By Laurie Chen and Liam Mo
BEIJING, June 11 (Reuters) – Barely a week after Nvidia-backed chipmaker Coherent warned of a shortage of indium phosphide in an earnings call in early May, its CEO Jim Anderson was on a plane with a U.S. business delegation accompanying President Donald Trump on his trip to China.
Anderson’s visit was partly to raise the issue of delays in China’s export licenses involving the highly strategic material, essential in manufacturing high-speed optical chips for AI data centres, said three sources familiar with the matter.
The issue was also discussed during talks in Seoul between top trade negotiators of the two countries ahead of Trump’s May 14-15 summit with China’s President Xi Jinping, according to two U.S. government officials and a person briefed on the talks.
The U.S. urgency to resolve China’s export controls on the compound highlights how indium phosphide (InP) has emerged as a powerful trade weapon for Beijing that experts and executives say could disrupt the global rollout of AI data centres.
“InP is one of several supply chain bottlenecks collectively gating AI data centre buildouts,” said Konrad Wang, a research analyst at SemiAnalysis.
With AI workloads growing exponentially, InP is in high demand as it is a core material with no substitute in the new technology that data centre developers are turning to – using light through optical fibres, or photonics, instead of electrical signals through copper wire.
Nvidia announced $2 billion investments each into U.S. photonic product makers Coherent and Lumentum in March, while custom-chip maker Marvell Technology announced the acquisition of semiconductor startup Celestial AI last year to tap into its work on photonics.
China’s export restrictions on InP that began in February 2025, however, have become a major hurdle in their race to design the fastest, most energy-efficient components for AI data centres.
China’s commerce ministry did not respond to a faxed request for comment.
Its control over InP highlights Beijing is prepared to expand on its well-proven export curbs on rare earths, which have disrupted global automotive, semiconductor and aviation supply chains since last year amid its tariff disputes with Washington.
“Beijing is developing a more granular ‘materials chokepoint’ toolkit,” said Paul Triolo, a partner at consulting firm Albright Stonebridge Group.
“Rather than blocking finished photonics products outright, it can slow or condition the export of the upstream compounds, substrates, metals … that determine whether the optical-module ecosystem can scale quickly enough to meet hyperscaler demand.”
China is the world’s top producer of indium, making up 70% of global output as of 2024, according to the U.S. Geological Survey.
RIPPLE EFFECT
AXT, the world’s second-largest InP substrate producer and a major supplier to Coherent, said in May that “InP export permits represent the most significant challenge we currently face.”
The company, which manufactures most of its InP substrates in China, said its Chinese subsidiary only received its first export permits last June and has a significant backlog of orders.
SemiAnalysis’ Wang said “the restrictions ripple through the entire optical supply chain,” beyond AXT and Coherent.
Lumentum is sold out through 2028 despite quadrupling output, while Taiwanese optical products makers VPEC and LandMark Optoelectronics faced InP substrate disruptions from AXT permit delays, he said.
Since China introduced export restrictions on InP, the average price for a 6-inch InP wafer has surged 250% to $5,000.
Faced with rising costs and prolonged disruptions, at least two major U.S. photonics chipmakers have approached industry organisations for help with export licences, according to a source familiar with the matter.
U.S. photonics firms are also trying to produce their own InP substrates and source from non-Chinese suppliers like Japan’s Sumitomo Electric Industries. But capacity additions are low and slow, as it usually takes two to three years for a new plant to come online, analysts said.
Coherent said in May it is doubling its own InP wafer capacity at its Texas plant this year and plans to more than double the capacity again by the end of 2027.
AXT, Coherent, Lumentum, VPEC and LandMark did not reply to Reuters’ requests for comment. LandMark in April signed a long-term InP supply contract with Sumitomo.
Sumitomo told Reuters it had not seen any impact on production from China’s InP export controls so far.
A person familiar with China’s photonic chip industry said Sumitomo consumes much of its InP substrate output internally, meaning the broader global market remains undersupplied.
Market leaders AXT and Sumitomo together account for almost 80% of global InP substrate manufacturing, while JX Advanced Metals makes up around 10%.
CHINESE COMPETITORS
China’s export restrictions have created an opening for local manufacturers of InP substrates, of which Yunnan Germanium , Guangdong Xiandao and Zhuhai Dingtai Xinyuan are the domestic leaders.
Many of these Chinese firms are rapidly scaling production capacity. In April, Yunnan Germanium announced a 189 million yuan ($28 million) investment to expand production capacity to 450,000 single InP wafers annually. Its 2025 annual report said shipments of InP wafers surged by 74%.
Guangdong Xiandao also launched a new investment project this year through its subsidiary Guangdong Xianrui with an expected annual output of 40 tons of InP crystals, the raw material needed for substrates.
Both Yunnan Germanium and Guangdong Xiandao are in talks with Chinese officials to secure export approvals, but their shipments overseas, if approved, are likely to be limited, a source at a major Chinese InP manufacturer said.
The source said his company was focused on the domestic market for the near term, as there was no evidence the Chinese government would favour domestic players over companies such as AXT looking to export InP substrates from China.
On top of that, companies such as Coherent, mainly supplied by AXT, and Lumentum, mainly supplied by Sumitomo and JX Advanced Metals, are unlikely to switch suppliers easily, as moving to a new supplier requires lengthy qualification cycles, the person said.
Neither Yunnan Germanium nor Guangdong Xiandao replied to faxed requests for comment.
(Reporting by Laurie Chen and Liam Mo in Beijing; Additional reporting by Michael Martina in Washington DC, Wen-Yee Lee in Taipei, Amy Lv and Xiuyuan Ning in Beijing, and Kentaro Okasaka in Tokyo; Editing by Miyoung Kim and Sonali Paul)
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