The demand for optical interconnects in data centers is driving a complete incremental value chain from InP substrates, epitaxy, and wafer foundry to advanced packaging, testing, and equipment. Currently, international giants hold roughly 95% of the global InP substrate market, while the industry faces a supply-demand gap of nearly 70%, with this high-growth cycle expected to continue through 2028. Against this backdrop of overseas monopoly, the semiconductor industry is entering a critical window of opportunity.

Recently, the global optical chip industry chain has seen a wave of capacity expansions, new builds, long-term supply agreements, major equity investments, and deep supply chain partnerships—a full-scale capacity arms race driven by AI data center high-speed optical interconnect demand has begun.

International leaders are accelerating upstream positioning:

• Coherent is ramping up its 6-inch indium phosphide (InP) compound semiconductor production line expansion at its Sherman, Texas facility.

• Nokia is expanding its advanced photonic chip testing and packaging capacity in Allentown, Pennsylvania.

• Japan's JX Advanced Metals plans to invest up to ¥120 billion to boost InP substrate capacity to 7–10 times current levels.

• IQE has signed a multi-year exclusive supply  agreement with Tower Semiconductor for InP epitaxial wafers, securing stable upstream epitaxial material supply.

Chinese industry leaders are making parallel major investments:

• DSBJ has announced that its wholly-owned subsidiary, Source Photonics, along with its subsidiaries,  will build an optical chip and high-speed optical module expansion project in Changzhou, China, with a total investment of US$1.2 billion, fully self-funded. Source Photonics possesses vertically integrated capabilities  spanning optical chip design, manufacturing, packaging, and optical module assembly and testing. Following DSBJ 's acquisition of Source Photonics,  the company has effectively expanded from traditional electronics manufacturing and consumer electronics into the core AI optical communications sector.

Industry Fundamentals: Surging Capex and Persistent InP Supply–Demand Tightness

According to data from Securities Times·Databao, as of Q1 2026, construction-in-progress for seven core listed optical module companies in China totaled RMB 3.898 billion—more than six times the level recorded in the same period of 2022, reflecting unprecedented capital expenditure intensity across the industry chain. China Post Securities research estimates that international giants currently control approximately 95% of the global InP market, with an overall supply–demand gap of nearly 70%. This high-growth cycle is expected to persist through 2028. Chinese companies are systematically strengthening the entire value chain from substrates and epitaxy to chip design, wafer manufacturing, packaging and testing, and optical modules, gradually breaking free from a historical reliance on low-margin downstream assembly.

Capacity and product progress among key Chinese players:

• Sanan Optoelectronics has achieved mass production of 6-inch InP optical chips, with total optical technology capacity of  2,750 wafers/month, expected to reach nearly 6,000 wafers/month following      epitaxial expansion. 400G/800G supporting optical chips are shipping in high volume, while 1.6T optical module companion chips have entered the sample verification stage with lead customers.

• Yunnan Germanium has launched a high-quality InP single-crystal wafer expansion project, planning a new production line with an annual capacity of 300,000 wafers (4-inch equivalent, including 6,000 units of 6-inch specification). Upon completion, total capacity will reach 450,000 wafers/year. The company is currently advancing equipment installation and third-party industry certification, with capacity being      gradually released as the project progresses—filling a critical gap in domestic InP substrate localization.

No Need to Worry About CPO Deployment Timelines—Bandwidth Demand Dictates Long-Term Optical Chip Growth

Regardless of whether the final architecture adopts pluggable optics, NPO (Near-Packaged Optics), CPO (Co-Packaged Optics), OBO (On-Board Optics), or hybrid approaches, the number of optical engines and lasers deployed per GPU and per rack will continue to rise. Architecture evolution is merely a matter of physical layout; the upward trajectory of overall optical component demand is a certainty.

• Traditional Pluggable Optical Module Solution
  Think of it as plugging a USB drive directly into the switch panel, with copper traces connecting internally to the ASIC switching chip. This mature technology offers straightforward installation and maintenance and remains the dominant AI data center deployment model today.

• NPO (Near-Packaged Optics)
  The optical engine is integrated inside the switch chassis, positioned in close proximity to the switching chip, significantly shortening high-speed copper trace lengths and reducing signal transmission loss. This serves as an intermediate technology path toward eventual CPO mass adoption.

• CPO (Co-Packaged Optics)
  Optical chips and switching chips/GPUs are co-packaged on the same  substrate, eliminating transmission bottlenecks caused by long copper traces and delivering optimal power efficiency and latency. However, current packaging processes are challenging, mass-production yields remain low, and a single point of failure can render the entire substrate unusable, with high maintenance costs. Large-scale commercial deployment may be somewhat delayed.

CPO's Three Laser Source Routes: Differentiated Competition, with Multi-Route Coexistence Long-Term

CPO is not a single technology track. Beyond packaging architecture, laser source differentiation is equally significant, and the industry has yet to converge on a single optimal solution. The three routes will serve different data center scenarios based on differences in transmission distance, cost, and energy efficiency:

• Silicon Photonics + Continuous-Wave Laser (SiPh + CW Laser)
       Highest technological maturity, effective transmission distance exceeding 1 km, ideal for long-haul, high-bandwidth interconnects, though system power consumption and cost remain challenging.

• VCSEL (Vertical-Cavity Surface-Emitting Laser)
  Clear energy efficiency advantages, cost-effective, and easily arrayed—with high maturity—but transmission distances are generally within 100 meters, positioning it for short-range, high-density interconnect within and between racks, serving as a complementary solution to silicon photonics.

• MicroLED
  A long-term future-oriented route, offering low latency, low cost, and high energy efficiency. Currently at the lowest stage of industrial maturity, with startups like Ayar Labs advancing its application in      chiplet-proximal high-density optical interconnects.

Optical chip companies are not betting on any single CPO technology; rather, they are seizing the broader industry opportunity of the transition from electrical to optical interconnect across AI clusters—driving a systematic upgrade of the entire value chain, from lasers and optical engines to advanced packaging and substrate materials.

A Structural Opportunity Across the Full Semiconductor Value Chain: InP and Silicon Photonics as Complementary Heterogeneous Integration Partners—with Foundry, Packaging, Testing, Equipment, and Materials All Benefiting

Wafer foundry: InP compound foundry capacity remains scarce, with customer qualification cycles typically exceeding two years. Downstream customers are mostly securing capacity through long-term, fixed-price agreements, giving foundries increasing pricing power. Silicon photonics, built on CMOS-compatible processes, forms a complementary heterogeneous integration partnership with InP: silicon photonics handles optical routing, while InP handles light emission, modulation, and optoelectronic conversion. This drives significant demand for heterogeneous wafer bonding foundry orders, opening a second growth curve for mature-node fabs.

Packaging and testing: As traditional optical chip/module packaging migrates from 800G to 1.6T, per-chip packaging value steadily rises. Photonics-specific advanced packaging and testing demand high-precision active alignment and optoelectronic co-testing—creating substantial technical barriers. CPO/NPO co-packaging is driving sustained growth in demand for wafer-level packaging, flip-chip bonding, heterogeneous bonding, and optoelectronic integrated test equipment—creating growth opportunities for OSATs with deep process expertise.

Equipment and materials: Approximately 70–80% of optical chip capital expenditure is directed toward equipment. MOCVD epitaxial equipment remains a critical bottleneck for InP and GaAs chip mass production, while creating parallel demand for InP-specific etching, electron-beam lithography, and silicon photonics process equipment. High-precision bonders, die bonders, heterogeneous wafer bonding equipment, and optoelectronic inspection systems are all seeing rising demand alongside NPO/CPO trends. On the materials side, InP/GaAs substrates, epitaxial wafers, high-purity germanium/gallium raw materials, specialized photoresists, sputtering targets, ABF substrates, ceramic substrates, and other packaging materials are all entering a period of explosive demand growth, presenting a critical window for domestic substitution.

CIOE × IICIE: Co-located Events That Align Perfectly with Industry Convergence Trends

IICIE (International Integrated Circuit Innovation Expo) is a professional event spanning the entire semiconductor industry chain, showcasing chip and chip design, wafer manufacturing, packaging and testing, core equipment, key materials, and critical components—covering the most capacity-constrained and highest-value segments driven by the optical chip expansion wave. CIOE (China International Optoelectronic Exposition)is a comprehensive exhibition covering the full optoelectronics industry chain, featuring innovative technologies and products from optical chip, high-speed optical module, and optical engine companies. Exhibitors include prominent domestic and international photonics leaders such as Accelink, Broadcom, CIG, Coherent, CompoundTek, Credo, Eoptolink, Enablence, H3C, Hisense, KAM, Ligentec SA, Linktel, Luceda Photonics, Luxshare Technology, MACOM, Marvell, Mitsubishi Electric, O-Net, PIC, Plansee, POET, Semtech, Sicoya, SiFotonics, SimWorks, WD Photonics, Wooriro, and many more—all showcasing their latest products.

*Partial exhibitor list, in alphabetical order.

The co-location of these two events creates a comprehensive upstream–downstream matchmaking platform—bridging optical interconnect demand with semiconductor manufacturing and packaging. Optical chip, module, and engine companies can directly access InP/silicon photonics foundry, advanced packaging, and domestic equipment and material suppliers for rapid process qualification and capacity securing. Conversely, semiconductor equipment and material suppliers gain direct access to the high-growth optical chip market, driving efficient order acquisition and reducing cross-sector qualification costs.

Whether you're in semiconductor equipment or optical modules, join us September 9–11 at Shenzhen World Exhibition and Convention Center for CIOE and IICIE—the ideal place to connect, collaborate, and grow with the optical interconnect boom. Register now for one-pass access. See you in September!