Supply chain ghosts haunt North America's optical equipment market

Previous supply chain issues are still casting a shadow over North America's optical transport market.

A new report from Dell’Oro showed that the North American market for optical transport equipment contracted by 4% year-over-year in the third quarter of 2023, while demand in the global market grew by 6% for a third consecutive quarter.

That difference in regional market conditions can largely be attributed to the supply chain crisis that caused a run for optical equipment in North America in 2021 and 2022.

Supply has been improving for at least months now, and it seems service providers stashed away more equipment than needed. As a result, this year saw a pause in new equipment orders as well as requests to move out deliveries into 2024.

This supply and demand shift has put operators in the “driver’s seat,” said Dell’Oro VP Jimmy Yu.

That is to say, now that there's enough supply flowing, operators sitting on overstocked inventories have more say in what they want — and when they want it.

"Operators feel confident to just say ‘okay, well, now I can try and rebalance my inventory. I can rebalance myself and I can take a moment’,” Yu told Fierce Telecom.

Manufacturers of optical transport equipment, on the other hand, might have to deal with a deflated market for a while longer.

This period of inventory digestion could last at least another two to three quarters, Yu predicted, before everything balances out and service providers are no longer sitting on extra inventory.

Eventually, they will start to order equipment at a normalized, pre-COVID pace.

Optical equipment market thrives outside of North America

While North America’s supply chain is causing odd market behavior, optical equipment markets outside of the region are continuing to grow. That should continue through 2024, according to Dell’Oro.

The firm predicts that the worldwide optical transport market will grow at an average annual rate of 3%, reaching $16 billion by 2024.

China, India, as well as regions across the Middle East and Africa, are already good areas of growth. Essentially, countries or regions that didn't go through the same supply chain issues and inventory buildup as North America are good markets right now, as “they're not doing an inventory correction,” said Yu.

Despite its shaky third quarter in North America, Nokia gained percentage points in the optical equipment market share this year when compared to 2022. However, the share gain that Nokia achieved wasn’t in North America, Yu explained. 

In Europe, Nokia is gaining share partially due to winning contracts with operators that bought from Huawei before it was banned by a cohort of EU countries. Nokia is also doing well in India, where it has captured over 50% share in a market that has been growing “really strong over the last year.”

Dell’Oro reported that FiberHome and Ciena also each gained more than one percentage point of global market share in the last four-quarter period compared to a year ago.

A majority of FiberHome revenues come from sales in its domestic market in China, which is anticipated to expand steadily over the coming years.

Ciena is still growing in North America. But considerably, the manufacturer had a backlog of orders which stood at over $4 billion at the end of the first quarter in 2023, another consequence of past supply chain disruptions.