The InP Chokepoint: How China's Export Controls Are Bottlenecking the Global AI Buildout

The scarcity of permits is not theoretical. AXT Inc., which manufactures InP substrates at plants in China, was forced to lower its Q4 2025 revenue guidance to $22.5–23.5 million specifically because fewer export control permits were being issued than previously expected . Even after the high-profile Trump-Xi summit in May 2026, the export curbs remain firmly in place .

Why InP Became AI's Hidden Critical Mineral

Indium phosphide is not a household name, but it is the substrate for the photonic integrated circuits and high-speed electro-absorption modulated lasers (EMLs) that power 800G and 1.6T optical transceivers . These transceivers are the nervous system of modern AI data centers, interconnecting tens of thousands of GPUs and accelerators. As AI clusters have scaled, optical interconnect density requirements have multiplied 8–16× compared to previous generations .

This structural demand arrived just as supply was already constrained. InP substrate qualification cycles run 18–24 months, and global production is concentrated among only 5–6 major suppliers . China controls roughly 70% of global indium refining, giving Beijing outsized leverage over the entire photonics chain .

By mid-2025, reports emerged of a 25–30% supply gap for InP lasers . Lumentum CEO Michael Hurlston quantified the pain in February 2026: the company was "undershipping customer demand by somewhere around 30%" and all EML capacity was spoken for through 2027 under long-term agreements . Coherent CEO Jim Anderson echoed the same reality, stating that "data center growth in Q1 was constrained by the supply of indium phosphide lasers" .

Broadcom, a major downstream consumer of InP-based components, has flagged InP wafer supply risks as a major challenge to its own operations . Coherent characterized InP laser capacity as "one of the key constraints across the industry" .

The financial impact has been dramatic. Six-inch InP wafer prices have surged 250% to approximately $5,000 . Spot indium metal prices climbed from $2,600 per kilogram in January 2025 to over $3,000 within weeks of the export control announcement, and continued rising through early 2026 . The supply-demand imbalance has granted manufacturers unprecedented pricing power, with critical optical components "essentially sold out for the foreseeable future" .

How Coherent Is Fighting Back

Coherent has attacked the InP shortage on three fronts simultaneously: capacity expansion, government-backed domestic manufacturing, and CEO-level diplomacy.

The company is investing to double its InP production output within 12 months, specifically targeting the EML lasers needed for data center applications . This expansion is partly anchored to an accelerated ramp of 6-inch InP wafers at its domestic facilities . Coherent operates a Texas-based InP facility backed by a $33 million U.S. government investment aimed at building domestic manufacturing scale .

The most dramatic move came in May 2026. Just days after Coherent warned investors about a looming InP shortage during an earnings call, CEO Jim Anderson boarded a plane with the U.S. business contingent accompanying President Donald Trump on his visit to China. According to three sources familiar with the situation, Anderson's journey was specifically aimed at addressing the delays surrounding China's export licenses for this critical material .

Despite these efforts, Coherent's data center and communications revenue, while still growing 26% year-over-year, remains constrained by the InP bottleneck . The unmet backlog from constrained quarters has rolled forward, and both internal and external InP supply continues to limit output .

Lumentum's Long-Term Supply Lock

Lumentum has pursued a different strategic path, prioritizing long-term supply security over short-term diplomacy. The company's most significant move was quietly securing a comprehensive 7-year supply agreement specifically for indium phosphide substrates, effectively locking in access to the foundational raw material through the early 2030s .

This agreement was designed to shield Lumentum from exactly the kind of geopolitical supply shocks that have roiled the market. Meanwhile, the company is expanding its manufacturing capabilities through a recently acquired InP fabrication facility and scaling production at a North Carolina site to reduce dependence on Chinese-sourced material .

Lumentum's forward order book tells the story of the supply crisis. The company has reported that its manufacturing capacity for critical AI optical components is effectively sold out through the end of 2028 . This backlog stretches years into the future, a phenomenon virtually unheard of in the historically cyclical optical components industry .

The shortage has transformed Lumentum's financial profile. The company's non-GAAP gross margin rose to 37.8%, up 1,000 basis points year-over-year, driven by strong pricing power amid the supply shortage . Cloud and networking revenue surged 67% year-over-year, propelled by record EML shipments and robust demand from hyperscale cloud customers .

The Domestic Capacity Gap Remains

Despite the aggressive responses from both Coherent and Lumentum, a critical fact limits the near-term outlook: neither company's U.S. expansion has yet reached production scale sufficient to close the supply gap .

The Coherent Texas facility, backed by $33 million in government funding, and Lumentum's North Carolina expansion are real investments that will eventually contribute meaningful capacity. But InP wafer fabrication is not a business that scales overnight. Qualification cycles for new production lines run 18–24 months, and the entire supply chain—from raw indium refining through substrate manufacturing to epitaxial growth and device fabrication—remains deeply interdependent on Chinese-controlled stages .

The 60-business-day permit window remains the single biggest bottleneck in the photonics supply chain . When permits flow, substrates leave China, move to epi houses in Taiwan, and then onward to U.S. and global data centers. When permits are blocked, the entire chain collapses . Until either China eases restrictions or domestic Western capacity reaches true scale, AI data center builders will continue to face a structural shortage of the lasers their networks depend on.

Industry observers note that the InP chokepoint represents a broader shift in how export controls are weaponized. It is no longer just a rare-earth mineral story—it has moved into the photonics chain, directly targeting the material base behind optical chips, lasers, and the infrastructure layer of the AI build-out . For hyperscalers racing to deploy the next generation of AI clusters, the message is clear: the bottleneck is no longer compute. It's the light that connects it.