US Optical Module Import Ban Rumors Shake China-US Optical Communications Sector! How Do Morgan Stanley and Citigroup Interpret This?

An exclusive report from Reuters about the US potentially restricting imports of Chinese optical modules stirred the US and Chinese optical communications sectors on Tuesday evening (4th). Morgan Stanley believes that if the ban becomes reality, it will benefit US suppliers such as Coherent (COHR-US) and Lumentum (LITE-US) in the short term by capturing orders, but limited by production capacity and supply of key materials like indium phosphide (InP), US manufacturers will struggle to quickly replace Chinese ones. Citigroup, on the other hand, believes that considering Chinese manufacturers control the majority of global high-speed optical module production capacity, the final policy is more likely to retain exemption clauses rather than impose a full-scale ban.

According to reports, the Trump administration is working on drafting a ban to restrict US imports of next-generation Chinese-made data center optical transceivers to strengthen the supply chain security of artificial intelligence (AI) infrastructure. This initiative is being led by the Federal Communications Commission (FCC), which oversees the US telecommunications industry, with officials aiming to announce and implement the rules within this year. However, insiders emphasize that the final rules could still be modified or even shelved.

Following the news, US optical communications supply chain stocks surged. Applied Optoelectronics (AAOI-US) skyrocketed 19% in a single day, while Coherent and Lumentum also rose. Even upstream fiber optic material supplier Corning (GLW-US) jumped nearly 9%.

In contrast, Chinese optical communications stocks plunged at Wednesday's (5th) market open. Zhongji Xuchuang (300308-CN) fell 10.41% during trading, and Cambridge Technology (603083-CN) dropped 4.06%.

According to Reuters, the FCC's proposed ban targets 'new model' optical transceivers, primarily aiming at 800G and 1.6T high-speed optical modules that support AI server computing.

However, the current draft contains significant ambiguity. It remains undecided whether existing models, already imported inventory, or upstream components will be included in the ban. These details will directly determine the ultimate scale of impact.

Notably, the report indicates the draft design will exempt 'non-Chinese suppliers,' meaning the target is theoretically limited to Chinese brands themselves, not all optical modules produced within China.

In other words, whether Chinese brands producing in Southeast Asia would also be restricted remains uncertain.

Moreover, this is not an isolated incident. The FCC had already voted on July 22 to expand the scope of its ban, prohibiting the import of products containing logic chip components produced by entities on the 'Covered List.' This means that even if an optical module is not assembled in China, it could still be restricted if it contains core logic chips made by Chinese manufacturers.

Looking further back, the FCC only announced on July 28 the ban on importing Chinese-made humanoid robots and power inverters, citing the same 'AI infrastructure national security' rationale; restrictions on consumer-grade router imports have been in place for even longer.

Overall, this represents a continuation and escalation of the Trump administration's technology containment policy toward China, which previously focused mostly on chips but has now extended to the underlying hardware of AI data centers.

Production Gap Unfillable: US Firms Can't Absorb Orders from Chinese Firms Within Six Months

Analysts point out that despite the news boosting related US stocks, the market is essentially trading on the 'order shift' narrative.

If next-generation Chinese optical modules are blocked from the US market, North American cloud operators' AI capital expenditures will inevitably shift toward domestic supply chains.

Among them, Applied Optoelectronics, as a direct manufacturer of high-speed datacom optical modules, is seen as the most direct alternative, with the greatest stock price elasticity. Lumentum and Coherent, holding laser and high-speed photonic chip capacity, have already had their production secured by NVIDIA (NVDA-US) through strategic investments, giving them dual advantages in upstream chip supply and full-module production. Corning benefits indirectly from increased demand for fiber optics and optical interconnect materials driven by data center construction.

However, analysts note the hard reality: current effective production capacity among US firms likely cannot fill the market gap left by Chinese manufacturers within six months.

Market estimates suggest global 1.6T module shipments will reach 4.2 million units in 2025. Adding demand for 800G modules, non-Chinese阵营 production capacity—Lumentum at about 100,000 units per month, AOI planning to expand to 500,000 units per month, and Fabrinet's (FN-US) Thailand plant still expanding—remains far from sufficient to absorb the gap.

In contrast, Chinese optical module manufacturers already have orders booked through 2028, highlighting an already extremely tight supply side. Chinese firms currently control over 70% of global high-speed optical module production capacity, with Zhongji Xuchuang holding around 27% market share in the US datacom optical module market.

Analysts believe that while a policy ban can immediately block imports, capacity ramp-up, yield optimization, and major customer qualification processes take significant time and cannot be completed within months—this is seen as the biggest downside risk for future stock prices.

Once the market realizes the benefit realization period is far longer than expected, or if the final rules include extensive exemption clauses, optimistic premiums could rapidly unwind.

Morgan Stanley: Short-Term Benefit for US Firms, Long-Term Bottleneck in Indium Phosphide Supply

Morgan Stanley's report states this event is positive for the US optical component supply chain.

Given that Zhongji Xuchuang and Eoptolink together account for about half of the global optical transceiver market, vertically integrated Coherent is expected to be the clearest large-scale beneficiary, while Applied Optoelectronics and Fabrinet also have opportunities to capture incremental demand.

Meanwhile, although Lumentum's own optical module business exposure is relatively limited, it supplies lasers to multiple module makers. If Chinese suppliers are restricted, the timeline for easing tightness in laser diode (EML) supply could be delayed, thus benefiting indirectly.

However, Morgan Stanley remains relatively cautious, stating that current non-Chinese manufacturer capacity simply cannot handle the massive demand from AI capital expenditures.

The report also mentions that CEOs of both Lumentum and Coherent have previously publicly advocated for similar restrictions, arguing that US firms generally cannot supply Chinese cloud operators, while Chinese firms can supply the US market, creating an unequal competitive landscape.

The report also highlights the biggest risk lies in indium phosphide supply. This key material is primarily supplied by companies including AXT (AXTI-US). Lumentum only signed a new agreement with relevant suppliers last week, and Coherent's CEO joined the Trump administration's delegation to China months ago, highlighting US firms' own reliance on Chinese supply chains—a major variable in whether the ban can be effectively implemented.

Citigroup's view is more reserved, believing this is unlikely to be a simple, blanket rule.

Citigroup presents four reasons:

1. Seven of the world's top ten optical module manufacturers are Chinese firms, supplying over half of high-speed optical modules to major US cloud service providers. 2. The AI optical component supply chain is already extremely tight, and Chinese leaders still hold key advantages in component security and advanced product development. 3. Chinese module makers have clear cost advantages, supporting cloud operators' capital expenditure efficiency. 4. Major Chinese optical module makers have already established overseas production lines.

Based on these realities, Citigroup judges that the final rules are highly likely to include certain exemption clauses, and overseas capacity expansion will remain the core strategy for Chinese suppliers to respond.

Varying Exposure Among Chinese Firms: Eoptolink Faces Most Direct Pressure

Analysts say that if the ban ultimately takes effect, the impact on domestic Chinese optical module manufacturers will vary.

Eoptolink (300502-CN) has the highest dependency on North American customers, with overseas revenue accounting for as high as 87% in 2024, making it one of the two most export-oriented Chinese optical module firms alongside Zhongji Xuchuang. With projected 2025 revenue of about $3.5 billion, it could face the most direct pressure if new product access is blocked.

Although Zhongji Xuchuang also has a high US revenue share, it has already established overseas production capacity, providing relatively more buffer space.

Analysts generally believe the short-term impact stems mainly from shifts in market risk appetite rather than immediate earnings cliff, and future developments remain highly uncertain, with the situation potentially reversing at any time.

Two Scenarios: Full Ban vs. Higher Threshold with Loopholes

Looking ahead, the market generally sees two scenarios.

The first scenario is that the draft is largely implemented, blocking new optical modules from the US market, effectively barring 1.6T and next-generation products from US entry. For already certified existing 800G products, it depends on whether the rules include a grace period.

In the short term, customers may accelerate purchases before the ban takes effect, followed by a sudden freeze in new orders. However, other markets such as Europe, the Middle East, and Southeast Asia, along with domestic computing demand in China, will still serve as important buffers, preventing a complete halt in revenue. Meanwhile, major North American customers will inevitably accelerate the qualification and onboarding of US suppliers, though production bottlenecks will constrain actual substitution speed.

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