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Summary

Around the time of OFC 2016, the US Department of Commerce put export restrictions on ZTE. The question had arisen as to whether optical component manufacturers would stay with ZTE or move on, with two – Acacia and Oclaro – opting to stay. Now that ZTE has admitted wrongdoing, what guarantees are there for Acacia and Oclaro that this will not happen again?

Optical component manufacturers looking

In March 2016, the Chinese telecommunication equipment maker ZTE was faced with export restrictions by the US Department of Commerce as a result of ZTE exporting US technologies to hostile regimes such as North Korea and Iran. The reaction from the optical component investment community was a swift selloff. Oclaro, with just under 10% of its revenue deriving from ZTE, took the biggest hit with a 14.4% drop in stock price, whereas Lumentum, Finisar, and Neophotonics dropped by 6.3%, 6.1%, and 4.8%, respectively. At that time, Acacia was not public, but it now reports that ZTE accounts for greater than 30% of their revenue. Since then, there have been several extensions to ZTE’s temporary export licenses, allowing the optical component companies to ship parts to ZTE under the restriction. Fast forward to March 7, 2017, when ZTE pleaded guilty to the charges against it, agreeing to pay $1.2bn in fines where $300m will be waived for good behavior after seven years.

Over the past year, there has been a cloud over the heads of optical component manufacturers on whether the export license restrictions will be lifted or not. In these times of uncertainty, companies such as Acacia and Oclaro had to make a decision on whether to continue supporting ZTE or move on. Acacia and Oclaro elected to stay with and support ZTE.

By its suppliers committing to stay with ZTE during these challenging times, ZTE comes out as a stronger company through better relationships with its suppliers. In addition, the $300m hanging over ZTE as an incentive to keep behaving gives its suppliers a sense of a guarantee that ZTE will continue down the right path. If not, ZTE will lose $300m and its trusted relationships with its suppliers.

Appendix

Further reading

Market Share Spreadsheet & Analysis: 3Q16 Optical Components, TE0017-000081 (December 2016)

Total OC Forecast Spreadsheet: 2015–21, TE0017-000079 (November 2016)

40G, 100G, and 200G OC Forecast Spreadsheet: 2015–21, TE0017-000080 (November 2016)

"DCI is reshaping optical networks and fueling component demand," TE0017-000073 (September 2016)

Author

Kevin Lefebvre, Principal Analyst, Components, Transport and Routing

kevin.lefebvre@informa.com

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