By Laurie Chen and Liam Mo
BEIJING, June 11 (Reuters) – About a week after Nvidia-backed chipmaker Coherent warned of indium phosphide shortages in a lead call in early May, its chief executive 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 in part to raise the issue of delays in licensing exports to China involving critical components, critical to the production of high-speed chips for AI data centers, three sources familiar with the matter said.
The issue was also discussed during talks in Seoul between the two countries’ top trade negotiators ahead of Trump’s May 14-15 summit with Chinese President Xi Jinping, according to two US government officials and a person briefed on the talks.
The US rush to resolve China’s export controls on the compound reveals 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 centers.
“InP is one of the bottlenecks in the collaborative supply chain in integrating AI data center architecture,” said Konrad Wang, research analyst at SemiAnalysis.
As AI workloads grow in intensity, InP is in high demand as it is a key workaround for the new technology that data center developers are turning to – using light through optical fibers, or photonics, instead of electrical signals through copper wire.
Nvidia announced investments of $2 billion each in US graphics makers Coherent and Lumentum in March, while custom chip maker Marvell Technology announced the acquisition of semiconductor startup Celestial AI last year to enter its graphics business.
China’s InP export restrictions that began in February 2025, however, have become a major obstacle in its race to design the fastest, most energy-efficient components for AI data centers.
China’s commerce ministry did not respond to a faxed request for comment.
Its control over InP highlights Beijing’s readiness to expand its well-proven export restrictions on the exotic world, which have disrupted global auto, semiconductor and aerospace supply chains since last year amid its tariff disputes with Washington.
“Beijing is building a sophisticated ‘utilitarian’ tool set,” said Paul Triolo, a partner at consulting firm Albright Stonebridge Group.
“Instead of banning finished photonics products directly, it can reduce or condition the export of upstream compounds, substrates, metals … that determine whether the optical-module ecosystem can grow fast enough to meet hyperscaler demand.”
China is the world’s top producer of indium, accounting for 70% of global production by 2024, according to the US Geological Survey.
THE RIPPLE EFFECT
AXT, the world’s second-largest InP producer and Coherent’s largest supplier, said in May that “InP export permits represent the biggest challenge we are currently facing.”
The company, which produces most of its InP substrates in China, said its Chinese subsidiary only received its first export permits last June and has a large backlog of orders.
SemiAnalysis’ Wang said “limitations are prevalent throughout the entire optical supply chain,” beyond AXT and Coherent.
Lumentum sold only through 2028 despite quadrupling production, while Taiwanese optical products makers VPEC and LandMark Optoelectronics face InP substrate disruptions from delays in AXT approvals, he said.
Since China introduced export restrictions on InP, the average price of a 6-inch InP wafer has risen 250% to $5,000.
Faced with rising costs and long-term disruptions, at least two major US chipmakers have reached out to industry associations for help with export licenses, according to a source familiar with the matter.
US photo firms are also trying to produce their InP substrates and source from non-Chinese suppliers such as 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 say.
Coherent said in May it is doubling its InP wafer capacity at its Texas plant this year and plans to double capacity again by the end of 2027.
AXT, Coherent, Lumentum, VPEC and LandMark did not respond to Reuters requests for comment. LandMark in April signed a long-term InP supply contract with Sumitomo.
Sumitomo told Reuters it saw no impact on production from China’s InP export controls so far.
A person familiar with China’s photonic chip industry said Sumitomo uses most of its InP from domestic sources, meaning the wider global market remains underserved.
Market leaders AXT and Sumitomo together account for about 80% of global InP production, while JX Advanced Metals accounts for about 10%.
THE CHINESE COMPETITION
China’s export restrictions have created an opportunity for domestic producers of InP substrates, with Yunnan Germanium , Guangdong Xiandao and Zhuhai Dingtai Xinyuan being the domestic leaders.
Many of these Chinese companies are rapidly increasing production capacity. In April, Yunnan Germanium announced an investment of 189 million yuan ($28 million) to expand production capacity to 450,000 single InP wafers per year. Its 2025 annual report said shipments of InP wafers will increase 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 obtain export permits, but their overseas exports, if approved, may be limited, a source from China’s largest InP producer said.
The source said his company is focused on the domestic market in the short term, as there is no evidence that the Chinese government would favor local players over companies like AXT that want to export InP substrates from China.
In addition, companies like 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 long qualification cycles, the person said.
Neither Yunnan Germanium nor Guangdong Xiandao responded 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)
