- A proposed U.S. ban on Chinese optical transceivers could disrupt a critical supply line for AI data centers and telecom networks
- Networking vendors warn domestic alternatives lack the capacity to quickly replace market leaders Innolight and Eoptolink
- Reshoring optical transceiver manufacturing could take years, raise costs and slow the U.S. AI infrastructure boom
Two major networking equipment vendors told Fierce a U.S. government ban on Chinese-made optical transceivers could completely derail the country’s booming AI data center buildout.
Though silent in public, networking vendors in interviews with Fierce voiced a mixture of confusion and concern about recent reports that the White House and Federal Communications Commission (FCC) are looking to shut Chinese vendors out of the domestic market.
At this point the scope of the ban – whether it will cover finished transceivers made outside the U.S. or all foreign-made components – is unclear. But the impact on AI data center buildouts would be “severe” regardless, the first vendor said.
“It would effectively halt progress at all in-U.S. buildouts. There would be nothing taking place, virtually nothing,” the first vendor said. “Nobody is building [transceivers] in the U.S. at this point at any volume.”
What is happening with the optical transceiver ban?
Optical transceivers are used to send data across networks, making them a critical component for data center and telecom operators alike. Chinese vendors Innolight and Eoptolink currently lead the optical transceiver market, meaning a ban would remove a significant supply stream for U.S. customers.
The U.S Department of Defense (Department of War) took the first step toward ousting Innolight in June, adding the company to its 1260H list. The list identifies “Chinese military companies” and prevents government contractors from procuring supplies from sources on the list.
On August 4, Reuters reported that the White House and FCC were working on a broader measure that would ban all Chinese-made optical transceivers. The FCC might execute the ban by, for instance, adding Innolight and Eoptolink to its “Covered List,” as it has done with foreign router, drone and power inverter suppliers in recent months. Entities on the covered list cannot receive new equipment authorizations from the FCC, which are required prior to import.
But there is significant confusion in the market about the scope of the ban, particularly whether it will cover only finished optical transceiver products or all the components inside them.
“The impact ranges pretty wildly based on the answer to that question,” the first vendor told Fierce. “If it’s a finished good, that’s one thing. If it’s a laser, that’s a very different thing in terms of the impact to the industry because most lasers come through China.”
It is also not clear whether the ban will include just Innolight and Eoptolink or all companies with a relationship to China, such as supply subsidiaries.
Why does the U.S. want to ban Chinese optical transceivers?
Motivations behind the ban are also murky, given it’s not very easy to exfiltrate data via optical transceivers. But both vendors speculated the government could be aimed at eliminating a chokepoint for critical infrastructure.
Dell’Oro Group VP Sameh Boujelbene told Fierce optical transceivers are “one of the largest remaining Chinese positions in the AI hardware supply chain.”
But like the vendors, she warned that the proposed restrictions “could create meaningful near-term supply chain challenges for AI data center deployments,” noting “it is not yet clear whether suppliers outside China have sufficient manufacturing capacity and qualified supply chain to fully replace that capacity in the near term.”
In short, the restrictions could slow AI infrastructure buildouts while vendors adjust and scramble to ramp production and complete customer qualifications, she said.
“It would create some pain because there would be a supply-chain constraint that would either slow down data center builds or it could increase the cost of those transceivers,” the second vendor said.
What is the outlook for networking vendors?
It might seem at first glance that cutting off Chinese vendors would be a boon for Western suppliers. But supply chain and manufacturing realities mean those networking vendors will be facing a significant uphill battle if the ban is implemented, the vendors told Fierce.
Vendors would need to foot extremely high capital costs to onshore manufacturing and would also have to undertake a massive workforce training program since much of the skilled labor used in optics production is in Southeast Asia.
Then there’s the matter of shifting the supply chain and either establishing a presence for component suppliers in the U.S. or having components shipped in.
“The supply chains are basically optimized around production in Malaysia or China,” the first vendor said. “So, it’s not just building a factory that can build a transceiver, but it’s having all suppliers around you that can support sourcing all that material.”
Both vendors indicated it would take two to three years to stand up a rush job operation and even longer – perhaps five to 10 years – for the entire ecosystem to fully reshore.
They also worried that customers might not be willing to pay the higher prices attached to gear made in America.
“There’s sort of a naïve view [among customers] that ‘yes, we want made in America, but we want it at the same price as if it was made in China.’ And that is a dysfunctional view,” the first vendor said. “That has to get reconciled…If the customers are not willing to pay a premium for it being made in the United States, things are going to break down or people are going to find ways around that.”
The first vendor said customers are expecting a 5-7% premium for made in America gear, while manufacturers expect the figure to be closer to 25%.
“Ultimately, the risk is that we’re forced to onshore and our equipment gets priced out of competition,” the second vendor added.
Another consideration is the potential impact on other industries – like broadband and wireless – if hyperscalers gobble up a tight supply of U.S. made kit. The first vendor said others with less buying power could be left holding the bag, just as has happened with the memory shortage.
What would make the ban more palatable?
The vendors indicated there are steps the administration could take to make a ban more palatable and incentivize domestic investment. Both argued tariffs are not the right vehicle and are more of a force mechanism rather than an incentive. They pleaded for more carrot and less stick.
The second vendor pointed to the $42.5 billion Broadband Equity, Access, and Deployment (BEAD) program as an example of onshoring done right. The BEAD program requires those receiving funding to comply with Build America Buy America (BABA) regulations, which mandate that certain network equipment be produced in the U.S.
The second vendor said BEAD onshoring was a success because the Commerce Department spoke with vendors about what would be feasible to build in the U.S. BEAD also offered the assurance that customers would pay a premium for BABA-compliant network gear.
An industry analyst, who Fierce granted anonymity to speak about policy, similarly suggested a ban would need to be backed by some sort of support mechanism. The analyst pointed to the way the CHIPS Act supported TSMC’s decision to move more manufacturing to the U.S. as an example.
The right approach would include a ban coupled with comprehensive policy incentives for companies to reshore manufacturing, the analyst said.
“If there’s a real interest in protecting the country from economic chokepoints for critical technologies, then I think there needs to be some encouragement in some way,” the second vendor said.
“The administration has to be cognizant of the fact that anything we do to slow down U.S. deployment of this AI capacity is a bad thing relative to our position with China,” the first vendor concluded. “These actions could slow down, would slow down for sure, the hyperscalers building this capability out and some of the neocloud players like OpenAI building this capability out. That would be a disaster for us.”
Read more about supply chain issues:
Ban on data center transceiver imports would be ‘terrible,’ analysts say
Broadband groups warn White House memory prices could upend supply chain