The Rise of Optical Engines: Embracing a Transformative Era
Over the course of just eight years, from 2016 to 2024, the optical module industry has undergone a remarkable transformation, evolving from 100G to cutting-edge 1.6T solutionsAt the heart of this revolution lies the optical engine, a key component that has experienced exponential advancements in technology and application.
A significant priority for the industry has been enhancing the integration of optical modules, which has led to the emergence of CPO (Co-Packaged Optics) technology as a dominant approach, primarily incorporating silicon optical engines and optical chips.
Within this domain, Tianfu Communication has established itself as a formidable leaderThe company has successfully realized mass production of 800G silicon optical engines and has initiated sample delivery for its 1.6T models.
Moreover, Tianfu Communication is ramping up its production capacity, which is projected to reach 60,000 units per year upon completion, highlighting its commitment to scaling operations to meet market demands.
The optical engine sector, much like the optical module industry, places immense importance on the speed of product iterationTianfu Communication has quickly secured a significant market share, commanding around 70% of China’s silicon optical engine market with its cutting-edge products.
This dominance in market share, coupled with burgeoning demand from downstream customers, has effectively accelerated Tianfu Communication's performance
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Between 2020 and 2023, the company recorded a compound annual growth rate of 22.08% in revenue and 27.18% in net profit attributable to shareholders.
As of the first three quarters of 2024, Tianfu Communication continues its impressive growth trajectory, achieving revenue of 2.395 billion RMB, a dramatic increase of 98.55% year-on-year, alongside a substantial net profit of 976 million RMB, marking a 122.39% rise compared to the previous year.
The coming years appear promising for Tianfu Communication, with expectations of sustained growth in an expanding marketThe surge in AI applications is continually expanding the silicon optical engine market, driving demand that shows no signs of slowing.
1. Continuous Demand Surge
Silicon technology boasts numerous advantages over its competitorsFor instance, within the realm of 1.6T and 3.2T optical modules, silicon offers superior yield rates, enhanced data security, and lower costs owing to its raw material compositionThese factors suggest that silicon optical modules and silicon optical engines are poised to maintain their dominance in the market.
From 2022 to 2028, it is projected that the market share of silicon optical modules will expand from 24% to 44%. Specifically, in the 3.2T segment, silicon optical modules are expected to capture up to 50% of market share, significantly propelling the silicon optical engine industry forward.
It’s noteworthy that many optical module manufacturers have made substantial strides in the silicon optical sectorFor example, downstream clients like Zhongji Xuchuang and Xinyi Technology have successfully moved their 400G/800G silicon optical modules into mass productionMeanwhile, both companies are gearing up for small-scale supplies and sample distribution of their 1.6T silicon optical modules.
Internationally, Nvidia has plans to launch a new CPO switch by 2025, which may require up to 24 silicon optical engines rated at 4.8T and 72 optical fiber array units (FAUs), a critical component of CPO technology.
With these developments, the push by downstream manufacturers to enhance silicon optical modules significantly boosts demand for silicon optical engines, further accelerating growth in the sector.
2. Rising Value Proposition
As optical modules experience continual upgrades in speed and technology, the price of silicon optical engines is expected to rise
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For example, the unit price of 800G modules is already at least double that of their 400G counterparts.
This pricing dynamic can be seen in Tianfu Communication's significantly improving profit marginsOver recent years, due to its strategic investments in premium optical engine products, the company has seen its gross margin rise dramaticallyBy the third quarter of 2024, Tianfu reported a gross margin of 58.21%, the highest level observed since 2021.
Furthermore, within the company, Tianfu Communication has several advantages that bolster its ability to increase market share.
1. High R&D Investment Establishing Technological Leadership
As previously mentioned, the optical engine industry is characterized by rapid product iteration, fostering a "winner-takes-all" environmentTherefore, sustained investment in research and development is crucial.
From 2020 to 2023, Tianfu Communication increased its R&D expenditure from 77 million RMB to 143 million RMB, far surpassing its competitors such as Tai Chen Guang and Guangku Technology.
In addition to technological advancements, the company is dedicated to creating a comprehensive product matrixTianfu has established a unique combination of 14 product lines and 8 technology platforms, contrasting sharply with competitors, which offer far fewer product varieties and a less comprehensive range of solutions.
By leveraging its robust product capabilities, Tianfu can swiftly implement integrated development of new products, significantly enhancing R&D efficiency and enabling faster market penetration.
2. Differentiated Products to Avoid Homogeneous Competition
Although a surge in industry demand has drawn numerous manufacturers into the silicon optical realm, distinct segments still reflect variation in focus
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Tianfu Communication specializes in silicon optical engines, while others like Huagong Technology and Guangxun Technology lean towards optical chip developmentCompanies like Zhongji Xuchuang and Xinyi Technology concentrate on integrating silicon optical modules, while companies like Robotech focus on packaging and testing these modules.
For instance, even as Xinyi enters the Nvidia supply chain, its role involves packaging optical engines, contrasting with Tianfu's exclusive supply of FAU and ELS componentsHence, competition between Tianfu Communication and Xinyi is less of a concern given their differing business focuses.
With its leading position and stable collaborations with downstream customers, Tianfu Communication is less susceptible to customer poaching by competitors.
By the end of Q3 2024, Tianfu Communication's contract liabilities reached 196 million RMB, a soaring 215.53% increase, indicating a strong backlog of orders.
3. Establishing Overseas Capacity for Enhanced Service Quality
In 2023, the top five customers accounted for 81.64% of Tianfu Communication’s sales figuresAmong these, international optical module manufacturer Fabrinet, which also operates as a supplier for Nvidia, represented the largest customer with a sales share of 53.61%.
In response to the growing needs of Fabrinet and other overseas clients while navigating regional trade complexities, Tianfu Communication has increased its investment in establishing international production facilities.
The company has set up a factory in Thailand, which focuses on producing high-speed 800G optical engine products and component solutions, with plans to add 1.6T and silicon optical engine production lines subsequently.
By Q4 2024, operations from Tianfu’s Thailand plant are anticipated to begin contributing output, with a second phase of construction expected to finish by 2025.
This expansion into international production capacity will not only enhance Tianfu Communication's responsiveness to overseas customers but also alleviate the risks associated with over-reliance on single large clients
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