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Indium Phosphide Shortage Threatens AI Data Centers, China Holds Key Supply Levers

From Liberty Times · () Chinese

Translated from Chinese, summarized and contextualized by DistantNews.

At a glance

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  • A shortage of indium phosphide, a key material for CPO (co-packaged optics) technology, is hindering the growth of AI data centers and CPO.
  • China holds significant influence over the upstream supply chain, controlling over 70% of proven indium reserves and a large share of refined indium production.
  • While China's control over raw materials is strong, challenges remain in high-end product validation and expanding production capacity for indium phosphide wafers.

The booming demand for AI data centers and CPO technology is creating a critical shortage of indium phosphide (InP), a material essential for optical chips.

Over half of the optical chips used in high-speed optical communication modules and CPO are made from InP. As AI computing power surges, the demand for these modules is skyrocketing, pushing supply pressure upstream to the raw materials.

Industry leaders have described the InP shortage as more severe than that of memory chips. Major manufacturers like Lumentum and Coherent, which together control over 80% of the high-end InP optical chip market, are struggling to meet the demand from Nvidia and other clients with their current production capacity.

The complex InP wafer manufacturing process involves three key stages: raw indium smelting, indium purification, and InP wafer production. China exerts considerable influence over all three. The country holds over 70% of the world's proven indium reserves and accounts for more than 50% of raw indium production. While Japan's DOWA and JX Metals dominate high-purity indium refining, they rely heavily on Chinese raw materials. Even though InP wafer manufacturing is a weaker point for China, AXT, a major global InP wafer producer, has shifted its production to China, with its physical operations managed by Beijing Tongmei.

Adding to the supply chain pressure are China's export controls. The country placed InP and related products under export control in February of the previous year. Although Beijing Tongmei received an export permit in June, the approved quantity was less than anticipated. AXT has stated that its ability to ship to clients outside China depends on government approval, even with strong demand and sufficient capacity. This year, China further tightened its grip by extending controls to high-purity indium, intensifying scrutiny over export approvals.

The shortage of indium phosphide is even more severe than that of memory.

— Lumentum CEOThe CEO of optical chip manufacturer Lumentum highlighted the severity of the indium phosphide shortage.
DistantNews Editorial

Originally published by Liberty Times in Chinese. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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