Upstream supply of optical modules is tightening! Domestic substitution is accelerating, and major downstream manufacturers have responded that the impact is limited.

March 27, Science and Technology Innovation Board Daily (Reporter Wu Xuguang) The AI computing power wave continues to sweep, and a supply alert has been issued upstream of the high-speed optical module industry chain. According to the latest industry information, leading global Faraday rotator manufacturers, such as Japan’s Granopt, have reduced their relevant production capacity, raising significant concerns about the stability of the supply chain.

As one of the upstream raw materials for optical modules, the production of Faraday rotators requires continuous operation of high-temperature furnaces to ensure product performance and parameter stability. Once the furnace is stopped and cooled, companies must restart the production line, recalibrate crystal growth, and adjust all process parameters, which can take as long as six months.

Recently, the reporter from the Science and Technology Innovation Board Daily has confirmed through multiple sources that a few domestic manufacturers, such as Fuzhong Technology and Tengjing Technology, can achieve batch supply of Faraday rotators and supporting magneto-optical crystals, and are accelerating the promotion of localization alternatives. However, the overall capacity layout remains relatively low; on the downstream application terminal side, this component, as the core part of optical isolators, only exerts stocking pressure on small and medium-sized optical module manufacturers, while leading manufacturers like Zhongji Xuchuang and Guangxun Technology have sufficient stock due to advance orders and are not significantly impacted in production and delivery.

▍Supply-Demand Imbalance Drives Up Faraday Rotator Prices

The reporter from the Science and Technology Innovation Board Daily has noted that with overseas core manufacturers reducing capacity and the downstream optical module sector experiencing continuous demand surges, the global supply-demand pattern for Faraday rotators is tightening, leading to increasing price pressures and forcing the industry to accelerate the diversification of the supply chain and the localization of alternatives.

On March 26, a responsible person from a domestic Faraday rotator manufacturing enterprise stated in an interview with the Science and Technology Innovation Board Daily that from an industry perspective, the logic of tightening overseas supply and speeding up localization alternatives is valid. “American and Japanese companies have advanced technology and dominate the vast majority of the global market share, but they do not possess rare earth resource advantages. Once they cannot obtain the rare earth raw materials needed for production, their capacity will inevitably be affected.”

However, another optical module industry insider stated that there is no need to overly amplify the suddenness of this event, as the shortage of Faraday rotators is not a new problem that has recently emerged; throughout last year, this material was in a state of tight supply.

This optical module practitioner further indicated that from last year to this year, the global computing power center construction has accelerated, resulting in explosive growth in the optical module market demand, while upstream material manufacturers have lagged behind in expanding production, making it difficult to match the overall demand growth, thus leading to a phased shortage.

Industry agency LightCounting estimates that current optical module demand has exceeded supply by more than double, with demand for 800G optical modules expected to remain strong, and 1.6T optical modules entering a large-scale release phase by 2026, with overseas major clients having raised their procurement plans for 2026 to 20 million units.

At the same time, the implementation of rare earth export controls in January this year has further exacerbated the risk of material supply disruptions and production line shutdowns for major international companies, increasing uncertainty in the global Faraday rotator supply chain.

It should be noted that the supply tightness has directly driven up product prices.

The aforementioned optical module industry insider noted that the price of Faraday rotators saw a significant increase throughout last year, with a cumulative increase of 50%. “Although this component is essential for optical module production, it is a low-cost part and not a core high-value component. The share of Faraday rotators in the overall cost of optical modules is extremely low, only in single digits or even lower. Even if prices rise significantly, the pressure transmitted to downstream is limited.”

▍Industry Chain Companies Reveal Latest Capacity Layout

Fuzhong Technology focuses on products such as laser crystals and nonlinear optical crystals. It is reported that the company is a listed company capable of mass-producing high-end magneto-optical crystals like TGG/TSAG and is also one of the domestic alternatives to overseas giant Faraday rotator products.

On March 25, a person from Fuzhong Technology’s board secretary office responded that the company has laid out magneto-optical crystal products, including Faraday rotators, which can benchmark against similar products from the U.S. and Japan. However, currently, the relevant business accounts for a small proportion, around 1%, and only small batch supply has been achieved. Regarding future expansion plans, they stated that capacity layout would be flexibly adjusted based on market conditions.

Tengjing Technology, as a precision optics manufacturer, mainly produces precision optical components, optical fiber devices, and optical testing instruments, which are widely used in the upstream of the optical communication and fiber laser industry chain. In addition to the optical module sector, the company’s OCS product production also requires materials related to Faraday rotators.

On March 25, a person from Tengjing Technology’s board secretary office revealed that the company has achieved mass production of large-size pure YVO4 vanadate crystals, which can provide supporting support for the production of Faraday rotators.

Dongtianwei focuses on the research, production, and sales of precision optoelectronic film components, and optical isolators are one of the company’s optical communication businesses. The supply stability of Faraday rotators, as upstream raw materials for the production of optical isolators, directly affects the capacity release of the company’s optical isolators.

Regarding the supply situation of Faraday rotators, Dongtianwei stated that the company has completed the establishment of the optical isolator product line and is actively expanding production through capacity optimization and personnel expansion, seizing market opportunities and enhancing delivery capabilities. Meanwhile, the company stated that it currently does not produce Faraday rotators, and this component is a core raw material for optical isolators, which the company procures externally based on production needs for subsequent production.

In addition, a relevant business person from the New Third Board enterprise Xiamen Sanyou Optoelectronics also stated that the company has self-developed optical isolator products but has not yet laid out the production of Faraday rotators, relying mainly on external procurement to ensure production.

▍Terminal Optical Module Manufacturers Claim “Supply Chain Stability”

Although upstream material supply is tight, the industry impact shows significant differentiation, with leading optical module companies’ production and operations temporarily unaffected.

On March 26, a person from Zhongji Xuchuang’s board secretary office stated that the company’s production and operations have not been affected by the supply of rotators, the material supply chain is stable, and they have stocked in advance to meet subsequent production needs; current customer orders are progressing normally, and there is no risk in future material supply, with the supply chain operating smoothly, and stability can be maintained for the foreseeable future.

“The share of Faraday rotators in the cost of optical modules is extremely low. In addition to purchasing Faraday rotators from suppliers in the U.S. and Japan, the company has implemented a diversification strategy for suppliers, covering multiple domestic manufacturers.” Zhongji Xuchuang added.

A person from Huagong Technology’s board secretary office introduced to the Science and Technology Innovation Board Daily that the company’s optical module materials are all sourced externally. In response to the phase-specific tightness of some upstream materials, they have proactively engaged suppliers and ensured adequate stock, maintaining normal overall production and operations.

Regarding the latest business developments, a person from Huagong Technology’s board secretary office stated that the company has currently laid out 800G and 1.6T optical module products, with 400G and 800G products achieving mass shipments, and 1.6T products transitioning from small batch trial production to full-scale production.

A person from Guangxun Technology’s board secretary office stated that the company has the production capacity for 1.6T optical modules, and the mass production schedule depends on downstream customer orders. In response to the tightness of upstream materials such as Faraday rotators, the company has a large purchasing volume, signed long-term cooperation agreements with upstream suppliers, and locked in sources in advance, ensuring that suppliers prioritize their supply, which will not affect the company’s normal production plans.

The aforementioned optical module industry insider told the Science and Technology Innovation Board Daily that despite the tight supply of upstream raw materials, the reason why leading companies are “not worried” is that these companies have ample stock, and even if the price of rotators doubles, its minimal value has a very limited impact on corporate costs.

“The domestic Faraday rotator industry chain companies are not incapable of filling the material gap; each enterprise will control the pace of expansion. Blindly expanding production on a large scale could easily lead to price wars and squeeze corporate profits, so companies in the industry chain are relatively cautious about expanding capacity.” said the optical module industry insider.

There are even market views analyzing that this round of material tightness can be interpreted as “hunger marketing,” and there is no clear judgment on future industry capacity release pace and changes in the supply-demand pattern. It is uncertain whether supply can be increased within the year. The technical barriers in the Faraday rotator industry are not high, and the future supply mainly depends on the expansion pace and rhythm of domestic manufacturers.