Global Supply Chain Volatility and Its Impact on the Polish Telecommunications Investment Market: A Strategic Analysis
Events in recent weeks invite reflection on the fragility of global supply chains and their profound influence on local investments. It would appear that, due to the combined effects of COVID-19 and the ongoing economic warfare between the USA and China, supply chains will never return to their previous state. The critical question remains: will the macro-scale issues increasingly impacting the optical fiber market also affect telecommunications investments currently underway in Poland?
Having begun my professional career in the telecommunications sector years ago, I operated in an environment where the fiber optic cable market was essentially dictated by the price list of the largest domestic manufacturer, only gradually being challenged by the first local distributors of European cable plants. Later, after more than 15 years, I participated in establishing the first supply bridges from Asia by introducing cables from Indian manufacturers to the market. Today, Poland and Europe host new factories from a diverse range of European producers, alongside the direct or indirect presence of every major Asian player. Consequently, we are no longer subject merely to local conditions, but to global events.
The Bubble and Chinese Procurement Dynamics
Following several years of relative market stability—despite the growing presence of foreign manufacturers—the period of 2017–2018 brought the first consequences of global turbulence. This was linked to a price bubble caused by overlapping FTTx projects in Europe and the USA, combined with a shortage in production capacity for optical fiber preforms. This drove single-mode fiber prices up to $12–$14/fkm, disrupting the European market and reshuffling the balance of power.
The natural response to these shortages was the construction of fiber drawing towers and increased capacity at preform production facilities. By 2019, global preform production capacity reached 26,676t against a demand of 18,902t, resulting in a significant supply surplus. This surplus stemmed from new investments by Chinese and international firms, compounded by several earlier, rolled-over projects. For instance, in 2018, China Mobile suspended its 5G rollout plans and halted numerous FTTx projects. Simultaneously, the US-China conflict redirected the sales strategy of Chinese manufacturers toward Europe, resulting in massive fiber sell-offs and aggressive price pressure targeting European projects and telcos. This once again reshuffled the market, causing many European and Indian manufacturers to lose hard-won contract positions.
The procurement decisions of Chinese telecommunications giants are far from minor fluctuations; the data confirms their systemic impact. China Mobile eventually concluded its tender in 2020, awarding a massive order of 119.2 million fkm over the following two years to several leading Chinese producers. This tender effectively locked in low fiber prices within the Chinese market, which may yield dual outcomes: manufacturers might continue their aggressive export policies supported by high-volume production (and thus low unit costs), or they may—prioritizing domestic supply—restrict external availability. Furthermore, the skyrocketing prices of other raw materials for cable production may force manufacturers to seek margin recovery in alternative markets, given the fixed sale prices of the cables themselves.
EU Regulatory Intervention
The era of low prices—often bordering on or falling below profitability—might have persisted to the benefit of telecommunications investors and the detriment of European manufacturers. However, this trend has been interrupted by the delayed reaction of the European Union. In a recent anti-dumping proceeding, the EU decided on the potential imposition of countervailing duties (initially set at 43%) on Chinese-made cables. Although the proceedings are ongoing, data on deliveries has been collected since April 1st of this year, carrying the risk of retroactive duty application. The distribution market and Chinese manufacturers have been aware of this since the initiation of the probe on September 24, 2020; consequently, many firms are prepared. They maintain factories outside of China and are establishing hubs within Europe or its periphery. If they have not already done so, announcements regarding new investments are likely imminent. Nevertheless, it is certain that new factories will lack the capacity to service the entire European market, and their operational costs will differ from Chinese conditions, likely impacting product pricing. Distributors have also prepared by building up inventory or switching suppliers, but the cost of distributing and warehousing increased stocks will inevitably influence final product prices.
It is worth noting that the protection of the European market is not an anomaly in a global context. Examples include the prohibitive duties routinely applied by the USA, or those seen in Australia during the National Broadband Network project. Trade barriers are also common in Middle Eastern countries, where high duties necessitate the opening of local factories. Additionally, China remains in a tariff dispute with India over optical fiber pricing, though the level of countervailing duties there is significantly lower (approx. 10%).
The delayed response of the European regulator is therefore surprising, if not frustrating. The market would have benefited more from preventive price controls than from the introduction of drastic remedial measures after two to three years of market erosion via undervalued prices—measures that further increase the risk for ongoing investment processes. The final outcome of these anti-dumping proceedings and the subsequent adaptation of the supplier market remains to be seen. However, experience suggests that business abhors a vacuum.
Concurrently, the European Commission is conducting other investigations to determine whether exporters benefited from illegal government subsidies or tax incentives (anti-subsidy). Proceedings regarding the dumping of aluminum components and steel sheets are also underway, which could impact the pricing of telecommunications hardware. All these factors point toward price increases, though likely not at the 43% level across the board.
The COVID-19 Factor
Could the situation of 2017—where demand outstripped supply—repeat itself? This is not unrealistic. Global 5G implementation is only in its nascent stages, overlapping with ongoing FTTx investments and a growing subsea cable market. This creates high demand for preforms, which remain the bottleneck of optical fiber production. It is estimated that global demand for optical preforms will rise to 38,480t by 2026, doubling compared to 2019. Notably, this market is served by only 20 major producers, with 58% of the market concentrated in the hands of five giants. Furthermore, the majority of factories are located in China, posing a long-term risk should customs wars with the EU escalate.
The situation is further complicated by the compounding issues of the COVID-19 pandemic, rising raw material costs, and global logistics hurdles. Plastics are reaching record price levels (HDPE has risen from €850/t to as much as €1,350–€1,400/t), while copper and steel have reached heights not seen in years. The primary issue, however, is a fundamental market shortage. In the production of passive components (cables, pipes, micro-ducts), we are seeing bottlenecks similar to those in consumer electronics, where trade wars, embargos, and COVID-19 have caused shortages of essential components—often low-value items (such as a $1 LCD driver) that stall the assembly of much larger systems. This affects entire, well-secured supply chains, including those of giants like Apple. Shipping via sea and rail from Asia is also disrupted, with container prices skyrocketing 2-3 times compared to 2017/18. Frequently, goods with low value-to-volume ratios are no longer economically viable to import from Asia. Finally, the temporary blockage of the Suez Canal—through which 12% of global trade passes—by a mega-container ship caused significant distress for managers in Poland and highlighted the extreme fragility of transit channels.
Strategic Implications for Investors
Should telecommunications investors fear the actions of the European Commission and global logistical difficulties? They must certainly account for them within their supply chain strategies, diversifying suppliers not only by volume but by taking into account geolocational and geopolitical factors. Current investments are being budgeted during a period following a price bubble. While subsequent drastic price reductions in materials were welcomed by investors, the parallel rise in fixed costs, labor rates, and tax burdens means that savings on materials will not offset the rising costs of project execution. Given the lump-sum nature of tenders and fixed remuneration characteristic of telecommunications projects, these fluctuations will undoubtedly cause significant challenges for investors and project directors alike.
We cannot influence the “butterfly effect” originating in Egypt, China, the USA, or the offices of the European Commission. However, it is time to accept that we live in a highly dynamic and fluid world where a change on the other side of the globe has an immediate local impact—faster than we could have imagined just a few years ago.
Perhaps this reflection will encourage decision-makers to structure tenders and investments (potentially modeling them after the road construction industry’s recent adjustments) so that global changes—beyond the control of both the investor and the contractor—can be reasonably accounted for and risks distributed across all parties. This may also lead clients to view the supply chain through the lens of partnership, rather than seeing it merely as a source of cost, conflict, and a “necessary evil.”
The above text has also been published in an online magazine TelkoIn: link
