Evidently, Oclaro is starting to think outside the box in selecting Walter Jankovic as its new President, Optical Connectivity, as he was formerly with Contract Manufacturer (CM), Celestica. It seems to indicate that Oclaro’s confidence level in getting acquired has gone down substantially, as it will need to look for diversification opportunities, if it remains an independent entity.
The move appears somewhat similar to Fabrinet, another CM, which was already in the process of aggressively getting into new businesses, when it chose its new CEO from Sanmina. Even before it became really clear that there would be local Chinese production of new types of optical components, fibeReality started about eight months ago to discuss that without a buyout, [Oclaro] was stuck with a story line based on its “self-perpetuating optical cycle" rhetoric, including a heavy emphasis on supporting 5G wireless, which is hardly a short-term occurrence, and enthusiasm for 400G+ migration, in a market in which the realization of extensive higher data rates always takes much longer than the initial hype.
Combining these factors with hyperscale data center operators increasingly looking to make additional transceivers/modules close-to-unprofitable businesses, and with its top two competitors branching out their product lines beyond traditional communications, Oclaro ostensibly needs to act now. Of course, another advantage of bringing on Jankovic is that Celestica has been involved in the semiconductor business, and as Finisar increasingly takes on more of a chip mentality, the prospects for a future merger between the latter and Oclaro at least theoretically is further bolstered in the much longer term, if the smaller company’s evolution mirrors closely that of the larger one.
Oclaro has already stated that it is targeting its game plan more at “high-speed laser chips to strategic customers” rather than on CWDM. Astonishingly (albeit unsurprisingly), we have heard that Intel is offering 100G CWDM4 devices at under $200 per unit, which would match the same pricing estimate we published in the past for the vendor for PSM4 devices at the same data rate, despite the former device going four times the distance within the data center as well as having substantially higher manufacturing costs than the latter.
So, we believe it is apparent that Oclaro has Intel in mind when it refers to “people aren't pricing for gross margin” on CWDM4. As an aside, we feel this untenable situation makes Lumentum Holdings’ claims of still wanting to be in this business even more unbelievable.
Concerning the market opportunity for Oclaro in China, while once again, fibeReality was the first research firm to publicly predict on our blog a little over a year ago, the anticipated shift by Huawei Technologies to becoming a substantial threat to the businesses of American optical componentry companies (initially alluded to in our October 2016, Clash of Metro 100G Optical Vendors with Shifting Network Paradigm report), obviously the Chinese manufacturer, along with other system houses in that country will continue to purchase some products from these US suppliers. In certain cases, the decision will be dependent on the ability of the firms in China to squeeze more attractive margins from the American vendors as compared to producing the hardware in-house. (One recent remark by Infinera that we agree with is that with less action in China, US optical system entities should be able to get more attractive pricing on components as well.)
Specifically, on the subject of DCOs, Oclaro has mentioned in the past that ZTE is making this gear itself. However, it is our understanding that the latter may not necessarily have the internal proficiency to pull it off quite effectively.
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[written by Mark Lutkowitz]