Lumentum CEO Michael Hurlston told an audience at the RAISE Summit in Paris earlier this month that indium phosphide, the compound semiconductor behind every laser in an AI data center, is heading into a supply squeeze worse than what we've already seen with DRAM / NAND, and that Nvidia's decision to fund Lumentum and its biggest competitor at the same time was a response to exactly that.

In his remarks, Hurlston said that telecom customers bought lasers in the hundreds, while Nvidia and the hyperscalers are asking for hundreds of millions. While Lumentum runs five indium phosphide fabs, it's still shipping more than 30% below what customers want. Nvidia's answer, in March, was to write $2 billion checks to Lumentum and Coherent, the two suppliers that, between them, make most of the world's high-speed datacom lasers, with purchase commitments and future capacity access attached to both.

"Between the two of us, I don't think we can service the demand that Nvidia and others are now putting on us to solve this resistance problem in the data center," Hurlston added.

Silicon doesn't emit light

Indium phosphide has a direct bandgap of roughly 1.34 eV, which lets it convert electrical current into photons efficiently. Silicon's bandgap is indirect, so it can guide, split, and modulate light but can't generate it. Every silicon photonics platform in production, including those of Nvidia, Broadcom, Marvell, and Cisco, still needs an indium phosphide laser somewhere in the package to supply the light for silicon to manipulate. Moving from pluggable transceivers to co-packaged optics changes where that laser sits and how it's mounted, but it doesn't remove it from the bill of materials.

Nvidia's marketing claims its photonics switches use four times fewer lasers than an equivalent pluggable deployment, alongside 3.5 times better power efficiency and ten times better network resiliency, all of which are vendor figures. Those savings are per port, and it's that port count that's exploding.

The high-end Spectrum-X Photonics configuration runs 512 ports at 800 Gb/s for 400 Tb/s of switching, and Quantum-X Photonics InfiniBand runs 144 ports at 800 Gb/s. Co-packaging also shifts the laser type toward high-power continuous-wave sources and external laser modules that feed multiple channels, which are harder to build than the electro-absorption modulated lasers inside a conventional pluggable. Coherent's Nvidia agreement covers that category of high-power CW lasers, external laser source modules, and fiber array units.

Capacity at Lumentum and Coherent

Lumentum posted record revenue of $808.4 million in its fiscal third quarter, up 90% year over year, with components revenue of $533 million and pump laser shipments up 80%. On the May earnings call, Hurlston told analysts the company expects its supply line to increase 50% measured from one December quarter to the next, and in the same breath said the supply-demand imbalance on EMLs had widened from the 25% to 30% given a quarter earlier to "somewhere greater than 30%," with pump lasers tighter still. A supplier growing output by half a turn per year and losing ground anyway is a clean measure of how steep the demand curve is.

Coherent's 6-inch indium phosphide line yields more than four times as many devices as its 3-inch line at less than half the cost, CEO Jim Anderson told investors on the company's fiscal Q3 call. Anderson said EMLs, CW lasers, and photodiodes are all in production on the 6-inch line with yields above the legacy 3-inch lines, and that internal capacity would double by the end of the June quarter, one quarter ahead of plan, then more than double again by the end of 2027. Coherent's revenue hit a record $1.8 billion, up 21%, with data center and communications now 75% of the total against roughly 41% a year earlier, and backlog stretching into 2028.

Logic and memory moved to 300mm wafers in the early 2000s. Indium phosphide is a brittle, expensive, small-boule material where the industry-wide upgrade currently underway is 3-inch to 6-inch, roughly the transition silicon completed in the 1980s. Lumentum's fifth fab, announced in March, is a converted Qorvo gallium arsenide plant in Greensboro, North Carolina, described as 4-inch and 6-inch compatible and ramping around 2028.

Running through China

Indium is recovered as a byproduct of zinc refining, so its output can't be scaled independently of zinc economics, no matter how much laser demand there is. The USGS Mineral Commodity Summaries 2026 put China at an estimated 760 tonnes of roughly 1,100 tonnes of global primary refined indium in 2025, about 69%, and recorded a 72% year-over-year fall in unwrought indium exports between September 2024 and September 2025 after Beijing placed the metal under export controls in February last year. The U.S. warehouse price averaged about $390 per kilogram in 2025 against $340 in 2024.

AXT's Chinese subsidiary Tongmei had to obtain Ministry of Commerce export permits, granted in June and August 2025, before it could resume shipping indium phosphide substrates out of China. The fabs Nvidia is funding sit downstream of that licensing regime, and the wafers going into them aren't made in the United States in meaningful volume.

DRAM contract prices rose 90% to 95% quarter over quarter in Q1 2026, the largest quarterly increase TrendForce has recorded, and the firm forecast a further 58% to 63% in Q2 with NAND up 70% to 75%. HBM is sold out for 2026. Hurlston is measuring his warning against a genuinely historic crunch, which makes it a strong claim rather than a throwaway one, and he runs a company whose valuation depends on the shortage persisting.

LightCounting's April 2026 market forecast puts current transceiver demand about 30% above supply, matching Lumentum's own figure, but states that the shortages should be gone by the end of 2026 and cuts expected Ethernet transceiver growth to 65% for the year after 82% in 2025 and 93% in 2024. Coherent, hitting its capacity doubling a quarter early, points the same way. The distinction from memory is that the fix here is a wafer-size transition already running in production with yields ahead of the old node, not a new fab that takes three years to build.

Reuters has named Shanghai Aishengna Electronic Technology Group as the state-owned company producing China's first domestic immersion deep ultraviolet lithography (DUV) scanners, a day after news of the program broke without identifying the manufacturer. Aishengna was established in August 2023 with RMB 7 billion, around $1 billion, in registered capital and is thought to have absorbed engineering teams from Shanghai Yuliangsheng Technology and Shanghai Micro Electronics Equipment.

Aishengna has been named by a single source who declined to be named, and its shareholders, SMEE and Yuliangsheng, didn’t respond to requests for comment. SMIC has been testing a Yuliangsheng immersion tool since September 2025, and first deliveries are slated for SMIC, Hua Hong Semiconductor, and ChangXin Memory Technologies.

Photoresist, coater tracks, and light sources

Tokyo Electron held an 89% share of the global coater/developer market in 2022, per Shared Research's analysis of the company's own disclosures, with its chief executive putting the figure near 90% and at 100% for EUV production. A scanner only exposes the wafer, however. It’s the track that's responsible for applying the resist film, baking it, and developing the pattern after exposure, and it has to be mechanically and thermally matched to the scanner in a single cluster, which is why the two are bought together. Shenyang Kingsemi has reached 28nm-class track capability and is currently targeting 14nm.

JSR, Tokyo Ohka Kogyo, Shin-Etsu, and Fujifilm hold a combined 72.5% of the ArF photoresist market, while Chinese suppliers hold under 1% of ArF immersion resist specifically. Nata Opto-electronic built a 25-ton ArF line, later expanded to 50 tons, passed customer qualification in December 2020, and completed project acceptance in 2024 with little volume to show for it. Xuzhou B&C says its ArF immersion products cover 45nm to 28nm and can stretch to 14nm, and chairman Fu Zhiwei has put mass production of China's core advanced resists five years out.

Cymer, Gigaphoton, and Coherent hold more than 80% of the ArF excimer laser market between them, and Cymer has been an ASML subsidiary since 2013. Beijing RSLaser shipped China's first high-power domestic excimer laser in 2018 under the national Project 02 program and has a 4 kHz 193nm ArF prototype aimed at 90nm and 65nm-class tools, generations behind what 28nm immersion requires.

Carl Zeiss SMT has been ASML's sole projection optics supplier since 1983, and Zeiss SMT revenue grew from €1.2 billion in 2016 to €4.1 billion in 2024. It’s not currently known what, if any, Japanese tooling is inside the Aishengna machines, but excimer sources and precision optics are areas where Chinese substitution is believed to be lacking.

CXMT

CXMT is projected to reach around 350,000 wafer starts per month by the end of 2026, roughly 25,000 short of Micron, up from 40,000 in 2020. DRAM scaling at 1a and 1b-class nodes runs on immersion multipatterning because CXMT has no EUV access, which makes any potential ramp lithography-gated rather than cleanroom-gated. DRAM contract prices rose 93% to 98% quarter on quarter in Q1 2026, and TrendForce projected a further 58% to 63% in Q2, lifting DRAM industry revenue 81% to $97 billion. A domestic immersion source is therefore worth having to CXMT, even at inferior overlay and throughput.

A DUV-only 7nm flow needs roughly 19 spacer-defined multipatterning masks from the front end through the second metal layer, against about 10 for an EUV-based N7+ process, by one published comparison of SMIC's process. SemiAnalysis has put SMIC's 7nm defect density near 0.14, around double TSMC's N5 and N6. ASML CEO Christophe Fouquet told analysts during the company's July earnings call that rising DRAM lithography intensity partly reflects "the increased replacement of multi-patterning with more cost-effective single-exposure EUV." As such, every exposure China adds to compensate for the missing EUV burns scanner hours a thin domestic fleet doesn't have.

The MATCH Act

China fell to about 14% of ASML's sales in Q2 2026 from 33% across 2025, and installed base management, the service and upgrade business, brought in €2.8 billion of ASML's €9.3 billion in second-quarter revenue. H.R. 8170 would ban both the export and the servicing of immersion DUV systems to any destination in China and designate SMIC, Hua Hong, Huawei, CXMT, and YMTC as restricted entities by statute. Former ASML chief executive Peter Wennink has said the company can service most Chinese tools, but not with spare parts of U.S. origin that fall under export control, which is the mechanism that the MATCH Act would widen.

The bill remains in committee after clearing the House Foreign Affairs Committee in April, with a Senate companion filed as S. 4281, and no floor vote yet scheduled. Its 150-day allied-alignment clause would also reach Nikon, which sold 11 ArF immersion systems in FY2024 and none in the first three quarters of FY2025, and which plans to deliver a new immersion prototype to a major chipmaker by 2027. ASML expects about 130 immersion shipments this year and intends to raise immersion capacity 30% in 2027, with a further 30% under investigation for 2028.

As for Chinese providers, SMEE prototyped its SSA600 ArF tool in 2011 and never reached sustained commercial sales, and a late-2023 shareholder claim that the company had developed a 28nm machine was subsequently retracted. SiCarrier showed etch, CVD, PVD, and ALD tools at SEMICON China 2025 without a lithography system, and a December 2025 government contract reported as a lithography award turned out to cover a KrF tool at 110nm. We’ve previously assessed that China’s toolmakers are more than a decade behind the market leaders.

The AI Futures Project's June forecast puts a commercially viable domestic 7nm-capable immersion scanner between 2032 and 2038, with a median of 2035, and claims ASML holds 98.7% of the immersion market today. Five machines in 2026 would be under 4% of ASML's annual immersion output, and each would still need a coater track, a qualified ArF immersion resist, and an excimer source to print a single wafer; China leads in none of those three.