[Introduction]
On the evening of August 4, Reuters broke a bombshell news: the U.S. FCC is drafting new regulations to restrict Chinese-made high-speed optical modules from entering the U.S. AI (Artificial Intelligence) computing power supply chain. Optical modules are the "neural network" of AI data centers, and Chinese manufacturers have secured over 70% of global shipments. Why has the U.S. suddenly targeted optical modules? What impact will this have on the NPO and CPO industries?
01. Why Does the U.S. Want to Restrict Chinese Optical Modules?
Seizing the Choke Point of AI Computing Power
Optical modules are one of the highest-value core components in AI computing clusters. Computing power has grown 28 times from 2020 to 2024, while PCIe bandwidth has only doubled, making interconnects the biggest bottleneck for computing power release. Whoever controls the supply of high-speed optical modules holds the "valve" for computing power expansion in the AI era. Allowing Chinese enterprises to occupy over 70% of the global market share is equivalent to handing the lifeline of AI infrastructure to others, which is unacceptable to the U.S.
Another Step in Tech Decoupling
The FCC's drafting of these new regulations is another extension of the Trump administration's tech decoupling strategy. Over the past few years, the U.S. has successively imposed strict export controls on China in areas such as high-end chips, EDA tools, and semiconductor equipment. Now, the blockade is spreading from the "computing side" to the "connectivity side," attempting to deliberately fragment the global supply chain by gradually eliminating Chinese high-end hardware, thereby locking in the initiative of the supply chain in the AI era.
Precisely Locking Down the Next-Generation 1.6T
The industry generally judges the probability of an "immediate and comprehensive ban" to be extremely low. Optical modules are not standardized commodities; each product must be paired with switches, DSPs (Digital Signal Processors), and a complete set of network architectures to complete a lengthy certification process with an extremely long cycle. The FCC is more likely to adopt a "gradual suppression" approach: allowing existing 800G products to be supplied normally, but prohibiting upgrades to the next-generation 1.6T products. The U.S. intends to leave a window for capacity ramp-up for its only two domestic manufacturers, Coherent and Lumentum, using administrative means to forcibly "change lanes and overtake."
02. The Harm of This Action: A Game with No Winners
Surging Costs of Global AI Infrastructure
Forcibly fragmenting the supply chain will first and foremost harm U.S. domestic tech companies. Leading cloud providers such as NVIDIA, Google, and Amazon are extremely reliant on the stable supply of Chinese optical modules. Zhongji Innolight alone accounts for 27% of the global market share, with over 90% of its revenue coming from overseas. If a forced supply cut occurs, the expansion pace of U.S. AI data centers will be directly disrupted, and the resulting supply-demand imbalance will lead to soaring prices, ultimately leaving global consumers and tech companies to foot the bill.
Slowing Down Industry Technology Iteration
The competitiveness of the optical module industry is built on a highly globalized division of labor. Artificially promoting decoupling and supply chain disruption means that global enterprises will have to rebuild supply chains, re-certify products, and ramp up capacity again. This is not only a huge waste of efficiency but will also slow down the technology iteration speed of the entire industry. For the optical communication industry, which is at the critical upgrade node from 1.6T to 3.2T, the cost of such fragmentation is incalculable.
03. China's Advantages and Breakthrough Paths
Scale Advantages and Complete Supply Chain
The strongest confidence of China's optical module industry comes from its absolute market share and complete supply chain support. Chinese manufacturers have secured over 70% of global shipments, with Zhongji Innolight firmly ranking first globally with a 27% market share. From upstream optical chips, electrical chips, and passive components, to mid-stream packaging and testing, and then to downstream optical fibers and cables, Chinese enterprises have laid out operations in almost all segments. Enterprises such as TFC Optical Communication,Shijia Photons, and Hengdong Optics have been deeply engaged in segmented fields for many years, forming a strong upstream and downstream synergy.
Global Leadership in Technology Iteration
In terms of technology iteration, Chinese enterprises are also at the forefront globally. With 1.6T rapidly penetrating and 3.2T becoming the next-generation direction, the R&D and mass production progress of leading Chinese manufacturers is basically synchronized with international peers. More importantly, Chinese enterprises are actively deploying next-generation technology routes such as silicon photonics, NPO (Near-Package Optics), and CPO (Co-Packaged Optics). It is estimated that the penetration rate of silicon photonics will reach 60% by 2028. In these frontier fields, Chinese enterprises stand on the same starting line as the rest of the world.
Three Major Breakthrough Paths
Facing U.S. restrictions, the breakthrough paths for China's optical module industry are clear: first, market diversification, reducing reliance on the single North American market and accelerating the expansion into emerging markets such as Europe, the Middle East, and Southeast Asia; second, autonomous and controllable technology, accelerating the domestic substitution of core components such as DSPs, EML (Electro-absorption Modulated Lasers) lasers, and high-speed TIAs/Drivers; third, stimulating domestic demand. China has the world's largest internet market and the fastest-growing AI computing power demand, which is sufficient to support the technology iteration and scale expansion of domestic enterprises.
04. Impact on China's NPO and CPO Industries
Limited Short-Term Impact
If the U.S. implements the restriction of "prohibiting the upgrade from 800G to 1.6T," it will cause certain disruptions to the iteration pace of next-generation products in the short term. However, as more cutting-edge technology routes, NPO and CPO are still in the early stage of industrialization—NVIDIA's CPO switches are expected to start mass production only in the second half of 2026. Therefore, the direct impact of short-term trade restrictions on the NPO/CPO industry is relatively limited.
Mid-Term: Acceleration of NPO Domestic Substitution
NPO (Near-Package Optics) moves the optical engine close to the ASIC while retaining detachable features, reducing loss while ensuring maintenance convenience, making it the most feasible upgrade path currently. In NVIDIA's latest Rubin Ultra design, the usage of NPO optical engines has nearly doubled, with an increase of 78%, indicating that the NPO route has been explicitly recognized by industry leaders. For Chinese enterprises, U.S. restrictions will instead accelerate the localization process of the NPO supply chain. TFC Optical Communication has launched 800G/1.6T silicon photonic optical engines adapted for NPO, and Zhongji Innolight's NPO near-package optical engines are also being actively deployed.
Long-Term: Acceleration of CPO Independent Innovation
CPO (Co-Packaged Optics) is the ultimate direction of optical interconnects, co-packaging the optical engine with ASICs/XPUs, which has significant advantages in power consumption and bandwidth density. U.S. restrictions may affect the depth of Chinese enterprises' participation in the world's most cutting-edge CPO R&D, but it will also force China's CPO industry to accelerate the pace of independent innovation. Currently, Chinese enterprises have laid out operations in multiple segments of the CPO supply chain: TFC Optical Communication's supporting components such as FAUs and MPOs are being supplied in batches; Hengdong Optics' DFAUs and polarization-maintaining coupling modules are adapted for 1.6T silicon photonic engines; and Shijia Photons's CW DFB lasers are adapted for CPO wavelength division scenarios.
The biggest warning from this game is that the autonomous and controllable development of core components is imminent. The core segments of the CPO supply chain include external laser sources, EICs/PICs, modulators, 2.5D/3D packaging, FAUs/DFAUs, MPCs, and polarization-maintaining fibers, among which packaging capability, optical fiber coupling precision, and testing efficiency are key to affecting mass production. The gap also means opportunities. Given the country's continuous investment in hard technology, China's NPO/CPO industry is expected to achieve an "overtake by changing lanes" in this global technological transformation.
[Conclusion]
The news of the U.S. planning to restrict Chinese optical modules reminds us once again: the essence of technological competition is supply chain competition. However, China's optical module industry has reached the first place globally in just over a decade, relying on a complete supply chain, a huge market scale, and the engineer dividend. These core competencies will not disappear due to a mere ban. The bigger the storm, the more valuable the fish. There may be short-term pain, but in the long run, a more autonomous, controllable, and innovative Chinese optical communication industry is worth looking forward to.
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