By Liang Ye, Partner of Strategy and Transactions, Ernst & Young (China) Advisory Limited
Optical communications has significant implications on information exchange and allows for much more efficient and secure data transmission. Not only does it have the potential to transform the future, but it is already an integral part of today’s digital revolution.
Optical networking has transformed our lives by providing the foundation for digital economies and empowers a wide variety of industries, from modern offices to hotel rooms, and from medical diagnostics to smart cities. According to the most recent studies, we are seeing some significant technological advancements in optical communications that lead to a huge market of new applications and opportunities for investment.
Technological advancements empower progressive fibre network upgrades. Here we highlight 4 major technologies.
Larger bandwidth, reduced latency, jitter and packet loss can be achieved with the incorporation of these technologies.
Optical communications act as the forefront of transforming information exchange. Up- and coming downstream applications have become the main driving force of the industry and can be categorised into 3 main sectors: entertainment, commercial and industrial, and lifestyle. The commercial/industrial sector has the greatest implication for fibre network, especially intelligent mining and smart grids.
Real-time data transmission is crucial for mining safety, which is secured by fibre network with extensive site coverage.
Digital mines are equipped with a monitoring system comprising of cameras, sensors and a data centre to collect, transfer and process large volumes of data. Each mine requires an independent local network due to its geographical uniqueness and remoteness.
Besides, using fibre network technologies like Wi-Fi 6 can greatly reduce the risk of explosion caused by exposure to dust.Smart grids:
Smart grids require low latency, high bandwidth and bidirectional data transmissions to a centralised management system. Built-in iterative learning capabilities analyse energy usage patterns to provide more precise electricity distribution.
High quality of service ensures signal reliability and transmission speeds to meet real-time energy demands, long distance electricity sourcing and efficient distribution. These can only be satisfied by fibre network. Optical signals are also superior as traditional electrical signals are dampened under electromagnetic interference along cables, resulting in ineffective distribution.
According to EY’s analysis, in terms of the revenues of downstream telecom companies and LAN installation service providers, the total market size will be around 180 billion euros in 2020. The market is expected to grow at a CAGR of 18% and reach the size of ~400 billion euros in 2025.
Positive trends are also reflected in the merger and acquisitions landscape. M&A activities along the industrial chain have shown stable growth over the past three years from around 65 billion euros in 2017 to 130 billion euros year-to-date. There was a 35% dip in 2019 compared to 2018’s 105 billion euros due to the adverse effects of the capital winter.
However, the industry quickly bounced back in 2020 with a historically high total transaction amount recorded. While most industries have witnessed a definitive drop in revenues as the global economy struggles because of the pandemic, the optical communications industry has been largely immune to the negative effects of COVID-19 in terms of investment activities, which is a perfect telling of its potential prospects.
Breaking down by value chain, the upstream has remained the M&A total transaction value stable; while the mid- and downstream has shown major growth.
The midstream market consists mainly of fixed assets that can generate steady revenues. Investments within this sector have a relatively lower risk due to the high cost barriers, thus has continuously been an attractive investment opportunity. Midstream transaction values have grown from around 30 billion euros in 2017 to 45 billion euros year-to-date.
The downstream market has also shown substantial growth by around 170% in the past three years to 70 billion euros, as larger financial players are entering the telecom market to enrich their portfolios. The increasingly unified market verticals have also been contributing to M&A’s steady growth.
As the optical communications industry continues to grow with technological advancements and booming applications, investments opportunities have become more prevalent than ever. Companies, research organisations and academic institutions directly benefit from the rising capital inflow which boosts product development, leading to even more investments. Such positive cycle allows the industry to flourish under University-Industry research collaboration. We can learn from the success stories of Silicon Valley and how the maturation of their UI collaboration has driven the digital revolution. With the rise of fibre optics in China and continuous capital support, Beijing ZOL-industrial park and Wuhan Optics Valley have thrived upon this model.
Another influencing factor is governmental support via national policies. One of the key success factors of Silicon Valley was the National Information Infrastructure Act of 1990. More commonly referred as the “information superhighway”, the Act included supportive policies such as tax and legal exemptions, funding, as well as trade stimulation. It positively encouraged education, investment and technological advancements within the ICT sector.
Overall, optical communications has significant implications on information exchange and allows for much more efficient and secure data transmission. Not only does it have the potential to transform the future, but it is already an integral part of today’s digital revolution. Here are 3 key takeaways.