Summary of Key Points
On August 5th, the A-share markets for optical modules and CPO (Component Packaging Optical) sectors opened significantly lower due to rumors that the United States intended to restrict the import of new types of Chinese optical modules. Leading companies such as Zhongji Xuchuang and NeoPhotonics saw their shares drop by more than 10% before rebounding driven by investors looking for bargains, but still closed in the red (Zhongji Xuchuang down 7.27%, NeoPhotonics down 5.29%). It is important to note that these rumors have not yet turned into official policy, and China has already taken countermeasures by including certain U.S. compliance testing companies on a blacklist. Key points include: leading companies have already established overseas production capacity to mitigate export risks; potential bottlenecks in upstream materials could reduce the effectiveness of the restrictions; and in the long run, it will be the product quality that determines competitiveness.
I. What are the rumors, and why did they cause panic in the market?
The rumors originated from media reports on the evening of August 4th, suggesting that the U.S. Federal Communications Commission (FCC) planned to restrict the import of new models of Chinese optical modules, which are essential components for high-speed data center transmissions, similar to "fiber optic connectors." Optical modules are a critical link in the AI supply chain, as large AI models require numerous data centers, and these modules act as the "highways" for data transfer within those centers.
The market reaction was immediate and intense: Zhongji Xuchuang's shares opened down nearly 14%, and NeoPhotonics' shares fell by more than 10%, leading the sector's decline. The reason is simple: domestic optical module manufacturers rely heavily on overseas sales (with Zhongji Xuchuang generating over 90% of its revenue from overseas, and NeoPhotonics nearly 96%). If the U.S. imposes restrictions, these companies' orders would be directly affected. However, the entry of investors looking for bargains indicates that some believe the rumors may not materialize or that the leading companies have prepared for such scenarios.
II. Leading companies are well-prepared with overseas production capacity
In fact, these companies had anticipated geopolitical risks and had already moved their production capacity overseas:
- Zhongji Xuchuang has five production bases globally, including one in Thailand and one in Taiwan (the Thai facility began operations in 2022).
- By 2025, its overseas production capacity is expected to reach 19.91 million units, 2.4 times its domestic capacity of 8.15 million units; by the first quarter of 2026, it aims to have five times more overseas capacity than domestically, with an utilization rate of 87.3%.
Industry analysts point out that many products are no longer manufactured in mainland China and are instead produced in Southeast Asia (Thailand, Malaysia, etc.), effectively avoiding the export restrictions.
This explains why the company's stock price rebounded after the market opening, as investors realized that the impact on leading companies might not be as severe as initially feared.
III. Upstream material bottlenecks could exacerbate supply shortages
The production of optical modules is not straightforward; key challenges lie in upstream materials:
1. EML chip shortage: The biggest bottleneck for 1.6T optical modules (high-end products needed for AI data centers) is the 200G EML chip, with a supply-demand gap of 20%-30%, which could persist until 2027. Even foreign manufacturers are in short supply of this chip.
2. Indium phosphide substrate dependence: The core material for optical chips, indium phosphide, is largely imported, and even U.S. companies face shortages.
3. China's leadership in silicon photonics: To circumvent the EML chip shortage, the industry is moving towards silicon photonics (which use silicon as a cheaper and more scalable material), and Zhongji Xuchuang is a global leader in silicon photonics production.
Therefore, even if the U.S. restricts Chinese optical modules, it may be difficult to find sufficient alternative suppliers, which could slow down the construction of AI data centers.
IV. What do analysts think?
- Foreign institutions: Banks like Citibank and JPMorgan believe that if the restrictions take effect, it would benefit domestic U.S. manufacturers (such as Coherent and Lumentum), potentially leading to additional orders worth billions of dollars.
- Domestic institutions: China International Capital Corporation (CICC) suggests that short-term market fluctuations are driven by sentiment, and in the medium term, the success will depend on product quality, yield rates, and delivery timelines. While policies can change the shipping locations, they cannot alter the fact that Chinese manufacturers dominate the market (with 70% of global share and over 70% of the high-end 800G/1.6T segments).
V. China's countermeasures
In response to the FCC's actions, China quickly took steps:
- The Ministry of Commerce added the relevant U.S. testing companies to a blacklist, prohibiting domestic organizations and individuals from doing business with them.
- The Chinese Embassy in the U.S. urged the U.S. to stop smearing Chinese companies and warned that "necessary measures will be taken if Chinese interests are harmed."
This shows that China is not indifferent to the situation. If the U.S. implements restrictions, there could be further negotiations between the two countries. However, since the rumors have not yet become official policy, investors should not panic excessively.
Conclusion
This incident is a typical case of market sentiment being influenced by rumors. However, the leading companies' overseas production capacity and upstream material bottlenecks mitigate the actual impact. For individual investors, the key points to watch are whether the rumors will materialize and any changes in the orders of these leading companies. In the long run, optical modules are a core component of AI infrastructure, and Chinese manufacturers' technological advantages remain unshaken. Short-term fluctuations should not deter investment in this sector.