As a key substrate material in compound semiconductors, indium phosphide (InP) is experiencing a surge in demand driven by the AI computing wave, leveraging its luminescent properties that are well-suited for fiber optic communications.
In 2026, with the continued ramp-up of 800G and 1.6T high-speed optical modules, the supply-demand balance for upstream InP substrates remains tight. Delivery lead times have lengthened, while new production lines typically require 2 to 3 years to build, making it difficult for capacity release to keep pace with downstream incremental demand.
Companies across the domestic and international industrial chain are positioning themselves in this sector through long-term supply agreements, capacity expansion, cross-industry investment, and M&A integration. A series of significant orders and capital actions have gradually come to light.
Yunnan Germanium Secures Five-Year Long-Term Order for 900,000 Indium Phosphide Wafers
On November 3, Yunnan Germanium issued an announcement stating that its controlling subsidiary, Yunnan Xinyao Semiconductor Materials Co., Ltd., has signed a "Long-Term Supply Agreement" and an "Annual Contract" with US optical communication company Applied Optoelectronics, Inc. (AOI). According to the agreement, AOI plans to purchase 180,000 pieces of 4-inch N-type InP substrates annually from 2027 to 2031, totaling 900,000 pieces over five years. The corresponding procurement amount for 2027 is USD 194.4 million (excluding tax), equivalent to approximately CNY 1.305 billion, which accounts for 122.46% of the company's audited operating revenue for 2025.
Yunnan Germanium is a leading enterprise in the domestic deep-processing sector of germanium. Its business covers germanium mining, smelting, and processing, with products including infrared-grade, fiber-optic-grade, and material-grade germanium, alongside compound semiconductor substrate materials such as InP. Yunnan Xinyao, the entity fulfilling this order, is the company's platform dedicated to the R&D and production of InP single-crystal substrates.
Applied Optoelectronics, Inc. (AOI), founded in Houston, USA, in 1997 and listed on NASDAQ, adopts a vertically integrated production model, independently completing laser chip epitaxy, device packaging, and optical module assembly. Its products cover multiple markets including data centers, cable TV broadband, telecommunications, and Fiber-to-the-Home (FTTH). Currently, its business focus is on high-speed optical transceiver modules for AI data centers.
Prior to this, Yunnan Xinyao had disclosed another InP substrate supply agreement on July 24, with an estimated total contract value ranging from CNY 570 million to CNY 855 million (including tax). Product delivery is scheduled between August 2026 and December 2027. In April, the company's board of directors approved a high-quality InP single-crystal wafer capacity expansion project with a total investment of CNY 188.56 million. Upon reaching full production, this project will form an annual capacity of 450,000 pieces (equivalent to 4-inch) of InP single-crystal wafers.
On October 21, the company released its Q3 2026 report. For the first three quarters, revenue reached CNY 1.364 billion, a year-on-year increase of 70.71%; net profit attributable to shareholders was CNY 176 million, up 869.79% year-on-year; Q3 standalone net profit attributable to shareholders was CNY 102 million, turning from loss to profit year-on-year. The company attributed this primarily to a significant increase in market demand from downstream AI data centers and optical communications, leading to higher sales of compound semiconductor materials like InP; increased sales of material-grade germanium due to the fulfillment of pending contracts; higher sales of infrared-grade germanium products due to increased infrared lens orders; and year-on-year increases in average selling prices for InP, infrared-grade, and fiber-optic-grade germanium products.
Optical Communications: A Tailwind for Indium Phosphide
To understand the value of InP substrate orders, one must clarify the connection between InP and the optical communication industrial chain.
Optical communications rely on fiber optics to transmit light signals for data transmission. Signal loss in optical fibers is lowest at the 1310nm and 1550nm wavelengths. As a direct bandgap semiconductor, lasers fabricated based on InP emit light precisely within these two communication windows, offering fast modulation speeds and high photoelectric conversion efficiency. Consequently, InP serves as the core substrate for EML (Electro-absorption Modulated Laser) diodes, DFB (Distributed Feedback) lasers, and high-speed photodetector chips in 800G and 1.6T high-speed optical modules.
Laser and detector chips require functional thin films to be epitaxially grown on InP substrates first, followed by cutting and packaging, before being integrated into optical modules to complete the mutual conversion between electrical and optical signals.
Even for the currently popular silicon photonics route, where silicon itself cannot emit light, an external continuous-wave (CW) laser source based on InP is still required. Similarly, CPO (Co-Packaged Optics) solutions also rely on InP light sources. Optical communications represent the largest downstream application for InP, with high-speed optical modules for AI data centers serving as the most critical source of incremental demand in this current boom.
In the industrial chain, companies like Lumentum and AOI produce InP-based lasers and optical devices, while manufacturers such as Yunnan Xinyao, AXT, and JX Metals operate upstream, providing InP substrate base materials.
Global Capacity Expansion and M&A Intensify, Accelerating Vertical Integration Among Giants
Against the backdrop of rising prosperity across the entire industrial chain, capital actions and capacity expansion plans in the global InP sector have landed successively this year, highlighting a prominent trend of vertical integration.
The transaction attracting the highest attention was announced on November 2, when Marvell stated its intention to acquire Lumentum in an all-stock deal. The implied enterprise value for Lumentum is USD 115 billion, with closing expected in the first half of 2028, subject to shareholder approval and regulatory clearance in multiple countries. Marvell specializes in DSP chips for high-speed optical modules. This acquisition aims to complement its self-developed manufacturing capabilities for InP lasers, creating an integrated solution for AI optical interconnects and CPO architectures. [Related Reading]
We can take a detailed look at Lumentum here.
Headquartered in San Jose, California, USA, Lumentum was spun off from legacy optical communication company JDSU in 2015 and listed independently. It subsequently acquired Oclaro, NeoPhotonics, Cloud Light, and other enterprises, establishing itself as a global leader in InP high-speed laser chips. The company possesses integrated capabilities in InP wafer manufacturing, epitaxy, and device packaging, with InP wafer production lines located in Japan, the US, and the UK, and a packaging and testing base in Thailand.
Before news of the Marvell acquisition emerged, Lumentum had already secured strategic investment from NVIDIA. In March 2026, NVIDIA announced a USD 2 billion strategic investment in Lumentum, accompanied by a multi-year procurement agreement. This included purchase commitments and priority access rights to advanced laser component capacity. The funds are earmarked for the renovation of Lumentum's InP production line in North Carolina, USA, and R&D investment.
Around the same time, Lumentum officially announced the acquisition of Qorvo's facility in Greensboro, North Carolina, to be converted into an InP optical device production line. This line will manufacture continuous-wave and ultra-high-power lasers for AI data centers, with production expected to start in early 2028. NVIDIA is the core customer for this production line.
During earnings calls, Lumentum management noted that shipments of EML lasers lagged behind customer demand by more than 30%. Existing InP wafer fabs in Japan are running at full capacity. To ensure stable upstream substrate supply, the company additionally signed a long-term supply agreement for InP substrates with AXT.
Looking at other suppliers globally, capacity expansion efforts continue to materialize.
In June, Japan's JX Metals officially announced a plan to invest JPY 120 billion in InP substrate capacity expansion before fiscal year 2030. This represents the largest investment in its semiconductor materials business history, aiming to boost capacity by 7 to 10 times compared to FY2025 levels to meet sustained incremental demand for high-speed optical interconnects in AI data centers. Simultaneously, price adjustment arrangements were proposed to customers.
In April, US-based AXT completed a follow-on equity offering, raising approximately USD 632.5 million. These funds will prioritize Beijing Tongmei Crystals, a subsidiary under AXT, for concentrated investment in InP substrate production line expansion. Products will supply global optical chip manufacturers, alleviating the current tightness in global substrate supply.
In the domestic market, several listed companies have also stepped up their involvement in the InP sector this year.
Regarding projects, Guangdong Xianrui Technology, controlled by Guangzhi Technology, received environmental impact assessment approval in March to launch a project producing 40 tons of InP crystals annually. In June, Suqian Liansheng announced a plan to jointly establish a venture with partners to develop and manufacture InP substrates, with Phase I planning an annual capacity of 120,000 pieces of 4-to-6-inch substrates, expandable to 400,000 pieces depending on market conditions. In August, Meishi Technology authorized management to initiate preliminary R&D verification for an InP industrialization project.
In terms of corporate acquisitions, in July, Xingye Technology announced its intention to acquire InP substrate-related business assets from Qingdao Liangjing Dian via its wholly-owned subsidiary Jiangsu Xingguang for CNY 55 million in cash. In August, Wuhan Tianyuan formally entered the InP substrate sector by acquiring a 60% stake in Zhongxun Semiconductor, adopting a cross-industry acquisition model to secure a mature technology platform. Haichuan Intelligent indirectly positioned itself in Daqing Yitai through equity participation; Daqing Yitai plans to build a project producing 240,000 pieces of 2–4-inch InP polished wafers annually, focusing on small-to-medium-sized substrates. Bojie Shares completed the acquisition of control over Dingtai Xinyuan in October; Dingtai Xinyuan is one of the earliest domestic enterprises to achieve mass production of InP substrates.
Beyond substrate material manufacturers, domestic research institutes are also making continuous breakthroughs in InP-based optical chips. CETC National Key Laboratory South (Institute 55) publicly disclosed progress in October regarding self-developed high-power InP lasers and high-speed InP photodetector chips. These products target light sources and receivers for high-speed optical modules and have entered the downstream customer verification phase.
How to Capitalize on the Current Indium Phosphide Market Trend?
At this point, a clear logic emerges: As AI computing power expands, data centers require faster optical interconnects. Optical modules are evolving from 800G to 1.6T, driving optical chips to become increasingly fast. Consequently, the substrate—the most fundamental layer of material—is feeling the pressure first.
The InP substrate industry inherently features concentrated supply, with only a few players capable of stable mass production. Capacity expansion takes two to three years to initiate. Once demand is pulled up by the AI thread, the gap cannot be filled quickly.
Thus, we observe downstream manufacturers of lasers and optical modules rushing to sign long-term agreements with substrate factories. Marvell, a DSP chip maker, intends to directly acquire Lumentum to bring laser manufacturing under its own control. Even NVIDIA invested USD 2 billion to secure a stable light source supply line. Everyone is doing the same thing—locking down critical materials and capacity in advance.
Yunnan Germanium's five-year long-term order is a sample of this broader logic landing on a domestic company. Looking solely at the amount, the contract for 2027 alone accounts for 122% of last year's revenue, indicating significant strength. However, the announcement clearly states that this is a framework agreement; annual procurement volumes are estimates, contingent upon export license approvals and changes in customer demand. In essence, this is a cooperation intent with ample sincerity but also room for flexibility.
The only remaining suspense is how much of this five-year order will ultimately be fulfilled. InP crystal growth is difficult, yield ramp-up is slow, and customer certification cycles are long. Ultimately, only a few in the industry can achieve stable volume production. For domestic substrate factories like Yunnan Xinyao, securing orders is just the first step. Building capacity, improving yields, and smoothly delivering every piece are the more substantial tests.
Nevertheless, for Yunnan Germanium, managing to place itself on overseas customers' supplier lists during an industry upswing is a good beginning. Whether InP companies can catch this tailwind blowing onto the substrates is left to time.