Optical component orders have been scheduled all the way to 2029. Who can take on this wave of large orders?

On October 9, Michael Hurlston, CEO of Lumentum, a major optical communication device manufacturer, stated that part of the company's optical device production capacity has been reserved until early 2029, and customers have even started to lock in supplies for 2030. Even with continuous capacity expansion, the company estimates that around 70% of the demand for some products will remain unmet by 2027, while there will still be roughly a 30% supply gap for other products by 2028.

Coherent, another leading optical device enterprise, has moved the timeline for doubling its indium phosphide production capacity one quarter earlier, and plans to further expand the capacity by more than 100% on this basis by the end of 2027. AOI, a U.S.-based optical communication product supplier, completed a $600 million financing on October 5 to continue investing in manufacturing and R&D; JPT announced on October 13 that it had accumulated approximately RMB 1.11 billion of North American fiber optic connector orders within the year.

LightCounting recently projected that the 2026 Ethernet optical module market sales will grow by 120%. From upstream optical chips to downstream modules and connectors, orders and manufacturing investments are increasing simultaneously. With orders scheduled as far out as 2029, can the optical device industry chain cope with this wave of demand?

01 Doubling Production Capacity, While Customers Are Still Locking Supplies In Advance

Over the past two years, the production capacity of Lumentum's core factory in the Tokyo area has been expanded to about 12 times its original level. The company also plans to invest at least 350 million US dollars in this factory and adjacent facilities, and expand the production capacity of its Caswell factory in the UK. Hurlston stated that building new production capacity usually takes three to five years, and some large cloud service customers are willing to share investment risks to secure future supplies.

For optical chip manufacturers, capital for capacity expansion needs to be invested before product delivery, while customers are booking demand for several years later. Long-term commitments can provide a basis for manufacturers to allocate equipment, engineering personnel and manufacturing resources; if the financial support that customers are willing to provide is further implemented, it can also share the upfront investment and help both parties arrange future supply.

In March this year, Lumentum announced the acquisition of Qorvo's existing factory in Greensboro, North Carolina, USA, taking over the facility along with skilled employees and infrastructure, which will be renovated for the production of 6-inch indium phosphide devices. Even skipping the step of building a factory from scratch, the company still estimates that the capacity ramp-up period will last until mid-2028.

This type of capacity expansion cannot be completed simply by adding more module assembly lines. Laser production involves material growth, wafer processing, device testing and packaging, and new production lines must also pass customer verification. After the plant meets the wafer processing conditions, the product power, rate and reliability still need to be stabilized within the customer's requirements to achieve continuous delivery. Existing plants and skilled teams can shorten the preparation process, but cannot eliminate the process introduction stage.

Coherent is also accelerating its investment in the manufacturing end. According to the roadmap announced in September, the milestone for its indium phosphide capacity to double the level at the end of 2025 has been advanced from the fourth quarter of this year to the third quarter; it plans to further expand the capacity by more than 100% on this basis by the end of 2027. 6-inch wafer manufacturing is a key support, and the same plan also arranges capacity expansion for special optical fibers to cover supporting demands beyond optical chips.

On October 13, Linktest, a test equipment manufacturer, disclosed in its performance forecast for the first three quarters that the demand for high-speed optical communications has driven continuous capacity expansion of optical module and optical chip manufacturers, which in turn promoted the sales of communication test instruments and optoelectronic device testing equipment. Manufacturing investments have been translated into equipment procurement. While manufacturers are adding wafer and assembly production lines, they are also supplementing corresponding testing capabilities.

For downstream buyers, seeing capacity expansion plans does not mean that they can purchase more devices right now. The ramp-up period of Lumentum's new factory and the phased release of Coherent's production capacity will all correspond to customers' future generations of products. The portion locked in by long-term contracts has been allocated in advance, and how much of the newly added production capacity can enter the spot procurement market cannot be simply calculated based on the capacity expansion multiplier.

02 From Selling Devices to Delivering Complete Component Sets

On September 21, Coherent launched the PhotonLink platform, integrating lasers, silicon photonic devices, precision optical components, optical fibers and photodetectors into a single product system together with assembly and testing capabilities. Customers can either purchase individual devices, or directly procure complete optical components. In addition to supplying devices, Coherent hopes to further undertake the assembly and testing business of optical components.

This business targets the trend that optical connections are moving closer to computing and switching chips. Co-packaged optics and near-packaged optics are commonly referred to as CPO and NPO respectively, both of which shorten the transmission distance of high-speed electrical signals to reduce loss and power consumption. However, after the optical units are close to the chips, lasers, optical fibers, packaging and heat dissipation must cooperate more closely. Customers can no longer just purchase a laser with higher performance and then piece together other links as before.

Coherent's existing manufacturing foundation exactly covers multiple of these links. The company disclosed that its data center business has shipped a cumulative total of more than 300 million indium phosphide lasers, and its capabilities also include special optical fibers, precision optics and final assembly. Combining these businesses can reduce customers' workload of coordinating multiple suppliers separately, and also allow Coherent the opportunity to increase the proportion of products and processes it provides in each system.

At present, Coherent has more than ten customer cooperation projects in each of the CPO and NPO directions, and has established cooperation with major customers in both directions and secured long-term agreements. The company plans to start generating CPO business revenue oriented to cluster expansion in the fourth quarter of this year, while CPO and NPO business oriented to inter-accelerator connections is scheduled to start contributing revenue in the second half of 2027. The currently expanded manufacturing capacity is also preparing for the subsequent volume ramp-up of these projects.

Optical module manufacturer Eoptolink also predicted on September 21 that its NPO products will gradually see order delivery demands in 2027, and the shipment volume will further increase in 2028. When customers choose new packaging methods, they will also rearrange the division of labor among these suppliers.

Viavi Photonics, in the exhibition materials released on September 24, also showcased high-speed optical engines, external laser sources, fiber arrays and custom optical packaging, and introduced its silicon photonic wafer back-end technology platform. The business it is striving for involves accurately connecting chips and optical fibers, completing packaging, and supporting mass manufacturing. As customers move more optical functions closer to chips, these processes still need to be completed by professional suppliers, and changes in product forms do not mean that the original processing capabilities become useless.

On October 12, the in-rack optical connection demonstration announced by Lumentum, interconnected chip manufacturer Astera Labs and Corning showed another cooperation mode: the three companies provided optical interconnection platforms, switching chips and multi-mode fiber connections respectively, and combined them into an operating system. The laser platform used by Lumentum is built on the mass manufacturing foundation of its 3D sensing for smartphones, and is being tried to enter the data center connection scenario.

This solution is still in the proof-of-concept stage and cannot be counted as mass production orders for now, but the manufacturing division of labor has been specified to the participating enterprises. Coherent hopes to deliver more integrated and tested components, Viavi provides optical engine and packaging manufacturing, while Lumentum jointly verifies new applications with chip and optical fiber manufacturers. When customers purchase next-generation optical connections, suppliers are not only competing for the number of devices, but also for assembly, verification and subsequent mass production work.

03 Module and Supporting Manufacturers Are Receiving More Business

Eoptolink stated in response to investors on September 21 that 1.6T optical modules have entered the stage of continuous volume ramp-up, but the supply chain is still relatively tight, and the company prepares materials in advance through methods such as locking agreements and prepaying for goods. The next day, the company further confirmed that its factories in Chengdu and Thailand are continuing to expand production. For module manufacturers, expanding assembly capacity and ensuring upstream device supply must be carried out simultaneously to convert customer orders into shipments.

Pluggable optical modules will also have subsequent products launched. On October 12, Cisco and NVIDIA announced the USFP design plan, intending to promote the open specification for next-generation high-density pluggable modules, retaining features such as independent module replacement and multi-supplier interoperability. For customers that have established manufacturing and maintenance systems, these capabilities are still valuable, and module manufacturers need to prepare for both the volume ramp-up of existing products and the introduction of next-generation products at the same time.

The $600 million equity financing completed by AOI this month is its third similar financing within the year. The company plans to continue investing in production and R&D equipment to expand its data center optical device manufacturing capacity, and the funds will also be used for working capital and debt repayment. The previously disclosed manufacturing site in Texas has expanded from 65,000 square feet to 1.6 million square feet within one year. After the site is expanded, equipment and personnel still need to be invested, and this round of financing will continue to support the manufacturing layout.

On October 15, optical device company FiberHome Laser Technology forecast that its net profit attributable to shareholders for the first three quarters will increase by 142% to 162% year-on-year. The company attributes the growth to the expanding demand for high-speed optical modules and optical devices, the expansion of new products and new customers at home and abroad, as well as the scale effect and cost reduction brought by the expansion of production and sales scale. The increase in demand has been reflected in the operating results of device enterprises, and the improvement in profitability is also related to whether manufacturers can expand delivery and control production costs.

The approximately RMB 1.1 billion orders disclosed by JPT come from a North American fiber optic connection solution provider, covering the cumulative procurement from the beginning of the year to the announcement date, with products including fiber patch cords and connection boxes. These components are responsible for connection and cabling in the system, and are in different links from the aforementioned lasers and optical modules. The expansion of data centers requires connecting chips, modules and optical fibers into an operable network, so supporting enterprises are also receiving actual procurement, and orders are not only concentrated in several leading optical chip manufacturers.

The procurement layout of overseas customers also faces policy variables. On September 24, U.S. senators introduced a bill to restrict optical transceivers from Innolight, Eoptolink and their affiliated entities from being used in federal government critical system procurement. As of October 15, the bill is still in the stage of being introduced and referred to the committee; even if it is enacted into law, the relevant restrictions are proposed to take effect five years later, and exemption arrangements will be retained, which cannot be equated with the fact that the U.S. commercial market has stopped procuring Chinese optical modules.

AOI previously stated that its capacity expansion was earlier than the relevant restriction rumors, and discussions among customers on supply chain diversification have also lasted for several years. The construction of overseas production capacity by Eoptolink helps to ensure delivery, but procurement restrictions may also involve supplier identity and component sources, which cannot be dealt with simply by changing the assembly location. For customers who are increasing procurement, reselecting suppliers still needs to go through product verification and capacity preparation, and policy expectations will not automatically become orders that an enterprise can fulfill.

This article is from the WeChat Official Account "Semiconductor Industry Review" (ID: ICViews), author: Jun Xi, published with authorization from 36Kr.