- Proposed U.S. restrictions on Chinese optical transceivers could reshape AI data center supply chains, but a policy advocate says growth doesn’t have to stall
- Onshoring optical transceiver production remains a major hurdle, though vendors like AOI, Coherent and Lumentum could help close the supply gap
- Failure to act now risks the industry repeating old mistakes
Can the U.S. government harden critical supply chains against China without choking booming AI infrastructure builds? That question is at the heart of a heated debate about a proposed ban on Chinese-made optical transceivers for data centers, and the answer depends heavily on the shape the government’s restrictions ultimately take.
Major networking equipment vendors are fretting about a clamp-down they fear could dramatically disrupt the supply chain and effectively halt progress on domestic AI infrastructure projects. But those fears are overblown, one policy advocate told Fierce.
“It’s about credible plans to onshore. It’s not about turning off the spigot immediately and causing disruptions,” said Evan Swarztrauber, principal and founder at CorePoint Strategies and former FCC policy adviser to Ajit Pai and Brendan Carr.
Optical transceivers are a critical element of both data center and fiber broadband networks. Two of the largest vendors in the market are Chinese companies Innolight and Eoptolink. In addition to concerns about transceiver firmware security issues, proponents of a ban worry that allowing an adversary like China to control a chokepoint on such critical infrastructure is a liability. Opponents say rash action could stall AI projects.
Swarztrauber argued the government’s twin goals – eliminating a chokepoint for critical infrastructure and supporting AI infrastructure expansion – aren’t necessarily in conflict. The trick is crafting a policy approach that walks the tightrope between those priorities.
Though Swarztrauber stated he doesn’t have any specific knowledge of what the White House and FCC are planning, he speculated a potential optical transceiver ban could be very similar to what the FCC has done with its recent bans on certain Wi-Fi routers and drones. The FCC’s router and drone bans only applied to upcoming devices from foreign vendors, allowing existing and previously approved equipment to continue to be sold.
“I think what you’ve seen is very reasonable exemptions being granted in the case of routers [and] drones that allow companies to continue operating while making shifts,” he said. “I think in general the agency and the administration have shown a willingness to be flexible where it makes sense.”
Onshoring hurdles
While it’s not entirely clear how exactly the proposed ban will be structured or who – the White House or FCC – will take the action, it is largely expected to impact Innolight and Eoptolink. That means Western vendors would be left to pick up the slack once the ban is implemented.
A key concern is whether they have the manufacturing capacity to do so in a timely manner.
In recent interviews with Fierce, two major networking equipment vendors said onshoring production of optical transceivers would be a major hurdle, citing costs, supply chain and workforce considerations. They warned it could take years to complete the process of standing up operations in the U.S.
Swarztrauber, however, said companies like Coherent, Lumentum and Applied Optoelectronics (AOI) have already begun expanding operations and could help bridge the gap.
Asked about its ability to step up in the event of a ban, an AOI spokesperson told Fierce the company has increased its Texas manufacturing footprint from 65,000 square feet to 1.6 million over the past year. It also makes its own chips and lasers in the U.S. and uses an automated manufacturing process, the representative added.
Beyond Texas, AOI also has R&D facilities in Atlanta and engineering and manufacturing facilities in Taipei, Taiwan and Ningbo, China.
The spokesperson noted AOI’s domestic production ramp predates reports of the ban.
“Supply chain diversification has been a priority conversation with our customers for several years now,” the representative said. “AOI's U.S.-based manufacturing has increasingly been part of that conversation, and we believe it's a durable factor in our customer relationships.”
Learning from past mistakes
While other vendors Fierce spoke with previously argued a ban would be painful, Swarztrauber argued it’s up to the government to make policy decisions that are in the country’s best interest.
“I think it should be obvious that we shouldn’t be overly reliant on our number 1 adversary for their technology,” he said. “These companies have shown that their top priority is always going to be profit and shareholder value. It is the role of government to correct of the shortcomings of that approach, and one of the shortcomings is national security.”
He added AI boom also presents an opportunity to learn from past mistakes before they’re repeated. By way of example, Swarztrauber pointed to Huawei’s presence in U.S. telecom networks and the government’s subsequent “messy and thorny and contentious process to try to rip and replace” that gear.
“Do we want to try to do that with data centers five to 10 years from now? I don’t think anyone wants to do that,” he said. The goal is to create a situation where data centers can turn to American vendors when they go through their optical transceiver refresh cycles, he added.
The Huawei rip and replace program and other recent reshoring initiatives like the one undertaken for semiconductors were both tied to supportive measures. In the former case it was funding via the Secure and Trusted Communications Networks Reimbursement Program, and in the latter it was a combination of manufacturing subsidies, tax credits and R&D grants via the CHIPS Act.
Major vendors and an analyst previously told Fierce similar supportive measures would likely be critical to making reshoring feasible.
For his part, Swarztrauber said supportive actions “should be on the table” but also expressed skepticism that they would be necessary for an industry with booming demand and unprecedented access to capital.
“We have a long history in this country of companies saying that they have to do things that are potentially bad for national security because it costs more to do the right thing. I generally view any of those arguments with a lot of skepticism,” he concluded.
Read more about this issue here:
Proposed U.S. ban on Chinese optical transceivers threatens AI data center boom
Ban on data center transceiver imports would be ‘terrible,’ analysts say
Broadband groups warn White House memory prices could upend supply chain