[News] InP Shortage Emerges as AI Optical Interconnect Bottleneck

Lumentum CEO Michael Hurlston has warned that the supply-demand gap for indium phosphide (InP) has now surpassed that of DRAM and NAND, making it one of the most critical constraints on AI data center optical interconnect expansion.

Despite operating multiple InP wafer fabrication facilities, Lumentum continues to face widening supply shortages as customer demand outpaces production. Orders that once numbered in the hundreds for telecom customers have surged to hundreds of millions of devices, driven by NVIDIA and hyperscale data center operators.

As AI infrastructure scales rapidly, the transition to 800G and 1.6T optical modules is significantly increasing demand for InP substrates and epitaxial wafers. However, global capacity expansion has failed to keep pace. To secure supply, downstream customers are placing orders further in advance and paying substantial deposits, while inventories across the supply chain continue to tighten, pushing prices higher.

To address the shortage, major AI companies are investing directly in upstream production. In March 2026, NVIDIA committed US$2 billion each to two key suppliers and signed long-term supply agreements. One supplier has already doubled its 6-inch wafer capacity and plans another expansion by the end of 2027, while the other is upgrading its 6-inch production line with mass production expected in 2028. A leading Japanese supplier has also announced a multi-year expansion program, although industry analysts expect the supply imbalance to persist beyond 2027.

Why InP Remains Irreplaceable

Indium phosphide is a III-V compound semiconductor widely regarded as the foundation of high-speed optical communications.

Unlike silicon, InP can efficiently generate light at wavelengths with minimal fiber transmission loss while offering high electron mobility, making it indispensable for next-generation optical transceivers.

In silicon photonics, silicon can guide, modulate, and split light but cannot generate it. As a result, both conventional pluggable transceivers and emerging co-packaged optics (CPO) architectures rely on InP-based lasers as their light source. For long-haul coherent communications, InP also remains the only commercially proven substrate for high-performance electro-absorption modulated laser (EML) chips.

The current shortage reflects a structural mismatch between rapidly rising demand and constrained supply.

On the demand side, AI data centers are driving higher optical interconnect density, increasing InP consumption per optical module as transmission speeds continue to rise. The adoption of CPO architectures is adding further demand for high-power laser sources.

Supply, meanwhile, is constrained by limited raw materials, manufacturing complexity, and industry concentration. Indium is primarily recovered as a by-product of zinc refining, making output difficult to expand quickly. China, which accounts for roughly 70% of global refined indium production, has tightened export controls on InP and indium since 2025, adding pressure to the global supply chain.

Manufacturing is another bottleneck. Producing large-diameter InP substrates requires highly sophisticated crystal-growth technology, with yield improvements taking years to achieve. At the same time, global production capacity remains concentrated among a small number of suppliers, limiting the pace of meaningful capacity additions.

China Expands Its Domestic InP Supply Chain

China has established a relatively complete InP ecosystem spanning raw materials, substrates, epitaxy, photonic chips, and optical modules.

• Upstream, Tin Industry Co., Zhuzhou Smelter Group, and GRINM Advanced Materials supply high-purity indium, while Xingfa Group provides high-purity phosphorus-based electronic chemicals.
• In the substrate and epitaxy segment, Yunnan Germanium is currently China’s only mass producer of 6-inch InP substrates and has launched a new capacity expansion program. San’an Optoelectronics has built a vertically integrated IDM platform covering substrates, epitaxy, and chip manufacturing. Bojie Technology is expanding into substrate-processing equipment, while subsidiaries of Haite Hight-Tech Group provide InP epitaxial foundry services.
• Downstream, Yuanjie Semiconductor has commercialized 100G EML chips and is preparing higher-speed products for mass production. Accelink Technologies has developed in-house InP photonic chips for high-speed optical modules. Everbright Photonics is extending its expertise into InP optical communication chips, while ZJ Innolight is accelerating the qualification of domestically produced InP substrates to strengthen supply chain resilience.

(Photo credit: Lumentum)