Hengtong Set to Shape the Global Subsea MarketHengtong Set to Shape the Global Subsea Market
Recent takeover activity could shake up a market forecast to be worth $5.1 billion next year.
January 24, 2020
The small but increasingly sensitive subsea cable market could be in for some choppy waters.
The acquisition of Huawei's submarine business by another Chinese vendor, Hengtong Optic-Electric, could shake up the market, forecast to be worth $5.1 billion in 2021.
The business of installing the undersea fiber system that carry virtually all intercontinental data traffic is currently dominated by three firms -- Nokia's Alcatel Submarine Networks, NEC and TE Subcom, owned by private equity firm Cerberus Capital.
Huawei offloaded its entire 51% stake in its ten-year-old marine business to Shanghai-listed Hengtong last June.
Hengtong then acquired another 30% stake from H2C, the parent of Huawei's partner Global Marine, for $149 million, valuing the business at $285 million.
H2C, chaired by Philip Falcone, founder of LightSquared –- now known as Ligado Networks -- also has an option to sell the remaining stake to Hengtong. (See Spectrum Shift: Anterix Says It's Not Another Ligado.)
Huawei boss Ren Zhengfei denied the company had been forced into the sale by the US campaign against Huawei, arguing that it was not core to Huawei's business.
Under the sale agreement, Huawei became Hengtong's second-largest shareholder, so the company still carries a strong Huawei connection.
Huawei's subsea business, like the rest of the company, is excluded from key geographies, including any cable that lands in Australia or the US.
Eighteen months ago the Australian government took over the Solomon Islands government's contract with Huawei Global Marine for a 4,700km cable to Sydney. (See Pressure on Huawei Shifts Closer to Home.)
But Hengtong, which has already installed more than 10,000 kilometers of undersea cable, sees plenty of opportunity in an industry now in a major build cycle.
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One part of this is bringing international connectivity to developing markets. Three months ago Hengtong won the contract from PCCW Global and Orange to build the 12,000km PEACE cable linking Pakistan, east Africa and France.
There's more to come. For example, the Development Bank of Latin America (CAF) has just commissioned a study into a possible 24,000km cable linking South America to east Asia.
But besides the growth story, Hengtong is also being driven by over-capacity in China's domestic market.
Research firm CRU reports that China optical suppliers underwent a sharp decline in 2018-19 after the market had ballooned 556% in the previous decade.
Manufacturers "did not respond immediately to the downturn" and inventories built up to levels in excess of 20 million fiber kilometres in 2019, CRU said.
"This contributed to the downward pressure on prices as well as the Chinese manufacturers' more aggressive strategies in export markets."
Hengtong, and how hard it goes after its business, is shaping up to be the key factor in the subsea market this year.
— Robert Clark, contributing editor, special to Light Reading
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