China's indium phosphide export curbs threaten AI data centers

China tightens grip on strategic semiconductor material

China's export restrictions on indium phosphide have emerged as a significant constraint on global AI infrastructure development, forcing executives from Nvidia-backed companies to personally lobby for relief during high-level diplomatic meetings.

Coherent CEO Jim Anderson joined a U.S. business delegation accompanying President Donald Trump to China in May 2026, partly to address delays in export licenses for the compound, according to Reuters sources. The issue also surfaced in trade negotiations between U.S. and Chinese officials ahead of Trump's summit with President Xi Jinping.

Since China began throttling indium phosphide export permits in February 2025, the average price for a 6-inch wafer has surged 250% to $5,000. The compound is essential for manufacturing high-speed optical chips used in photonics—a technology that transmits data through light rather than electrical signals and has no viable substitute for next-generation AI data centers.

Supply chain dominance creates leverage

China controls approximately 70% of global indium production as of 2024, according to the U.S. Geological Survey. Two companies—California-based AXT and Japan's Sumitomo Electric Industries—together command nearly 80% of the global indium phosphide substrate manufacturing market.

AXT, which produces most of its substrates in China, reported in May that export permit challenges represent "the most significant challenge we currently face." The company's Chinese subsidiary only received its first export permits in June 2025 and is working through a substantial order backlog.

The restrictions have cascaded through the optical supply chain. Konrad Wang, a research analyst at SemiAnalysis, noted that Lumentum is sold out through 2028 despite quadrupling production capacity. Taiwanese optical component makers VPEC and LandMark Optoelectronics have also faced substrate disruptions tied to AXT's permit delays.

Why it matters

Indium phosphide represents a new category of trade weapon for Beijing—one that targets upstream materials rather than finished products. As AI workloads grow exponentially and hyperscalers race to deploy photonics-based infrastructure, China's control over this bottleneck gives it leverage over the pace of global AI data center buildouts. The restrictions follow Beijing's proven playbook with rare earth export curbs, which disrupted automotive, semiconductor, and aviation supply chains throughout 2025.

Industry scrambles for alternatives

U.S. photonics manufacturers are attempting to diversify supply chains by producing their own substrates and sourcing from non-Chinese suppliers. Coherent announced plans to double its InP wafer capacity at its Texas facility in 2026 and more than double it again by end of 2027. LandMark Optoelectronics signed a long-term supply contract with Sumitomo in April 2026.

However, capacity additions face significant time constraints—new plants typically require two to three years to come online. A source familiar with Japan's photonics industry noted that Sumitomo consumes much of its substrate output internally, leaving the broader market undersupplied.

Meanwhile, Chinese domestic manufacturers including Yunnan Germanium, Guangdong Xiandao, and Zhuhai Dingtai Xinyuan are rapidly scaling production. Yunnan Germanium announced a 189 million yuan ($28 million) investment in April 2026 to expand capacity to 450,000 single InP wafers annually, with 2025 shipments up 74%.

Nvidia announced $2 billion investments each into Coherent and Lumentum in March 2026, while Marvell Technology acquired photonics startup Celestial AI to accelerate its optical interconnect capabilities.

These details were first reported by Reuters correspondents Laurie Chen and Liam Mo.