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

      The bottleneck in the development of AI is proving to be a little-known metal. China has intensified its monitoring of exports of indium phosphide, a crucial compound for high-speed optical chips that facilitate data transmission within AI data centers, potentially hindering the infrastructure upon which the technology relies.

      Indium phosphide, abbreviated as InP, may not be a widely recognized material, but it is becoming increasingly strategic. As data center operators transition from transmitting electrical signals via copper to using light through optical fibers—a method called photonics—InP has emerged as an essential material with no immediate alternative.

      The AI industry's demand for faster data movement between chips is driving the need for this compound, placing China at a critical junction. This situation arises from both geological and processing factors: China accounts for approximately 70% of global indium production, and since export controls on InP began in early 2025, Beijing has been slow to grant the necessary licenses for the material to be exported.

      Rather than imposing outright bans, these delays function as a significant barrier, since the absence of a permit is as effective as a prohibition and is harder to contest. The market has responded, with the price for a six-inch InP wafer surging from around $1,400 to roughly $5,000 since the controls were implemented, marking a 250% increase due to buyers vying for limited supply.

      Coherent, an Nvidia-backed chipmaker, issued warnings about a potential shortage earlier this year, while AXT, the second-largest producer of InP substrates globally, noted that obtaining export permits has become its most pressing challenge.

      This situation follows a familiar trend in the ongoing US-China technological rivalry. As Washington has imposed restrictions on China's access to sophisticated chips and manufacturing tools, Beijing has retaliated by leveraging its control over critical materials, having already established limits on gallium, germanium, and rare earth elements.

      InP serves as a similar leverage point in another segment of the supply chain, specifically targeting the optical layer instead of the logic layer. Its significance lies in its role in infrastructure rather than finished products. The compound is integral to the transceivers and optical components that connect the numerous accelerators in contemporary AI clusters; therefore, restrictions on InP do not render individual chips inoperative but hinder the overall speed at which data centers can be developed and equipped. The impact manifests in delays in construction rather than malfunctioning silicon.

      This situation arises at a time when the demand for computing power in the AI sector is at its peak, as operators strive to expand capacity faster than the supply chain can accommodate. The same pressure seen in the race for chips and components is now apparent with this specialized material, which was not widely monitored outside the industry just a year prior. China's influence over InP has transformed it into a geopolitical tool.

      The overarching concern for the AI sector is the potential precedent set by these delays. If a hold-up in InP permits can impede data center construction, similar pressure could be exerted on any of the specialized inputs where China has a significant market share, converting a diversified supply chain into multiple vulnerabilities.

      This fragility now poses a strategic challenge for Western governments and operators, contributing to the broader struggle for technological supremacy where materials have become as crucial as the chips they support.

      Immediate alternatives are limited. While it is feasible to establish InP production capacity outside of China, the process is gradual, necessitating years of investment in refinement and wafer fabrication that cannot be hastened by the current shortage.

      In the interim, buyers must navigate allocation challenges, cope with rising prices, and engage in diplomatic efforts to secure permits for movement, creating a reliance that the controls were intended to exploit.

      The licensing issues were also brought up directly with Beijing; the CEO of Coherent raised the permit delays during a US business delegation's recent visit to China, highlighting how seriously buyers regard the threat.

      Whether permits will resume flowing, and under what conditions, has now become part of the wider negotiations between the two governments concerning technology and trade. For the advancement of AI, the outcome will dictate how quickly operations can commence.