Nvidia's co-packaged optics push has hit a wall that has nothing to do with GPUs. The bottleneck sits one material layer up: indium phosphide (InP), the substrate behind most optical chips. And the country with the strongest hand on that supply chain is China — which is why Coherent's CEO booked a seat on Trump's delegation to China in May, why Nvidia wired $2 billion into Coherent, and why Jensen Huang personally attended the topping-out of Coherent's new fab in June.
CPO is the industry's answer to moving data off silicon: lasers co-packaged with the switch, cutting the power that pluggable transceivers burn. But every CPO module needs InP-based lasers, and over half of all optical chips are made from InP. As AI data centers scale, the demand curve for optical modules has gone vertical — and the dominoes fell all the way up to a footnote in the periodic table.
The supply chain: three links, three choke points
Getting from raw metal to a finished InP wafer passes through three stages, and China holds leverage at every one of them.
Primary indium. Indium almost never appears as ore. It is a byproduct of zinc and tin smelting — the okara left over from tofu production, as one Chinese industry analyst puts it. No one builds a smelter for a byproduct, so supply tracks zinc and tin markets, not indium prices. China makes the most tofu and therefore the most okara: over 50% of global primary indium output and more than 70% of proven reserves. At its peak, 80% of the world's 400 tonnes of annual indium came out of China's Yunnan province.
Refining. Primary indium (95-99% pure) must be refined to 4N-5N (99.99-99.999%), then to 6N (99.9999%) before it can feed InP crystal growth. China produces 70-80% of the world's refined indium. The 6N+ tier is still dominated by Japanese players Dowa and JX Metals — but their feedstock is almost entirely Chinese.
InP wafers. This is China's weakest link — or it was. Sumitomo and AXT control most of the wafer market, but AXT moved its entire InP production to China years ago to sit next to the raw material. Its operating entity, Beijing Tongmei, is the world's #2 InP wafer maker, and AXT's wafers are physically made in China — even shipments back to the US run through Chinese export procedures.
Export controls turned geography into policy
China's structural advantages were always there. What changed is that it started using them. In early 2025, Beijing put InP and related products on its export control list — Beijing Tongmei (AXT) was the first target, and the license it eventually received came with quantities "smaller than expected," which hit AXT's fourth-quarter revenue. This year, controls extended further upstream to indium itself: exportable volume is now capped at 30% of output, with tighter approval for 6N+ material.
The downstream pressure is real. Sumitomo and JX Metals source over 90% of their high-purity indium feedstock from China; reports put Sumitomo's annual InP capacity down from 180,000 to under 100,000 wafers, with lead times stretching from under six months to eighteen. Lumentum's CEO said InP scarcity is worse than memory, noting that Lumentum and Coherent — together over 80% of high-end InP optical chips — cannot meet Nvidia's demand. That, in a nutshell, is why Coherent's CEO flew to Beijing: to ask for supply, not to discuss cooperation.
The numbers behind the panic
The gap is not marginal. Estimates put 2026 global InP wafer demand at 2.6-3.0 million wafers against effective capacity of 600,000-700,000 — a shortage of roughly 70%. The optical-communications indium shortfall is around 50 tonnes this year. Meanwhile Nvidia has been pushing suppliers for a 20x increase in InP laser capacity by 2030; per Rosenblatt Securities, it has so far extracted only a 12x commitment.
China's own suppliers are the direct beneficiaries. Yunnan Germanium, the only domestic producer shipping 6-inch InP wafers, saw domestic revenue up 60.8% in 2025, and its first-half 2026 profit is forecast to jump over 500%; its subsidiary just signed supply agreements worth 570-855 million RMB — more than Yunnan Germanium's entire 2025 revenue. Zhuzhou Keneng now supplies 6N/7N high-purity indium to overseas InP makers and claims 8N material, breaking what was a US/EU/Japan monopoly, with real sales. Yuguang Gold & Lead has 7N in stable mass production and is in customer validation with Huawei and Accelink.
What actually decides who wins
Two gates remain before Chinese suppliers convert leverage into share: validation and capacity. InP wafer qualification takes months to a year; high-purity indium can take one to five years. Domestic 6-inch wafer self-sufficiency is still under 5%, and China's total InP wafer share is under 10% across all sizes. Yunnan Germanium plans 180,000 wafers this year against Sumitomo's 400,000+.
For buyers, the lesson is structural: when a core AI hardware input gets consolidated in one geography and then regulated, lead times and prices stop following demand curves and start following geopolitics. If your roadmap depends on CPO optics, qualify alternate suppliers now, and treat 6N indium as a strategic input — not a commodity. The last time this played out, in 2011, Japanese buyers scooped up cheap Chinese indium and sold finished components back at dozens of times the price. This cycle, the leverage sits on the other side.
The AI infrastructure story is no longer just about GPUs and Arm CPUs. The next constraint is upstream materials, and compute's supply chain is becoming a map of geopolitical leverage — with indium as its newest choke point. As even the financing of compute evolves, the physical inputs behind it are changing faster.
