InP shortage worse than memory as AI optics demand jumps 90%

Indium phosphide, the compound semiconductor that emits light inside every AI data-center laser, is becoming the next bottleneck in the AI buildout.

Lumentum Chief Executive Michael Hurlston warned July 8 that the indium phosphide (InP) shortage will become "even more acute" than the memory crisis, with shipments running more than 30 percent below customer demand.

"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 said at the RAISE Summit in Paris.

Lumentum's fiscal third-quarter revenue rose 90.1 percent to $808.4 million, with components revenue up 77 percent to $533 million. Pump laser shipments grew 80 percent year-over-year, yet the supply-demand gap for electro-absorption modulated lasers (EML) and pump lasers exceeded 30 percent.

NVIDIA invested $2 billion each in Lumentum and Coherent in March, securing multi-year purchase commitments and rights to future production capacity — a sign the GPU maker sees optical components as a risk to AI cluster buildout.

Why InP Can't Be Replaced

Silicon's indirect bandgap lets it guide, split, and modulate light but not emit it efficiently. InP, with a direct bandgap of about 1.34 electron volts, converts electricity to photons — which is why every silicon photonics platform from NVIDIA, Broadcom, Marvell, and Cisco still requires an InP laser as its light source. Moving from pluggable transceivers to co-packaged optics (CPO) changes where the laser sits, not whether it appears on the bill of materials. NVIDIA's CPO switches consolidate lasers into a front-mounted external light source, cutting laser count to a quarter per port, but the maximum Spectrum-X Ethernet Photonics configuration still spans 512 800-gigabit ports for 409.6 terabit-per-second of total bandwidth.

The shift does change which device is needed. Pluggable transceivers lean on EMLs, while CPO drives demand for high-power continuous-wave (CW) lasers that feed multiple optical engines. Sumitomo Electric estimates CW lasers will rise from 24 percent of in-datacenter optical device volume in 2024 to 69 percent by 2028, meaning demand for old and new architectures will overlap during the transition.

The 6-Inch Race vs. the 2028 Factory

The supply chain narrows well upstream of the finished factories. The US Geological Survey put 2025 global refined indium production at 1,100 tons, with China accounting for 760 tons, or 69.1 percent. Indium is recovered as a byproduct of zinc smelting, so output cannot expand on laser demand alone. China added InP substrates to its export control list on Feb. 4, 2025; AXT's Chinese subsidiary Tongmei won licenses for some European and Japanese customers in June but cannot predict review timelines for future applications.

The near-term fix is a wafer-diameter transition. Coherent says moving from 3-inch to 6-inch wafers quadruples devices per wafer and cuts chip cost by more than 60 percent, with 6-inch yields already exceeding the older process. The company plans to double InP production by the end of 2026 and more than double it again by the end of 2027, expanding in Sherman, Texas, and Järfälla, Sweden. LightCounting projects the shortage could resolve by the end of 2026 if those plans hold.

Lumentum's own expansion is slower. Its 240,000-square-foot Greensboro, North Carolina plant, converting a gallium-arsenide line to 6-inch InP at a cost of several hundred million dollars, starts mass production in mid-2028 — too late for the current crunch. AXT signed a three-year 6-inch substrate supply deal with Coherent on June 25, and IQE and Tower Semiconductor announced a multi-year epiwafer agreement on June 15, tying upstream capacity to the laser ramp.

The divergence between strong fundamentals and falling shares captures the uncertainty. Lumentum fell 22.3 percent and Coherent 37.6 percent over the past month even as both reported record revenue, while substrate maker AXT dropped 39.9 percent and transceiver maker Applied Optoelectronics 35.7 percent. TrendForce sees DRAM contract prices rising 90-95 percent quarter-over-quarter in the first quarter of 2026, but InP has no comparable price index — the risk is substitution difficulty, not price. If the 6-inch transition delivers the planned fourfold device increase, the shortage could ease without waiting for new factories; if demand growth outpaces it, NVIDIA's $2 billion bets on two rivals will look prescient well before 2028.

This article is for informational purposes only and does not constitute investment advice.