Supply security over cost: Google leads CSP charge to diversify InP substrate sourcing
China has recently eased controls on some indium phosphide (InP) substrates, relieving a bottleneck in optical communications capacity for the second half of the year. But supply chain players say the long-term priority is still to expand substrate capacity from non-China sources, with supply security for the AI industry outweighing price.
Representatives from Google and other cloud service providers (CSPs) have personally visited overseas substrate makers to signal that demand for their products is real and substantial.
Given the technological rivalry between the US and China, Beijing began imposing export controls on InP substrates in February 2025, a move the industry has viewed as retaliation for US restrictions on advanced chip exports.
Shortage hampers high-speed transmission
As AI infrastructure drives greater demand for high-speed transmission, the shortage of compound semiconductor substrates caused by China's export controls has become a major bottleneck for the optical communications industry.
Sources familiar with the compound semiconductor supply chain say the InP substrate market has long been dominated by AXT, Japan's Sumitomo, and JX Advanced Metals. AXT and Sumitomo each hold about 40% of the market, together controlling roughly 80% of global InP substrate capacity.
Recently, the industry has raised concerns that the shipment schedule for co-packaged optics (CPO) could be delayed. Meanwhile, industry insiders say that CSPs have already raised their inter-rack transmission requirements from 400G to 800G. Even though in-rack compute nodes still rely mainly on copper wiring for now, CPO scale-out will become the mainstream trend, pushing optical communications demand to peak in 2027 and 2028.
The search for non-China substrates
There has been some good news on China's InP substrate export controls. After a batch of substrates was released in August 2025, the first 2026 batch of InP substrates began shipping at the end of May, which could support second-half operations for Taiwan-based compound semiconductor suppliers including Visual Photonics Epitaxy (VPEC) and Global Communication Semiconductors (GCS).
But industry sources stressed that supply chain security is currently a top concern, one that even overtakes price considerations. Even if China temporarily loosens its substrate export controls and optical communications shipments remain stable in the second half of the year, companies still need to aggressively expand their sources from Europe and Japan over the longer term.
Sources said that non-China supply must eventually exceed 50% of total substrate sourcing to ensure supply chain stability.
However, under China's export controls, large substrate inventories have accumulated inside the country, and domestic makers such as Yunnan Germanium are aggressively expanding capacity, triggering price competition among local substrate suppliers. Overseas makers are also worried that if China fully opens exports in the future, low-priced InP substrates will flood other markets, discouraging local producers from expanding production.
German manufacturer Freiberg Compound Materials originally specialized in gallium arsenide (GaAs) substrates and currently ships only small volumes of InP substrates, with yields still needing improvement. Japanese suppliers have also been relatively conservative about expanding production.
Substrate makers need more certainty before committing to capacity expansion. To that end, Google and other CSP giants have been visiting suppliers in person to make one thing clear: demand for their products is genuinely substantial.