Accelerated Integration of Core Optical Communication Device Technologies: Chinese Manufacturers Must Strengthen Basic Research Without Delay

Commentary on October 27 (Liu Dingzhou) Last Friday, news emerged that two manufacturers ranked among the world's top ten in the optical communication device industry completed a significant transaction, with Emcore selling its tunable wavelength laser and partial optical module production lines to NeoPhotonics. The transaction price was US$17.5 million, including US$1.5 million in cash, and is expected to be completed in Q1 2015.

Both Emcore and NeoPhotonics are manufacturers skilled in capital operations, and both have some connections with China. NeoPhotonics was previously primarily Shenzhen Photon Technology Co., Ltd., which was integrated after being acquired by American investors; Emcore had planned to relocate its optical communication device business to Tangshan, China. Those days are gone. This transaction is not merely an integration of both parties' product lines, but also a microcosm of the ongoing mergers and acquisitions occurring in the industry.

Core Technologies Are Concentrating at an Accelerated Pace

Prior to this acquisition involving tunable laser technology products, Emcore had already sold its VCSEL (Vertical-Cavity Surface-Emitting Laser) and parallel module business to Sumitomo Electric for US$17 million. Before this acquisition, NeoPhotonics had also acquired the high-speed laser and detector chip business of Japan's ROHM, with the business acquisition price itself at US$21.2 million.

In earlier years, Emcore acquired numerous optical device businesses and technologies, including Intel's 10G optical module business in 2007, but it has now fallen from its former glory. Sharing the same plight is Oclaro, which has been on a downward trajectory since the "strong-strong combination" with Opnext, another top-ten manufacturer. It has successively sold its VCSEL, 980nm pump laser, and optical amplifier businesses, and is still in the process of "streamlining operations."

Meanwhile, Finisar, the leader in optical devices, acquired u2t Photonics, a supplier of high-speed optical devices and chips, for approximately US$20 million. Finisar has also been rumored to be linked with router giant Cisco, with repeated speculation of being acquired by Cisco. JDSU, on the other hand, has split off its optical device business and will undertake a new round of capital operations, reportedly targeting Finisar as its first objective.

These events have all occurred within the past two years. Looking through these scattered and isolated incidents, it is evident that core optical device technologies are accelerating their concentration toward industry leaders, forming a de facto technological monopoly. Previously, media reported that a domestic optical module manufacturer had negotiated a 100G chip supply agreement with ROHM, but NeoPhotonics' acquisition immediately cut off this procurement channel. Finisar's acquisition of u2t Photonics is likely similar, posing a serious threat to technologically weaker Chinese manufacturers.

Basic Research Cannot Be Delayed

Looking across these acquisitions, they involve multiple core technologies at the optical device and chip levels, each of which would be enough to make most Chinese manufacturers envious. However, in this game of technology and capital, there are no Chinese players. The reasons may be, on one hand, that Chinese manufacturers are too weak and technically unable to digest such acquisitions. More importantly, given the precedent of Huawei's "small deal" to acquire assets of 3Leaf for US$2 million, which was strongly obstructed by the U.S. government, Chinese manufacturers face formidable resistance in acquiring core optical device technologies.

Take Emcore as an example. In 2010, the company planned to sell 60% equity of its optical device business to China's Tangshan Caofeidian Investment Company for US$27.75 million. The outcome was obvious — the deal was terminated due to obstruction by the U.S. government. Now Emcore is selling this business at a low price to American manufacturer NeoPhotonics, indicating that Emcore's optical device business was not developing smoothly at the time, and the U.S. government's attitude is evident.

Currently, the vast majority of manufacturers holding core optical device technologies are from the United States and its ally Japan, and the concentration process is still accelerating. For Chinese manufacturers, they may increasingly face the significant risk of component supply disruptions caused by supplier acquisitions. Due to the lack of domestic alternative suppliers, this risk will be extremely daunting. Since we cannot depend on others, the only path is self-reliance — strengthening basic technology research without delay.

Mastering core optical device technologies requires strengthening basic research efforts. Currently, Huawei is the largest investor and most accomplished player in the field of basic research. It is reported that Huawei has already mastered the complete 100G technology chain from chips to devices to modules, is increasing investment in 400G/1T optical device technology research, and has also made considerable progress in the field of integrated photonics. Additionally, optical device manufacturer Accelink Technologies has recently successfully raised RMB 600 million in the capital market, striving to achieve significant breakthroughs in the optical chip field.

However, most manufacturers are still engaged in so-called "Chinese-style innovation," merely making improvements to process details based on existing products. Their motivation is understandable, after all, China's basic research foundation is too weak, and the development of advanced technologies cannot be achieved overnight, requiring substantial capital investment. Recently, the United States released the "National Photonics Initiative," with the government funding US$200 million to invite research institutions and enterprises across the country to build an American integrated photonics process research institute, strengthening U.S. photonics technology capabilities. The level of attention from the Chinese government is still far from sufficient.