Us Tech Giants Unleash Domestic Manufacturing Power As Nvidia And Intel Make Billions In Ai Infrastructure
As the United States bolsters its local chip supply chain, companies like Nvidia and Intel are …
31. July 2026
Indium Phosphide Supplies To Hit Critical Point In Ai Era Crunch
The world of silicon photonics is facing a critical bottleneck on a crucial material: indium phosphide. The compound semiconductor is at the heart of every laser in an AI data center, and its supply is expected to hit a major snag in the near future. Lumentum CEO Michael Hurlston recently warned that the shortage will be worse than what we’ve seen with DRAM/NAND, and Nvidia’s decision to fund his company and its biggest competitor was a response to exactly that.
In his remarks at the RAISE Summit in Paris, Hurlston stated that telecom customers are buying lasers in the hundreds, while Nvidia and hyperscalers are asking for hundreds of millions. Despite Lumentum running five indium phosphide fabs, it’s still shipping more than 30% below what customers want. Nvidia’s answer was to write $2 billion checks to Lumentum and Coherent, the two suppliers that make most of the world’s high-speed datacom lasers, with purchase commitments and future capacity access attached to both.
“Between the two of us, I don’t think we can service the demand that Nvidia and others are now putting on us to solve this resistance problem in the data center,” Hurlston added. This statement highlights the severe shortage that’s building up in the market, with Lumentum’s own estimates suggesting a 50% increase in supply line capacity by the next quarter.
Indium phosphide has a direct bandgap of roughly 1.34 eV, which makes it an efficient material for converting electrical current into photons. Silicon, on the other hand, has an indirect bandgap, making it difficult to generate light. As a result, every silicon photonics platform in production still needs an indium phosphide laser somewhere in the package to supply the light for silicon to manipulate.
The shift from pluggable transceivers to co-packaged optics changes where that laser sits and how it’s mounted, but it doesn’t remove it from the bill of materials. Nvidia’s marketing claims its photonics switches use four times fewer lasers than an equivalent pluggable deployment, alongside 3.5 times better power efficiency and ten times better network resiliency.
However, this savings is per port, and it’s that port count that’s exploding. The high-end Spectrum-X Photonics configuration runs 512 ports at 800 Gb/s for 400 Tb/s of switching, and Quantum-X Photonics InfiniBand runs 144 ports at 800 Gb/s. Co-packaging also shifts the laser type toward high-power continuous-wave sources and external laser modules that feed multiple channels, which are harder to build than the electro-absorption modulated lasers inside a conventional pluggable.
Coherent’s NAND Flash Crisis Deepens: Prices Surge 50% Overnight agreement covers that category of high-power CW lasers, external laser source modules, and fiber array units. This partnership is crucial for Coherent, as it aims to double its internal capacity by the end of 2026 and more than double again by the end of 2027.
Capacity at Lumentum and Coherent
Lumentum posted record revenue of $808.4 million in its fiscal third quarter, up 90% year over year, with components revenue of $533 million and pump laser shipments up 80%. On the May earnings call, Hurlston told analysts that the company expects its supply line to increase 50% measured from one December quarter to the next.
However, despite this growth, Lumentum’s supply line is still struggling to keep up with demand. The shortage has widened from 25% to 30%, and pump lasers are tighter still. A supplier growing output by half a turn per year and losing ground anyway is a clean measure of how steep the demand curve is.
Coherent’s revenue hit a record $1.8 billion, up 21%, with data center and communications now 75% of the total against roughly 41% a year earlier. The company also reported a backlog stretching into 2028, which suggests that the shortage will persist for an extended period.
Logic and memory moved to 300mm wafers in the early 2000s. Indium phosphide is a brittle, expensive, small-boule material where the industry-wide upgrade currently underway is 3-inch to 6-inch, roughly the transition silicon completed in the 1980s. Lumentum’s fifth fab, announced in March, is a converted Qorvo gallium arsenide plant in Greensboro, North Carolina, described as 4-inch and 6-inch compatible and ramping around 2028.
The challenge of scaling indium phosphide production is further complicated by the fact that indium is recovered as a byproduct of zinc refining. As a result, its output can’t be scaled independently of zinc economics, no matter how much laser demand there is. The USGS Mineral Commodity Summaries 2026 put China at an estimated 760 tonnes of roughly 1,100 tonnes of global primary refined indium in 2025, about 69%, and recorded a 72% year-over-year fall in unwrought indium exports between September 2024 and September 2025 after Beijing placed the metal under export controls in February last year.
AXT’s Chinese subsidiary Tongmei had to obtain Ministry of Commerce export permits before it could resume shipping indium phosphide substrates out of China. The fabs US Tech Giants Unleash Domestic Manufacturing Power as Nvidia and Intel Make Billions in AI Infrastructure are funded downstream of that licensing regime, and the wafers going into them aren’t made in the United States in meaningful volume.
DRAM contract prices rose 90% to 95% quarter over quarter in Q1 2026, the largest quarterly increase TrendForce has recorded, and the firm forecast a further 58% to 63% in Q2 with NAND up 70% to 75%. HBM is sold out for 2026.
Hurlston’s warning against a genuinely historic crunch makes it a strong claim rather than a throwaway one. He runs a company whose valuation depends on the shortage persisting, and he’s measuring his warning against this backdrop.
The current transceiver demand is about 30% above supply, according to LightCounting’s April 2026 market forecast. However, the shortages are expected to be gone by the end of 2026, and Ethernet transceiver growth is cut to 65% for the year after 82% in 2025 and 93% in 2024.
Coherent points the same way, with its internal capacity doubling a quarter early. This distinction from memory is that the fix here is a wafer-size transition already running in production with yields ahead of the old node, not a new fab that takes three years to build.
In conclusion, the shortage of indium phosphide is a critical issue that affects the entire silicon photonics industry. Lumentum CEO Michael Hurlston’s warning highlights the severity of the problem and the need for innovation and collaboration to address it. As the demand for high-speed datacom lasers continues to grow, it’s essential to find ways to scale production efficiently and reduce bottlenecks in the supply chain.
[“Memory Crisis: AI Boom Sparks Global Shortage of High-Speed Chips”]