China's control over indium phosphide exports threatens global rollout of AI data centers

China Export Controls Create Critical Shortage for AI Infrastructure

When Nvidia-backed chipmaker Coherent warned of an indium phosphide shortage during its early May earnings call, CEO Jim Anderson immediately joined President Donald Trump's business delegation to China. His mission was urgent: address delays in China's export licenses for the highly strategic material essential to manufacturing high-speed optical chips for AI data centers2

2

. The issue reached high-level trade negotiations in Seoul ahead of Trump's May 14-15 summit with President Xi Jinping, underscoring how indium phosphide has emerged as a powerful strategic trade weapon that could disrupt the global rollout of AI data centers1

1

.

Why Indium Phosphide Matters for AI Data Centers

With AI workloads growing exponentially, indium phosphide has become indispensable as a core material with no substitute in photonics technology. Data center developers are shifting from electrical signals through copper wire to using light through optical fibers, making InP critical for the fastest, most energy-efficient components2

2

. "InP is one of several supply chain bottlenecks collectively gating AI data centre buildouts," said Konrad Wang, a research analyst at SemiAnalysis1

1

. Nvidia announced $2 billion investments each into U.S. photonics companies Coherent and Lumentum in March, while Marvell Technology acquired semiconductor startup Celestial AI to tap into photonics work2

2

.

China's Expanding Materials Chokepoint Strategy

China export controls on indium phosphide began in February 2025, creating a major hurdle for companies racing to design cutting-edge AI infrastructure1

1

. China produces 70% of global indium output as of 2024, according to the U.S. Geological Survey, giving Beijing significant leverage. "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"1

1

.

Price Surges and Supply Chain Disruptions Ripple Across Industry

Since China introduced the restrictions, the average price for a 6-inch InP wafer has surged 250% to $5,0002

2

. AXT, the world's second-largest InP substrate producer and major supplier to Coherent, stated in May that "InP export permits represent the most significant challenge we currently face." The company manufactures most of its InP substrates in China and only received its first export permits last June, creating a significant backlog of orders1

1

. 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.

Race Toward Domestic Production and Non-Chinese Suppliers

Faced with rising costs and prolonged disruptions, at least two major U.S. photonics chipmakers have approached industry organizations for help with export licenses1

1

. U.S. firms are attempting to boost domestic production and source from non-Chinese suppliers like Japan's Sumitomo Electric Industries. However, capacity additions are slow, as it typically takes two to three years for a new plant to come online. 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 20271

1

. LandMark signed a long-term InP supply contract with Sumitomo in April, though a source familiar with China's photonic chip industry noted that Sumitomo consumes much of its InP substrate output internally, leaving the broader global market undersupplied. Market leaders AXT and Sumitomo together account for almost 80% of global InP substrate manufacturing, highlighting the concentration risk in this critical supply chain1

1

.