Industry Insights | From Technological Upgrade to Localization Trend: The Optical Module Industry in China Will Continue to Develop

Optical modules have become the mainstream fixed network communication method, continuously integrating with advanced technologies such as artificial intelligence and big data to empower various industries in the 5G era; optical modules are core components in the field of optical communication, playing an important role in the generation, conversion, and processing of optical and electrical signals.

Optical communication is an important industry that meets the network needs of the 5G era, mainly comprising three levels: equipment/components, technology, and application. The equipment/components level mainly includes optical/electrical chips, optical modules, and optical communication devices. The all-optical network within the technology layer is a key technology for enhancing network transmission speed and capacity; the application layer primarily serves communication networks and 5G. The construction of 5G infrastructure in China has laid a solid foundation for the development of the optical communication industry. Currently, the industry is developing towards the trend of 5G+, continuously integrating with advanced technologies such as artificial intelligence and big data to empower various industries, improve industrial efficiency, and drive industrial upgrading.

Optical modules are an important component in optical communication, playing a crucial role in realizing optoelectronic conversion. The main principle is that the transmitting end converts electrical signals into optical signals, which are then transmitted through optical fibers. Upon reception, the receiving end converts the optical signals back into electrical signals. Based on classification methods such as packaging form, transmission rate, and network topology structure, optical modules are divided into various types to meet the needs of different optical communication application scenarios.

In the upstream of the optical module industry chain, optical chips account for about 20-50% of the finished optical modules and are a key technology determining the iteration of high-speed optical modules; in the midstream of the optical module industry chain, leading Chinese optical module manufacturers already have a certain advantage in global R&D levels in the field of optical modules; the downstream of the optical module industry chain mainly includes telecommunications and network equipment providers, as well as telecommunications networks and data centers.

The higher the transmission rate of an optical module, the more complex its structure becomes, which also necessitates different packaging methods. Optical module packaging standards are established by major optical communication standardization organizations, including IEEE (Institute of Electrical and Electronics Engineers), ITU-T (International Telecommunication Union), as well as MSA (Multi-source Agreement), OIF (Optical Interconnection Forum), CCSA (China Communications Standardization Association), etc.

According to the packaging method, optical modules can be classified into: 1×9, GBIC, X2, XENPAL, XFP, SFP, SFP+, SFP28, QSFP, QSFP28, CFP, CFP2, QSFP-DD, OSFP, etc. Optical modules have evolved from the earliest mainstream GBIC packaging method to the current advanced QSFP-DD and OSFP packaging methods, generally moving towards higher speeds, miniaturization, and hot-swappable capabilities.

The global optical module market has been on an upward trend. Driven by the rapid development of telecommunications industries such as wireless connectivity and fiber broadband access, the total market size exceeded $10 billion in 2022 and will continue to grow with the continuous deployment and upgrading of fiber broadband in the future.

On the one hand, the rapid development and successful application of technologies such as artificial intelligence (AI) and cloud computing will generate a huge demand for data processing capabilities and data storage.Simulating the development of the data center service industry, it is expected that the demand for optical modules in data communication will grow.

On the other hand, the continuous improvement in data processing capabilities and data transmission speeds will drive the upgrade of telecom backbone networks and metropolitan backhaul networks, leading to an increasing demand for high-speed long-distance optical modules.The market scale of optical modules in transmission networks is expected to grow.Due to the development of technologies such as Internet of Things (IoT) and the expansion of downstream applications,It is expected that the market demand for optical modules will also climb for other applications such as smart grids and smart city monitoring systems.

As one of the important regions in the global optical module market, the China optical module market has developed in a manner largely similar to that of the global market.

In addition, due to the high demand for high-speed optical modules in data communication applications, North America occupies the largest global market share. Internet and cloud computing giants such as Amazon, Google, and Meta have invested in building large-scale cloud data centers to meet the demands of massive data processing and storage, supporting artificial intelligence, augmented reality/virtual reality (AR/VR), and the Internet of Things.In the future, the North American market will continue to be an important region for the global optical module market.

In recent years, driven by the development of artificial intelligence technology, representative downstream applications such as 5G, fiber broadband access, transmission networks, and data communications have seen significant growth. Driven by factors such as the large-scale popularization of 5G, increased demand for data centers, wireless communication upgrades, and traffic bursts in multiple application scenarios, the optical module industry is expected to achieve sustained and rapid development in the future.

The continuous progress of high-speed optical communication technology has driven an expansion in the demand for updating and iterating optical modules. With the emergence of 400Gbps and 800Gbps high-speed optical modules, transmission rates in fields such as data centers and cloud computing are also constantly increasing, leading to higher requirements for the performance and bandwidth of optical modules. At the same time, the development of related technologies such as integrated circuits and digital signal processing is also driving continuous updates and iterations in optical module technology and products.

In recent years, the Chinese government has strongly supported the coordinated development of the upstream and downstream ecosystems in the optical communication industry. It has actively introduced supportive policies related to the optical module industry, such as the 'Three-Year Action Plan for the Development of New Data Centers (2021-2023)', the 'Dual Gigabit' Network Coordinated Development Action Plan, etc., to encourage domestic enterprises related to optical modules to innovate and develop, and promote the coordinated development of the industrial chain. For instance, the Chinese government actively encourages enterprises to increase investment in research and development, improve technological innovation and product quality, accelerate technological progress and upgrading, raise industry standards and quality requirements, enhance the global competitiveness of China's optical module industry, thereby driving the expansion of the optical module industry.

With the continuous development and maturation of the optical module industry and related enterprises, midstream optical module companies are gradually showing an integration trend towards expanding upstream in the industrial chain to achieve lower costs and stronger supply chain control. For example, some leading optical module companies are committed to creating IDM (Integrated Device Manufacturing) models or self-sufficient optical chip models. Some optical communication giants have undergone a series of mergers and acquisitions to enhance the vertical synergy of the entire industrial chain, increase scale advantages, and improve bargaining power. At the same time, leading companies in the industry are also actively expanding horizons into new categories and developing new downstream customer groups.

Miniaturization, low cost, and high speed are the main directions for optical module products and technological iterations. With the continuous improvement of data center switch chip throughput, data centers require optical modules that match this performance, featuring higher rates and lower power consumption. The speed of optical modules will gradually evolve to above 800 Gbps. In addition, silicon photonics integration is an important evolution direction for future optical modules. Silicon photonics technology performs well in terms of peak speed, energy consumption, and cost, making it one of the important research and development directions for future optical modules.

Although foreign companies have long monopolized the high-end optical module market, in recent years, domestic substitution opportunities have become increasingly broad. Overall, overseas manufacturers occupy the main share of the high-end optical module market. China highly relies on imports for optical chips above 25 Gbps. However, with continuous technological iteration, industrial upgrading, and market expansion, China's optical module market has developed particularly rapidly. The global production focus of optical modules will gradually shift from overseas markets to China, and China is gradually becoming the world's largest optical module market. Some leading Chinese manufacturers have already announced 800 Gbps optical modules for downstream scenarios such as next-generation data center networks.