time, the company's sales revenue in US dollars is positively affected by exchange rate fluctuations. The company is a leading global enterprise in digital optical modules, with a leading share in 400G and 200G products, and a clear first mover advantage in 800G and related modules. It has achieved mass delivery, and its technological first mover advantage and continued leading share are expected to consolidate the company's profitability.

The company focuses on overseas markets and has abundant resources of top customers. The major Internet cloud manufacturers in the world are all the company's customers, of which the North American market is the company's biggest performance guarantee. The company has a stable cooperation relationship with Meta (Facebook), Google, Amazon and other major customers in North America.

Leading the industry in technological strength and continuously increasing market share. The company has a complete reserve of new product technologies in the field of high-speed optical modules, with a first mover advantage. Both 400G and 800G have been introduced first. In 2021, the company ranked first in the global optical module supplier market share, achieving the first domestic optical module company to reach the top. In the fourth quarter of 2021, the market share reached 12%, and the development momentum was rapid.

Tianfu Communication: A one-stop provider of complete solutions for optical devices

The company has good profitability. The company's operating revenue has shown a high-speed growth trend, with a revenue of 890 million yuan in Q3 2022, a year-on-year increase of 16%. In 2020, thanks to the acceleration of global 5G communication network infrastructure construction and continuous investment and expansion of data centers, the company's revenue increased by 67% year-on-year. The net profit attributable to non parent companies also showed a high growth trend, increasing from 127 million yuan in 2018 to 250 million yuan in Q3 2022. In Q3 2022, the company's net profit attributable to non parent companies increased by 29% year-on-year.

The product matrix continues to expand, and the horizontal expansion strategy is successful. The company has expanded its product line from 3 in 2008 to 13 in 2021, covering basic components, passive components and devices, ODM/OEM outsourcing, and packaging, achieving a vertical integration layout of upstream and downstream.

The high-speed optical engine project is progressing smoothly, and the company is steadily expanding production. The high-speed optical engine is the core component of high-speed optical transceiver modules, widely used in data transmission applications, including high-speed optical modules such as 400G/800G, highly integrated co packaged optical (CPO) switches, and optical interconnections between chip modules. The company's 2020 private placement project for high-speed optical engines is currently in a stable mass production stage.

The CPO switch solution replaces packaging, and the optical engine has great potential. CPO continuously brings the optical module closer to the switching chip, shortens the wiring distance between chips and modules, and gradually replaces the pluggable optical module, ultimately encapsulating the switching chip (or XPU) ASIC and optical/electrical engine on the same substrate. At present, CPO has become an alternative packaging solution in the industry. The company has launched project investment and laid out high-speed optical engines, which is expected to gain a first mover advantage.

New Yisheng

Xin Yisheng is a leading manufacturer of high-speed optical modules in China. At present, the company's main products are point-to-point optical modules and PON optical modules. We have successfully developed over 2800 different types of optical module products, covering industries such as data broadband, telecommunications, Fttx, data centers, security monitoring, and smart grids. We can provide customers with customized product services and a package of solutions. Comprehensive layout of silicon light and 800G optical modules, actively expanding customer categories. The company has acquired the Alpine silicon photonics technology platform, providing single wavelength 100G optical solutions for data center connectivity, and also offering PAM4 products to strengthen its layout in the silicon photonics field. The company's 800G series product portfolio has been released for exhibition and is expected to gradually enter the commercial phase in the future.

Yuanjie Technology: a leading domestic supplier of optical chips

10G and above high-speed chip series and stable overall revenue growth. In 2020, with a significant increase in sales of mid to high end products such as 10G and 25G, high gross profit products brought about a significant increase in the company's overall gross profit margin. From 2019 to 2021, the company's revenue increased from 80 million to 230 million, and the net profit attributable to the parent company increased from 15 million yuan to 95 million yuan.

Focusing on the research, development, design, and production of high-speed semiconductor chips, continuously exploring product types. The company starts with the 2.5G series chip products and continues to advance towards the high-end, covering products ranging from 2.5G to 50G indium phosphide laser chips, committed to becoming an international first-class semiconductor device supplier.

The production scale has been increasing year by year, and fundraising projects have increased production capacity. In recent years, the production scale of the company has been increasing year by year. From 2019 to 2022, the production capacity of the company's laser chips was 24.69 million, 28.43 million, 41.97 million, and 29.48 million, respectively. The production capacity was 24.54 million, 25.75 million, 42.07 million, and 26.53 million, with utilization rates of 99.39%, 90.56%, 100.24%, and 90.01%, respectively.

The company produces in IDM mode and masters the entire production process. IDM (Integrated Device Manufacturing) refers to a business model that includes all or major business processes including chip design, chip manufacturing, and packaging testing. In the future, under the IDM model, the company will continue to strengthen its core process development capabilities for the entire production process of optical chips, continuously accumulate experience in optical chip research and production, apply scientific and technological achievements to core links such as chip design and wafer epitaxy, achieve differentiated characteristics, high performance indicators, high reliability, etc. of products, and improve product competitiveness.

Huagong Technology

Huagong Technology originated from Huazhong University of Science and Technology. After years of technological and product accumulation, it has formed an intelligent manufacturing equipment business supported by laser processing technology, optical and wireless connection business supported by information and communication technology, and sensor business pattern supported by sensitive electronic technology. The industrial base covers nearly 2000 acres. In the field of optical communication, the company continues to solidify its position as a leading global optical module supplier in the industry. Surrounding the next generation of information and communication networks, we will lay out new fields in terms of chips, materials, technology, processes, and applications. With the full launch of the "East Data and West Computing" project in China, Zhengyuan has vigorously promoted the business of data center, successfully managed to pool resources of Internet manufacturers at the head of the card, and delivered 100G/200G/400G full series optical modules in batches; Actively promoting the application of silicon optical technology, we now have the ability to independently design from silicon optical chips to silicon optical modules; The optical module products continue to consolidate their advantageous position in the front-end, midstream, and back-end markets.

Liante Technology

Liante Technology adopts differentiated competition, focuses on long-distance wavelength division communication optical modules, launches industry-leading 10G40/80km DWDM/CWDMSFP and optical module products, establishes a wholly-owned subsidiary in the United States, and expands overseas markets. The company focuses on developing customers in the communication equipment manufacturing industry, releasing 40G and 100G optical module series products, and building a new 10000 level optoelectronic integrated manufacturing center, winning its market position through differentiated competition. Independent innovation helps the company enter a period of high-speed growth. Since 2018, the company has successfully released 100G, 400G and other data communication optical module products through independent innovation, forming a pattern of synchronous development in the telecommunications and data communication markets. The operating revenue for the first three quarters of 2022 has reached 618 million yuan, a year-on-year increase of 27.18%.

Guangxun Technology

Guangxun Technology is one of the few optical communication leaders in China with a full industry chain layout of chips/modules/systems. The company's products cover multiple fields such as telecommunications transmission networks, data communication networks, and broadband access networks. After more than 20 years of development, the company has now acquired the vertical integration ability of the entire optical communication industry chain through endogenous growth and mergers and acquisitions, and has a leading market share. Full product coverage, independent research and development of optical chips. At present, the company's products have achieved full coverage of comprehensive solutions from chips to devices, modules, and subsystems, providing one-stop services for data communication and telecommunications customers. The company is one of the few domestic enterprises that can independently develop optical chips. It is leading the industry in the research and development progress of silicon optical chips and is expected to have an advantage in future competition.

Zhaolong Interconnection

The main business of Zhejiang Zhaolong Interconnection Technology Co., Ltd. is the design, manufacturing, and sales of data cables, specialized cables, and connection products. The main products include data cables of Category 6 and below, data cables of Category 6 and above, high-speed transmission cables, industrial digital communication cables, cable components, and wiring systems. Zhaolong Interconnect is a leader in the subdivision of cable components and connection products. The company can provide secure, stable, convenient, and low-cost connection solutions for the layout of 5G micro base stations. Zhaolong Interconnect has been able to scale up the production and application of high-speed transmission components and supporting high-speed transmission cables for transmission speeds up to 400Gbps, meeting the data transmission needs of large and even super data centers.

Shijia Photon

The company focuses on the optical communication industry, with its main business covering three major sectors: optical chips and devices, indoor optical cables, and cable materials. The optical communication market is growing, and the domestic market space is vast. In 2022, there will be strong demand for 200G/400G from major overseas cloud vendors. As the main combiner and splitter component, the penetration rate of modules above 100G is rapidly increasing. The company is one of the few bulk suppliers of digital communication AWG chips and is expected to directly benefit. Starting from Q3 2021, the company will increase production by 200GAWG. The domestic demand for DFB lasers is urgent, and the optical chip market in China is expected to reach approximately 1.1 billion US dollars in 2025. The company's 2.5G/10GDFB chips have passed customer certification and are expected to usher in new growth points. With a background from the Chinese Academy of Sciences and strong research and development capabilities, as well as both passive and active independent IDM capabilities, we seize the opportunity of domestic substitution to achieve overtaking on curves. The company has developed passive PLC splitters, AWG, microlenses, VOA, and active 2.5G, 10G, 25G, CWDFB chip products from scratch. The core advantage of the company is the ability to have full process technology, which allows for quick research and development of passive and active new products. In addition, under the IDM model, after passing the break even point, it has high profitability elasticity.