London, June 22 (Argus) - The demand for indium phosphide (InP) semiconductor wafers required for AI data center photonics has soared, driving companies to invest in new production capacity to alleviate the supply shortage.
The US Department of Commerce has signed a preliminary agreement under the "Chip and Science Act" to provide up to 50 million US dollars in direct funding to the US optical materials manufacturer Coherent. This sum of money will be used to expand the company's factory in Sherman, Texas - the company claims this is the world's first and largest large-scale 150-millimeter (6-inch) indium phosphide semiconductor manufacturing base.
Coherent stated last month that "given the exceptionally strong demand environment and the limited capacity of indium phosphide across the industry", expanding production is one of its top priorities.
The company plans to double its indium phosphide wafer production capacity in Texas by the end of 2026, and again double it by the end of 2027. Moreover, the yield rate of the 6-inch (15.2 cm) production line has exceeded that of the 4-inch production line.
Jim Anderson, the CEO of Coherent, stated that the transition to 6-inch phosphorus-doped indium gallium arsenide is the main driving force behind the company's long-term expansion plan. Coherent has already delivered the first batch of optical module transceivers using components from the 6-inch production line in the first quarter.
The AI leader Nvidia invested 2 billion US dollars in Coherent in March this year and signed a supply agreement that will last until the end of this decade. This reflects that downstream equipment manufacturers are increasingly signing long-term contracts to ensure the supply security of indium phosphide-related components.
Indium phosphide photonic devices can enable high-speed optical interconnections between processors, memory, and systems within AI data centers. As AI workloads continue to expand, these components are becoming increasingly crucial for breaking through data connection bottlenecks and building more powerful and energy-efficient computing architectures.
Coherent stated that the Texas factory will play a crucial role in increasing the production of laser component modules, including those products that are in collaboration with NVIDIA. Given the smooth progress of the 6-inch production line expansion, the company also plans to launch 6-inch indium phosphide production at its third manufacturing site in Zurich, Switzerland.
Manufacturers in the Asia-Pacific region are also dealing with supply shortages. Japanese company JX Advanced Metals plans to invest up to 120 billion yen (approximately 744.1 million US dollars) over the next four years to increase the production capacity of indium phosphide substrates, a significant increase from the previously announced 30 billion yen plan.
In addition to expanding the production capacity at the Isohara Works in Nishi-Tsukui City, JX also plans to establish new production capacity in Hitachinaka City. The goal is to increase the phosphorene indium substrate production capacity to 7 to 10 times the current level.
JX is currently engaged in price revision negotiations with the client, aiming to establish a stable supply framework.
As customers began to secure supplies, AXT (American Crystal Technology Company) stated that its subsidiary, Beijing Tongmei Xtal Technology, has signed an agreement with Nanjing Casela Technologies to supply indium phosphide substrates throughout the entire year of 2027. AXT recently publicly pointed out that the government's restrictions on the export of indium phosphide have exacerbated the market supply shortage.
Casela has committed to purchasing a specified quantity of indium phosphide substrate wafers, with a total value of 173 million yuan (approximately 25.4 million US dollars), to be delivered on a monthly basis. According to the agreement signed on June 11th, Casela is required to pay 50% of the total price as a deposit within 15 working days after signing the contract, and the remaining 50% must be paid by December 31st or before.
Casela can flexibly increase its purchase volume based on the further rapid growth of the indium phosphide market. Tongmei Crystal has agreed to "prioritize meeting Casela's excess demand, subject to the availability of production capacity", and the terms and conditions will not be inferior to those provided to customers of the same status. The pricing and other terms for any excess supply will be subject to a separate supplementary agreement.
Furthermore, the communication equipment manufacturer Nokia announced a significant expansion of its advanced semiconductor testing and packaging facility located in Pennsylvania. Nokia released a series of digital signal processors and optical components constructed using indium phosphide and silicon photonics technology in March this year.
The Nokia factory located in Allentown is one of the few bases in the United States that can provide advanced testing and packaging of photonic chips, and integrate them into optical modules for use in AI and telecommunications infrastructure.
The company is increasing the production capacity of this base by up to 10 times. They are installing new manufacturing equipment and expanding the factory area. The new production capacity is expected to be put into commercial operation by the end of the third quarter.
This investment includes a contribution of approximately 30 million US dollars from Nokia, a 10 million US dollar federal tax credit provided by the "Chip Act", and 4 million US dollars of support from the Pennsylvania state government. This expansion project is part of Nokia's plan to invest 4 billion US dollars in research and manufacturing in the United States.
