China’s Critical Material Restrictions Threaten US AI Hardware Supply Chain

China’s tightening control over critical raw materials is creating significant bottlenecks for the United States’ burgeoning artificial intelligence industry. New export restrictions on indium phosphide, a key component for high-speed optical chips, are driving up prices and threatening the scalability of advanced data centers and AI infrastructure.

The issue came to prominence when Jim Anderson of Coherent, a supplier of optical components, sought to understand delays in China’s export licenses for indium phosphide. This material is essential for optical chips, which are poised to replace traditional copper interconnects within data centers to handle the increasing demands of AI workloads. These optical chips offer superior latency and bandwidth, crucial for improving the performance of AI platforms.

Nvidia, a major player in AI hardware, has recognized the importance of this technology, investing $4 billion in Lumentum and Coherent, two companies involved in advanced photonics. The company anticipates that laser-based chip interconnects will be necessary to overcome the physical limitations of current copper technology. However, the production of these advanced components relies on strategic materials, many of which are under China’s control.

Key facts

Strategic Material Control

China’s influence over strategic materials, including rare earth elements, extends to indium phosphide. The country began implementing supply chain restrictions on indium phosphide in February 2025. This move has reportedly led to a 250% surge in prices for the material and has prompted U.S. technology firms to lobby for a reversal of these policies.

The primary concern is not a direct ban on finished products but rather a slowdown in the supply chain by controlling the export of essential raw materials. This strategy impedes the rapid scaling of the optical module ecosystem, which is critical for hyperscale data centers powering AI development.

Supply Chain Domino Effect

The current situation with advanced photonics mirrors challenges faced in the NAND flash memory market. Manufacturers like Lumentum have reported that their production capacity is fully booked through 2028, despite efforts to quadruple output. This scarcity affects not only U.S. companies but also Taiwanese firms such as VPEC and LandMark Optoelectronics, which are experiencing supply disruptions. Even with expanded production facilities, the reliance on raw materials sourced from China, coupled with export controls, creates an insurmountable bottleneck.

China’s Strategic Ambitions

Concurrently, China’s domestic technology sector is experiencing significant growth. Chinese tech companies are rapidly expanding their capabilities in both consumer-level components and high-end technologies like photonics and semiconductors. China has outlined a clear roadmap to become a global technological superpower by 2030, with a strategic focus on securing the necessary materials and identifying key companies that will drive this future. Firms like Huawei and SMIC are prominent, but others, such as Yuanjie, which specializes in photonics components for data centers, are also seeing substantial growth.

This dynamic underscores a broader geopolitical and economic competition, where control over critical resources directly impacts the technological advancement and strategic capabilities of nations. The U.S. reliance on China for these essential materials highlights a vulnerability in its AI hardware supply chain, necessitating strategies for greater material independence.

Source: China’s Critical Material Restrictions Threaten US AI Hardware Supply Chain, Xataka IA, https://www.xataka.com/materiales/china-esta-estrangulando-materiales-criticos-que-eeuu-necesita-para-su-industria-tecnologica-guerra-a-dos-velocidades