China Holds 56% of Optical Module Output; Short-Term Decoupling Unlikely

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According to recent media reports, the U.S. Federal Communications Commission (FCC) is drafting a proposal that would expand its Covered List to restrict imports of new-model optical transceivers manufactured in China.

TrendForce notes that since the proposal has not yet been officially released, several key issues remain unclear, including the definition of “new models,” the criteria for determining “Chinese manufacturers” (e.g., company nationality, inclusion on the Covered List, or manufacturing location), and whether any transition period will be provided. Therefore, it is believed to be too early to interpret the proposal as a comprehensive ban on Chinese optical transceivers.

In the short term, U.S. customers will find it difficult to eliminate reliance on optical transceivers manufactured in China. Over the longer term, however, pressure from these policies is expected to encourage U.S. data center operators to diversify toward contract manufacturers outside China and adopt next-gen semiconductor optical interconnect technologies to reduce dependence on China’s dominant manufacturing capacity.

Proposed FCC restrictions could extend beyond optical transceivers to CPO, NPO, and switch supply chains

TrendForce points out that the proposal’s implications extend beyond whether Chinese optical transceivers can enter the U.S. market. A more important issue is whether network switches and other end products incorporating these components will continue to receive FCC equipment authorization, and whether or not U.S. CSPs will eventually remove Chinese vendors from their supplier lists.

The FCC previously used the Covered List to restrict companies such as Huawei, ZTE, and Hikvision, and has recently expanded those measures by prohibiting new equipment from listed companies from obtaining FCC authorization.

If similar restrictions are extended to optical transceivers, it would mark the first time U.S. regulatory controls directly reach the optical interconnects supply chain for AI data centers. Products potentially affected would extend beyond pluggable optical transceivers to include co-packaged optics (CPO) and near-packaged optics (NPO) optical engines that are integrated into network switches.

Current information points to the U.S. possibly adopting a transitional approach that allows existing authorized products to remain in use while imposing stricter scrutiny on new models. Chinese-manufactured optical transceivers that have already received FCC authorization may therefore remain unaffected in the near term, whereas future products could undergo more rigorous review—or even require approval from additional U.S. government agencies before entering the market.

TrendForce believes the proposed policy reflects the U.S. government’s broader objective of reducing AI data center dependence on China’s optical interconnects supply chain. However, the final scope of the measures and their implementation timeline remain subject to change as U.S.-China relations evolve.

High reliance on China’s supply chain means rapid policy implementation could widen near-term supply gaps

TrendForce estimates that Chinese optical module makers will account for approximately 56% of global contract manufacturing capacity in 2026. Export-oriented suppliers serving the North American market, including Innolight, Eoptolink, and Cambridge Industries Group (CIG), will collectively represent approximately 46% of global manufacturing capacity.

The global optical interconnect supply chain for AI data centers remains highly dependent on China’s module manufacturing, packaging, and testing capabilities. This would make alternative manufacturing capacity, customer qualification, and product migration difficult to scale up simultaneously in the short term if the U.S. government were to impose restrictions covering a broad range of companies and products. As a result, lead times and costs could increase, potentially slowing AI data center deployment and disrupting the global supply chain for AI-related components.

AI data center optical interconnects currently remain heavily reliant on the manufacturing capabilities of Chinese suppliers. Additionally, laser light sources used in optical transceivers continue to depend heavily on indium phosphide (InP) substrates and epitaxial wafer production.

Consequently, decoupling AI optical interconnect manufacturing from China will be difficult in the near term. Should the Chinese government respond with countermeasures by tightening exports of upstream materials such as InP wafers and laser epitaxial wafers, short-term supply-demand gaps could widen further.