The U.S. Considers Banning Chinese Optical Modules Amid Rising Tensions

Introduction: Is the U.S. ready to decouple from Chinese optical modules?

Yesterday (August 4), the global optical module market was suddenly rocked by news of a U.S. version of the "domestic replacement" plan.

According to media outlets such as China News Service and Yicai, citing overseas reports, a source with knowledge of the matter revealed that the Federal Communications Commission (FCC), which regulates the U.S. telecommunications industry, is drafting a ban to prohibit the import of new models of optical transceivers from China. The report also indicated that U.S. officials aim to announce and implement the ban within 2026. However, the source noted that the FCC may still modify or delay the proposed restrictions.

Interestingly, within a single day and night—between the close of the A-share market and the open of the U.S. market—the trends for optical module-related stocks diverged: U.S. optical module stocks briefly strengthened, while China’s “Yi Zhongtian” opened lower but closed with significantly narrowed losses; even Tianfu Communications (300394.SZ) ended higher.

According to LightCounting, Chinese optical module manufacturers currently hold more than 60% of the global optical module market share, with leading companies such as InnoLight and Eoptolink. In the细分markets of 800G and 1.6T optical modules, domestic manufacturers hold an even larger share.

Optical modules are primarily used for high-speed fiber optic data transmission within data centers. Currently, global AI computing power is driving strong demand for optical modules, with 800G and 1.6T products dominating the global market. As NVIDIA’s AI servers continue to upgrade, optical modules are rapidly evolving from 800G to 1.6T and even 3.2T. Goldman Sachs predicts that the optical module industry is transitioning from the mature 800G phase into a new profit cycle driven by emerging 1.6T and 3.2T technologies.

Data shows that, based on 2025 optical interconnect revenue, InnoLight holds approximately 21.2% of the global market share, and in the high-speed (400G and above) datacom optical interconnect market, it holds a 28.1% market share, making it the world’s largest optical interconnect solutions provider.

Domestic manufacturers' advantages in the critical optical module sector have begun to unsettle the United States. However, it is not that simple for the U.S. to decouple from China's optical module industry.

What is the global market landscape for optical modules? Simply put, China and the U.S. dominate the global optical module market.

According to data from Lightcounting, one of the most authoritative third-party institutions in the optical module industry, between 2018 and 2024, the number of Chinese optical module manufacturers among the top ten global vendors expanded rapidly. In 2018, only three Chinese companies were in the top ten; by 2022, seven Chinese manufacturers had entered the top ten, and this number has remained stable since then.

In 2024, the remaining three of the world's top ten optical module manufacturers were all from the United States, ranking second, fifth, and eighth in the Lightcounting rankings.

Source: Company financial reports; Data: Lightcounting

Looking at it this way, U.S. optical module companies still have a place in the market—but if the U.S. ultimately bans all purchases of Chinese optical modules, can domestic companies meet the country’s demand for optical modules?

First, the conclusion: it's simply not possible.

U.S. companies have strengths in upstream optical chips, DSP digital signal processors, and silicon photonics technology; however, they lag behind Chinese manufacturers in large-scale manufacturing of optical modules, cost control, and delivery responsiveness. Currently, U.S. domestic production capacity cannot meet the full demand of North American cloud providers for AI computing optical modules and can only provide partial supplemental supply.

According to the article "2026 Optical Module Market Analysis and Forecast" published on the official website of ETU-LINK, North American cloud providers such as Meta, Google, Microsoft, and Amazon collectively require approximately 27.5 to 29.5 million 800G optical modules. Among them, Meta has the highest demand (at least 10 million, potentially up to 12 million), while Google and Microsoft together require about 12 million, and Amazon requires approximately 5.5 million. In the 1.6T optical module market, NVIDIA's demand in 2025 is projected to reach 2.5 to 3.5 million units (accounting for 80% of global demand), increasing to over 5 million units in 2026, while Google's demand is estimated at around 4 million units and Meta's at approximately 1 million units.

Above, major manufacturers are expected to collectively require approximately 40 million high-speed optical modules by 2026.

According to industry analysis, the monthly production capacity of major U.S.-based manufacturers for 800G optical modules is only around 40,000 units; Coherent has relocated a significant portion of its assembly capacity to overseas contract manufacturers; AAOI’s U.S. production line is still ramping up—it previously announced expansions at its new facility in Texas and its plant in Taiwan, but its near-term goal is merely to increase monthly output of 800G and 1.6T products to over 500,000 units by the end of 2026.

Overall, the combined monthly production capacity of all U.S.-based high-speed modules falls short of one-fifth of that of a single leading Chinese manufacturer. For example, InnoLight’s production capacity for optical transceivers in 2025 exceeds 28 million units, with an actual output of 23.76 million units and sales of 21.09 million units; Eoptolink’s optical interconnection products are projected to have a capacity of approximately 17.47 million units in 2025, with an actual output of 16.34 million units and sales of 16.03 million units.

The actual output of just these two giants exceeds 40 million units, and in the high-speed data communication market, Chinese manufacturers hold a global market share of 65% to 70%, with Zhongji旭创 and XinYisheng together accounting for nearly 50%.

Renowned financial commentator Liu Xiaobo believes that major U.S. players such as Coherent, Lumentum, and AAOI are no match for Chinese manufacturers; the expansion cycle for high-speed optical modules typically takes 18 to 24 months and cannot be instantly realized simply by spending money.

Another piece of data also reveals the U.S. market’s heavy reliance on Chinese optical modules.

According to Zhongji旭创's data, over 90% of the company's revenue exceeding RMB 38.2 billion in 2025 came from overseas, demonstrating strong demand for Zhongji旭创 from international customers. Another leading optical module manufacturer, XinYisheng, generated over RMB 24.8 billion in revenue in 2025, with overseas income accounting for more than 96%.

Zhongji Xuchuang also revealed in its Hong Kong listing prospectus that the majority of its revenue comes from U.S. customers.

For the three months ended March 31, 2023, 2024, 2025, and 2026, revenue from U.S. customers accounted for 75.9%, 60.5%, 57.3%, and 61.7% of Zhongji旭创's total revenue, respectively.

However, Zhongji Xuchuang also acknowledges that the company’s business, financial condition, and operating performance are susceptible to changes in the U.S. economy, politics, laws, regulations, and market conditions, as well as changes in the purchasing methods, demand, financial condition, and business strategies of our U.S. customers.

In fact, the U.S. side has not yet officially released any new rules regarding China's optical module products, and most of the information circulating online remains unverified.

Media outlets such as "China News Service" also cited responses from major optical module companies including InnoLight, NeoPhotonics, and TFC Communications regarding the incident, all of which stated that the U.S. Federal Communications Commission has not yet issued any restrictive documents in this area, and the information cannot be verified by any authoritative institution.

In fact, the United States has consistently imposed restrictions on China’s AI-related products in the AI industry competition—for example, limiting NVIDIA’s sales of H200 chips to China and directly prohibiting NVIDIA from selling its latest chip products to China, as well as the more widely known ban on exporting EUV lithography machines to China.

The U.S. previously added Zhongji Xuchuang, known as the "leader in optical modules," to its concerning lists.

"Alpha" noted that in its prospectus, Zhongji Xuchuang mentioned that on June 8 of this year, the U.S. Department of Defense added Zhongji Xuchuang to the list of Chinese military-linked companies. However, to date, there has been no significant cancellation, suspension, reduction, or delay of customer orders, nor have any customer relationships been terminated as a result.

InnoLight stated that its products are designed and integrated into commercial technologies for civilian industries, not developed as customized military products. Furthermore, "the China Military-Industrial Complex Companies List is not an economic sanctions list and, in the absence of other applicable restrictions, does not by itself restrict our business with U.S. customers."

Against the backdrop of U.S.-China competition in AI, although the United States has not yet imposed any related bans on China’s optical module industry, its future evolution is certainly worth market attention and caution.

Some industry insiders analyze that, even though there is currently no explicit ban, it is important to remain cautious about potential future changes. In terms of response measures, the key concern is whether, if the U.S. were to announce a ban in the future, it would restrict companies or products.

The individual believes that if the United States imposes restrictions on corporate entities, then Chinese optical module companies—regardless of whether they build their factories in Vietnam, Thailand, Malaysia, or Mexico—will find that products manufactured overseas may still be barred from entering the U.S. market if the companies themselves are placed on the restriction list.

If restrictions are only placed on the product's country of origin, there is still theoretically some room for circumvention by establishing factories overseas.

According to publicly available information, nearly all leading domestic data communication optical module companies have established overseas assembly facilities, mostly concentrated in Southeast Asia (Malaysia, Thailand), with some also located in Mexico and Europe. For example, Zhongji Xinchuang, Xinyisheng, Huagong Technology, and Fiberhome have already built or are currently constructing production bases in Thailand.

However, these individuals believe that, based on past restrictions imposed on Huawei and SMIC, the U.S. typically does not maintain obvious loopholes for long. Initially, restrictions may apply only to certain products, technologies, or origins, but they often gradually expand to include the companies themselves, affiliated entities, supply chain partners, and end uses.

If the situation ultimately evolves into restrictions on corporate entities, affiliated companies, and others, the final response may involve seeking overseas private labeling or alternative sales channels, but this will ultimately depend on how the U.S. final rules define corporate control, actual manufacturers, sources of core components, and ultimate beneficiaries.

The above is based on analysis from industry insiders regarding the industry, market, and related companies. However, looking at the broader context of Sino-U.S. competition over the past several decades, unilateral restrictions by the U.S. ultimately cannot fully halt the development of an entire industry—in fact, Chinese companies may even accelerate their growth under such pressure.

The U.S. side’s continued restrictions on Chinese companies only strengthen China’s determination to develop independently, increase investment in resources, and expand the market for domestic alternatives. Although some overseas markets may be squeezed, this also drives us to open new growth pathways in the domestic market and other global markets, ultimately enhancing the overall industrial strength, technology stack, and global market share.

For example, Yangtze Memory Technologies, which was added to the U.S. Export Control Entity List; DJI drones, which were previously subject to U.S. restrictions; and the photovoltaic industry chain, which once faced high tariffs.

In today's international market, the global supply chain for production capacity is the prevailing trend, and key production capacities, such as optical modules, remain in China; it is difficult for the United States to enforce its unilateral procurement restrictions comprehensively.

After initial volatility at the open, the stocks of major Chinese A-share optical module companies saw their losses narrow. For example, Zhongji Xuchuang opened at RMB 880 per share but closed at RMB 947.74, down 7.27%; New Optical opened at RMB 400 per share and closed at RMB 424.30, down 5.29%; TFCOM opened lower but rebounded during trading, ultimately closing at RMB 216.85 per share, up 2.29%.

What are your thoughts on the future potential of domestic optical module manufacturers?

This article is from the WeChat official account "Alpha Factory Research Institute," authored by Alpha.