Huawei intensifies competition in FTTx PON

OvumWe have known for some time that HiSilicon, a Huawei-related company, was developing PON MAC (media access control) chips. We now know that HiSilicon’s chips are being used in some of Huawei’s GPON OLT (optical line terminal) systems.
This means that Huawei is adopting a vertical integration strategy in FTTx PON. In addition, we believe that Huawei is researching FTTx optical transceivers and ways to reduce the costs of the optics and related components. If successful, Huawei would be able to save further on its bill of materials (BOM).
We believe that it will become increasingly difficult for the non-Chinese system vendors, and possibly even ZTE, to compete with Huawei. These system vendors need to consider the benefits and risks of acquiring component vendors versus the savings in BOM. The key deciding factor may be the size of the FTTx PON market that they could hope to win with a vertical integration strategy versus market share without such a strategy.
The news that HiSilicon’s OLT chips, which go into the central office, are ready and are being deployed in Huawei’s GPON equipment is not a surprise to PON chip vendors. In fact, it was only a question of when they would become ready. For all PON chip vendors (except HiSilicon), the longer it took, the better, as they had more time for design wins and chip sales.
EPON chip vendors, while concerned, had the first-mover advantage in Japan, Korea, and even China, all countries where EPON has been dominant. While Huawei might choose to use the HiSilicon chip for EPON OLTs, its chip would need to be backward-compatible with more than 1.5 million EPON OLT ports that Chinese vendors have shipped for deployment in China alone. In addition, it is unlikely that Japan and Korea’s equipment vendors would begin to replace their chip solutions given their stage of EPON deployments and favoritism to national vendors.
GPON chip vendors have greater reason for concern. GPON has not been deployed in the same volume as EPON and many deployments are new, implying that Huawei could more easily replace chips from current GPON OLT vendors with HiSilicon’s chip.
We believe that Huawei will continue to develop additional areas of vertical integration. With HiSilicon, Huawei can save some portion of the likely 50% gross margin that a third-party OLT GPON chip vendor would hope to secure in a sale. While the chip is just one piece of OLT port equipment, if it represents 5% of the OLT port BOM, a savings of 50% represents an overall savings of 2.5% and this matters in the highly price competitive environment of FTTx PON.
Huawei could save further BOM if PON optical transceiver modules were to be developed in-house or if Huawei could find a way to reduce the costs of optical modules and related components. If a GPON OLT transceiver costs around $250 or around 25% of the OLT port BOM and if the margins are around 30% to the vendors, a savings of just over 8% would be achieved by not having to provide a margin to those vendors.
Together, these two integration activities represent approximately 10% in savings without diving into other possible areas of vertical integration.
FTTx GPON is no longer a Verizon-only story, as deployments are taking place in China, Russia, Belarus, Georgia, Hungary, Romania, Lithuania, and Italy, among other places. The non-Chinese system vendors need to objectively analyze their product offerings, their competitive positioning, and their respective abilities to compete with Huawei. ZTE also needs to consider a vertical integration strategy, even though it is benefiting from a robust local and export market.
The vendors need to build scenarios based on several assumptions, such as whether or not it makes sense to acquire an optical transceiver module company or move from FPGA-based OLTs to chips through an exclusive partnership with one of the smaller PON chip vendors. We know that this recommendation goes against the grain of many; some of these system vendors spun-off chip and component divisions not so long ago.
Our response is simple – the access market is highly price sensitive while offering a multibillion-dollar pie for consumption.