China strengthens inspections on indium phosphide as demand for AI rises.

      The main obstacle in the expansion of AI is emerging from a metal that most people are unfamiliar with. China has increased its oversight of indium phosphide exports, a compound vital for the high-speed optical chips that transmit data within AI data centers, which poses a risk to the very infrastructure upon which the technology relies.

      Indium phosphide, or InP, is not a commonly known material, yet it is gaining strategic importance. As data center operators transition from transmitting electrical signals via copper to using light through optical fibers—an approach referred to as photonics—InP has become the essential material, with no immediate alternatives available.

      The faster the AI sector seeks to transfer data between chips, the greater the demand for this compound, and China holds a key position as the chokepoint.

      This situation arises from both geological factors and processing capabilities. China accounts for about 70% of global indium production, and since the export controls on InP were implemented in early 2025, Beijing has been slow to grant the licenses necessary for the material to exit the country.

      These delays, rather than an outright ban, serve as a leverage point: a missing permit is functionally equivalent to a prohibition and is more challenging to contest.

      The market has reacted to this situation. The cost of a six-inch InP wafer has surged from approximately $1,400 to around $5,000 since the controls were put in place, reflecting an increase of about 250%, as buyers compete for limited supply.

      Nvidia-backed chip manufacturer Coherent alerted that a shortage might arise earlier this year, and AXT, the world’s second-largest InP substrate producer, has cited these export permits as its most significant current challenge.

      This scenario aligns with a familiar trend in the U.S.-China technology rivalry. While Washington has restricted China’s access to advanced chips and manufacturing tools, Beijing has countered by utilizing its dominance in key materials, having already placed controls on gallium, germanium, and rare earth elements.

      InP is a similar tool now aimed at a different section of the supply chain, affecting the optical layer instead of the logic layer.

      The potency of InP lies in its focus on infrastructure rather than end products. The compound is used in the transceivers and optical components that connect the numerous accelerators within a modern AI cluster. Thus, a shortage does not hinder the functionality of any single chip; instead, it slows down the pace at which entire data centers can be constructed and interconnected. This constraint manifests as delayed construction rather than defective silicon.

      The urgency for compute power in the AI sector is particularly high, with operators racing to establish capacity faster than the supply chain can accommodate.

      The same pressures seen in the rush for chips and components have now extended to a specialized material that few outside the industry monitored a year ago. China’s control over this material has transformed it from a niche input into a geopolitical tool.

      A broader concern for the AI industry is the precedent that this sets. If delays in InP permits can hinder data center construction, similar tactics could be applied to any specialized inputs over which China has a dominant influence, converting a diversified supply chain into a series of single points of vulnerability.

      This fragility has become a strategic concern for Western governments and companies as part of a larger struggle for technological dominance, where materials have taken on an importance equivalent to the chips they support.

      Finding substitutes offers little immediate relief. While establishing InP production capacity outside of China is feasible, it requires significant time and investment in refining and wafer fabrication, a process that the current shortage does not expedite.

      In the interim, buyers find themselves managing allocations, paying higher prices, and advocating through diplomatic channels for the necessary permits, creating a dependency that the controls aimed to exploit.

      The InP controls were also addressed directly with Beijing; Coherent’s CEO raised the issue of licensing delays during a visit by a U.S. business delegation to China, highlighting the serious nature of the threat perceived by buyers.

      Whether permits will commence again and under what conditions has now entered the broader dialogue between the two governments regarding technology and trade. For the AI expansion, the resolution will dictate the speed at which operations can resume.