Asia/Pacific and Japan: Optical Network Equipment Market, (Executive Summary) Executive Summary

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1 Asia/Pacific and Japan: Optical Network Equipment Market, (Executive Summary) Executive Summary Publication Date: 30 June 2003

2 Authors Sumit Malik John Mazur This document has been published to the following Marketplace codes: TELC-WW-EX-0631 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 Asia/Pacific and Japan: Optical Network Equipment Market, (Executive Summary) Overview The Asia/Pacific market for optical network equipment declined by 21.8 percent in 2002 to $2.9 billion. It is, however expected to show a modest growth of 9.8 percent in 2003 to $3.3 billion, with a further growth of 28.2 percent in The decline in the 2002 market is due primarily to uncertainty in the local Chinese market, as operators conducted an audit of network capacity and ownership as a result of the breakup of China Telecom. Severe constraints on capital expenditure among major carriers in 2002 have also carried over into 2003, making it a difficult year for operators and vendors. However, declines in sales, especially for European and American vendors, have been offset by continuing dominance of the local market by local vendors, reflected in a price war that has seen prices drop by at least 20 percent in China, South Korea and Japan. Defensive moves from carriers aimed at meeting investor demands for financial results have also shaped the investment climate in 2002 and will continue, albeit at a slower pace in 2003, as spare capacities in carrier backbone networks catch up with the increased network traffic. Strategic investments in future-oriented network upgrades, particularly with metro dense wave division multiplexing (DWDM) and next-generation Synchronous Digital Hierarchy (SDH) is, therefore, expected to start picking up. Therefore, Gartner Dataquest forecasts an increase of 9.8 percent in While carriers will continue to be mindful of their capital expenditure, increased deployment is likely. Our forecast, while cautious, will lay the framework for further increase in Investments in optical network equipment in 2003 will continue to focus on meeting short-term demand rather than longer-term strategic network upgrades, but a combination of push (from vendors) and pull (from operators) coupled with greater certainty in the Chinese, Indian and South Korean markets will see a 28.2 percent increase in During the next 18 months, carriers will become increasingly aware of a network scenario in which traffic continues to grow and too-tight budgets for capital expenditure will lead to unforeseen operational expenditure. However, spending will be selected and limited to metro DWDM and next-generation SDH. Gartner Dataquest's 2004 projection is also based on the demand for higherbandwidth services in Chinese cities that is stretching the limits of existing metro networks. New applications and new services are already creating bottlenecks in the metro-area network (MAN). Presently, most traffic in metro rides on SDH. Given the need for additional capacity, especially with demand for data service as seen in the increasing adoption of asymmetric DSL (ADSL) by China Telecom and China Netcom, and further investment of NTT DoCoMo and KDDI in Japan, metro wave division multiplexing (WDM) deployment will grow. Deployment of DWDM is a fundamental step (and necessary) for Chinese, Japanese, South Korean and Taiwanese carriers if they are to satisfy the demand for high-bandwidth applications, although they might be starting from a small base initially. Continuing pursuit of customers (especially by China Netcom and China Telecom) will also lead to further investment in their respective areas China Telecom in North China and China Netcom in South China. If the merger of China Railcom goes ahead with China Mobile, we will see further investment in long-haul/ultra long-haul/dwdm, especially in outlying provinces. This do not take into account the level of competition brought on by major overseas 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

4 2 Asia/Pacific and Japan: Optical Network Equipment Market, (Executive Summary) Market Drivers and Inhibitors vendors that are just as eager as the local manufacturers to carve out a strong market presence in China. In short, a combination of vendor sales activities, while driving down prices, also means that this would be the best opportunity to connect China. Migrating from a pure SDH environment to include DWDM would be the single most important challenge facing many Asia/Pacific operators during the next 18 months. Under the present "caution investment" climate, this has only been put on the back burner, if investment in DWDM by Huawei and ZTE is any indication. While SDH has served as a useful transport layer in these countries, it remains expensive to implement and also has difficulties in adapting data services to its voice optimized hierarchy. In addition, major Chinese and Japanese operators have started deploying next-generation equipment that is less expensive and more flexible than traditional SDH. Drivers Following are market drivers in optical network equipment: China, Japan and India will drive growth in this region. There is greater regulatory certainty in China, India and South Korea. There will be greater investment in metro DWDM and next-generation SDH in China, Japan, South Korea and Taiwan. Deployment of metro DWDM will be particularly aggressive in China and Japan in 2003 compared with longhaul DWDM. Aggressive sales push by local vendors via further price cuts will reinforce their market position. Operators experience an increasingly stable and consistent revenue yield. Ongoing deregulatory efforts and greater financial accountability among operators in these countries are expected to increase investment confidence. Strategic investments in future-oriented network upgrades, particularly with metro DWDM and next-generation SDH, is expected to start picking up. Bottlenecks in MAN in China and Japan and the continued increase in network traffic in South Korea and India is catching up with the excess capacity in carrier networks. Continuous traffic growth in the public sector will ensure healthy growth for 2003 and beyond. The recession has accelerated the migration from current generation network to next-generation Synchronous Optical Network (SONET) and SDH platforms. Large-business segment remains a driver for metro and fiber in the loop (FITL) deployments. Residential and small-business FITL deployments are emerging in Asia/ Pacific Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 June 2003

5 Asia/Pacific and Japan: Optical Network Equipment Market, (Executive Summary) 3 Introduction of an optical layer in network architecture and equipment functionality aimed at data-centric networks will ensure a steady, healthy growth. Inhibitors Following are market inhibitors in optical network equipment: Plesiochronous digital hierarchy (PDH) is out and digital cross-connect (DXC) will come under pressure from optical exchange equipment (OXE), although SDH is still showing signs of positive growth. Severe acute respiratory syndrome (SARS) is now becoming the dark horse for China, Hong Kong, Singapore and maybe Bangkok (Malaysia) and Vietnam that might lower the growth of the total Asia/Pacific economy. Lack of bandwidth, scalable broadband access deployment and broadband services might act as major inhibitors. Continuous downward pressure on DXCs is expected, brought on by deployment of OXE. Capital expenditure constraints of 2002 are likely to carry forward into 2003 for some carriers. Catch-up on existing spare capacities in some countries/pockets is not yet complete and this will continue to depress further spending on optical equipment in these areas. Downward pressure on pricing will continue to depress the overall market size in revenue terms, while the deployments are likely to grow faster. Note: We would like to highlight here a key observation related to SDH in Japan, as this is a special version of SDH/SONET that is neither SDH nor SONET,andisnotthesameasthestandardEuropeanTelecommunications Standards Institute (ETSI) SDH equipment that is used in the rest of the world (except North America). SDH (Japan) and SDH (ETSI) are two different types of products. Hence, in the Japan statistics, "SDH" denotes "SDH (Japan)," while for the other countries, SDH denotes SDH (ETSI). In the summary worksheet of total Asia/Pacific and Japan, the SDH numbers reflect the sum of both flavors, SDH (Japan) and SDH (ETSI). For the full report, see "Asia/Pacific and Japan: Optical Network Equipment Market, ," TCOP-WW-MS Gartner, Inc. and/or its Affiliates. All Rights Reserved. 30 June 2003