Indium phosphide, commonly abbreviated as InP, is an essential compound that plays a crucial role in the optical transceivers of AI data centers. These centers rely on this technology to transfer vast amounts of data at exceptionally high speeds. However, recent developments have positioned China in a significant control over the global supply, especially after the country included InP on its export control list as of February 4, 2025.
This decision resulted in a significant permitting bottleneck which affected the supply chain for high-speed optical components extensively. The demand for these high-performance optical transceivers, particularly the 800G models needed for next-generation AI clusters, puts InP at the center of discussions among tech companies striving to establish their efficiency in data management.
In fact, over 60 percent of InP usage is associated with optical communications and AI data center operations. The production of InP substrates is highly concentrated, especially within AXT Inc., a major industry player that operates through its subsidiary, Tongmei, in China. Following the export controls imposed by Beijing, the shipping of InP products by Tongmei slowed dramatically, with the first permits arriving only around June 11, 2025, a daunting four months after restrictions were initiated. The shortage of permits has caused significant revenue challenges for AXT, leading to warning signs about continued effects into 2026.
This situation echoes China’s earlier strategies of leveraging its dominance over key materials like gallium and germanium through export limits, a maneuver that has resonated within the semiconductor supply chain. The scarcity of InP threatens to impede the rollout of energy-efficient communication solutions, making the scalability of AI clusters increasingly difficult and costly.
As of mid-2026, U.S. officials are making attempts to negotiate with their Chinese counterparts to alleviate the bottleneck surrounding licensing, aiming to align with the urgent timelines of AI infrastructure development. Meanwhile, major companies such as Lumentum, a well-known optical component manufacturer, are proactively relocating production outside of China in a bid to diminish their reliance on Chinese operations.
New facilities are under development in areas like North Carolina, aligning with a broader trend toward domestic and regional production of critical semiconductor materials. It is important to note, however, that establishing alternative InP manufacturing is not a quick process. The requirements for crystal growth facilities include expensive equipment and stringent cleanroom conditions that demand several months of qualification to achieve the necessary quality for high-performance optics. Thus, the timeline for alternative supplies could stretch into years, complicating the dynamics of the current market landscape.