In January 2025, ByteDance made a significant leap in the tech landscape by unveiling its real-time voice model named "Doubao." This advanced model has streamlined the process of transforming textual data into spoken words through a cohesive audio generation frameworkThe intricacy of this process lies in the meticulous capture and efficient compression of vast amounts of voice data, a feat dependent on extensive data collection and training methodologies.
Essential to this data training paradigm is the role of optical modules, critical hardware components required for high-speed and long-distance optical signal transmission and conversionIt’s noteworthy that this essential technology supplier for ByteDance’s "Doubao" project is none other than Ocutec Technology, a leading firm in the optical module sector.
Currently, Ocutec Technology supplies ByteDance with 400G and 800G optical module products catering to various operational scenarios of the "Doubao" voice modelThis partnership has led to an enhanced cooperative product relationship, evident during their joint presentation of the 800G OSFP SR8 high-speed optical module at the 2024 OFC ConferenceThis collaboration raises a valid question: Why has ByteDance chosen Ocutec Technology over numerous competing optical module enterprises?
The root of this preference lies in Ocutec’s unique vertical integration manufacturing capabilities, a rarity among optical module manufacturersByteDance prioritizes supply chain security and has actively sought to construct a comprehensive domestic supply chain, making Ocutec's vertically integrated manufacturing capabilities—from photonic chips to optical devices and modules—extremely attractiveTheir IDM (Integrated Device Manufacturer) production model for photonic chips has emerged as a significant competitive advantage that facilitated collaboration with ByteDance.
The manufacturing process for photonic chips is complex, particularly for the high-end chips utilized in AI, which involve hundreds of steps
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This has resulted in a limited number of enterprises capable of producing chips via the IDM model, with Ocutec and a few others, such as Source JET Technologies, leading the chargeIn the current climate, where the supply of chips is quickly dwindling, many optical module manufacturers struggle to fulfill orders due to chip shortages.
Ocutec's IDM production mode ensures full coverage through all processes from chip design and epitaxy growth to wafer manufacturing and chip testing, thereby securing its supply chainRemarkably, Ocutec guarantees a 90% self-sufficiency rate in the production of mid-range optical chips and a 70% self-sufficiency rate for 25G chipsExcitingly, the development of 200G chips is underway, demonstrating the company's commitment to increasing the proportion of self-manufactured optical chips above 50G to adapt to market demands.
Beyond photonic chips, Ocutec has also made impressive strides in the optical module domainThe company has achieved large-scale shipments of its 800G optical modules, while 1.6T optical modules are capable of small-scale deliveries and are currently undergoing sampling verificationAlthough Ocutec may not match the advanced production capabilities of its competitor, Zhongji Xuchuang, which has already mass-produced 1.6T modules, it does hold a competitive advantage in pricing for the more mainstream 400G and 800G optical products.
The pricing of Ocutec's optical modules tends to be 5% to 20% lower compared to its rivals, allowing the company to present clients with more cost-effective choicesThis strategic emphasis on value for money has enabled Ocutec to carve out a significant niche in the marketIn 2023, Ocutec maintained its position as the fourth-largest optical module manufacturer globally, capturing a 6.3% market share.
Faced with rising demands downstream, Ocutec has experienced a rapid boost in performance, recording revenues of 5.378 billion RMB in the first three quarters of 2024, marking a year-over-year increase of 24.29%. The net profit attributable to shareholders also saw an increase of 12.26% to 464 million RMB, reversing a trend of declining growth rates witnessed since 2020.
That said, Ocutec's growth rate may not appear particularly remarkable when compared to industry frontrunners like Zhongji Xuchuang, NewEase Information, and Tianfu Communication, exceptionally in how the company's business structure plays a role in its performance
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The segment of business related to optical modules currently represents 50.66% of Ocutec’s operations, which, while promising, reveals a somewhat lower overall profitability compared to the leading firms.
In the same timeframe of 2024, Ocutec reported a gross margin of 23.71%, while industry frontrunners achieved margins exceeding 30%. Additionally, there exists room for improvement regarding asset management within Ocutec’s operations.
The first point of concern involves inventory management, which appears somewhat aggressive, leading to increased inventory pressureThroughout the first three quarters of 2024, Ocutec significantly ramped up raw material purchases, resulting in a year-on-year increase of 102.73% in inventory, amounting to 4.006 billion RMBConsequently, the inventory turnover rate diminished, prompting worries about cash flow efficiency and the potential to stifle working capital.
Furthermore, the rapid growth of accounts receivable has become another potential pitfall regarding profit conversion capabilitiesSince 2023, accounts receivable have surged at a pace that far outstrips revenue growthIn the first three quarters of 2024, Ocutec’s operating cash flow dropped to -1.009 billion RMB, indicating a critical need for tighter management of accounts receivable.
Despite these challenges, the company’s performance is anticipated to maintain an upward trajectory, propelled by robust demand from downstream clients like ByteDanceObserving the current growth of "Doubao," subscriptions have exploded in 2024, thereby increasing usage rates; by the end of November 2024, the total user base surpassed 160 million, with an impressive 9 million daily active users, making it the second most popular AI application worldwide and the leading application domestically.
As demand for training and inference power grows in tandem with these applications, the use of optical modules is set to rise, suggesting an increased procurement volume by ByteDance from Ocutec
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