Tight supply of InP and epitaxial wafers, with technical barriers and yield gaps supporting price increases
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Tight supply of InP and epitaxial wafers, with technical barriers and yield gaps supporting price increases
Nomura's 69th AI expert call focused on upstream optical communication InP/epitaxial wafers, arguing that large-size InP is in short supply among Chinese customers and that domestic manufacturers still lag global leaders in stability and yield.
- The core difficulties in InP wafer manufacturing lie in the conversion from polycrystalline to single-crystal material, as well as wafer cleaning, surface treatment, and control of metal residues/impurities.
- Barriers to epitaxial growth include MOCVD equipment performance, InP wafer quality, and know-how in materials, processes, and epitaxial structure design; larger wafers such as 6-inch require even higher standards.
- The first tier of global InP wafer suppliers includes Sumitomo Electric, JX Metal, and AXT; in the Chinese market, Yunnan Germanium and Vital Materials are leading, but their single-crystal pulling yield and process control still trail global peers.
- Epitaxial wafer suppliers are divided between third-party foundries such as IQE and Landmark, and IDMs such as Coherent and Lumentum; the expert believes IDMs have stronger pricing power than foundries.
- Affected by tight supply, China's 2-inch InP wafer price rose from CNY500-600 at the end of 2025 to CNY850-880, and 3-inch InP rose from CNY1800 to CNY3200; prices for 2-inch EML epitaxial wafers and 3-inch CW epitaxial wafers also increased significantly.
Report interpretation
Overview
This report summarizes Nomura's 69th AI expert call held on June 30. The interviewed expert focused on the optical laser chip industry chain, discussing the technical barriers, competitive landscape, price dynamics, upstream material supply-demand gap, and EML/CW laser chip output related to InP wafers and epitaxial wafers.
Core views
The report's core view is that InP and epitaxial wafers are high-barrier links in the upstream AI optical communications supply chain. Large-size InP wafers are in short supply among Chinese customers, driving price increases for InP and epitaxial wafers; global leaders still maintain an edge in single-crystal pulling, process control, and epitaxial stability, while Chinese manufacturers have room for domestic substitution but remain constrained in the short term by yield and stability; IDM epitaxial wafer suppliers have stronger pricing power than third-party foundries.
Analysis framework
The report is mainly based on expert interviews and reviews the InP/epitaxial wafer industry chain from five dimensions: manufacturing process, equipment capability, supply chain landscape, price changes, and output efficiency, while comparing global leaders, Chinese manufacturers, third-party foundries, and IDM players.
Methodology notes
Using expert perspectives from optical laser chips to validate supply chain bottlenecks
The report's information comes from an expert call, making it suitable for capturing first-hand industry signals such as technical barriers, tight supply-demand conditions, and price changes, though specific data still needs cross-validation with company disclosures and channel checks.
From InP wafers to epitaxial wafers and then to EML/CW laser chips
The report views InP wafer quality, MOCVD equipment performance, and epitaxial process know-how as key constraints affecting output, yield, and pricing.
Different business models and process capabilities correspond to different pricing power
Global InP wafer leaders, leading domestic manufacturers, third-party epitaxial foundries, and IDM suppliers differ in yield, stability, customer relationships, and pricing power.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Sumitomo Electric (5802 JP)The expert listed it as one of the first-tier global InP wafer manufacturers.
- Strengths
- Its global leadership position reflects competitive advantages in InP wafer manufacturing, yield, and process stability.
- Weaknesses
- The report did not disclose specific weaknesses or capacity data.
- Comparison
- Compared with Chinese manufacturers, global peers are stronger in single-crystal pulling yield and process control stability.
- Risks
- Export controls, customer regional restrictions, and changes in large-size capacity may affect supply and demand in the Chinese market.
- JX Metal (5016 JP)The expert listed it as one of the first-tier global InP wafer manufacturers.
- Strengths
- Benefiting from global large-size InP wafer supply capability and relatively mature process control.
- Weaknesses
- The report did not provide company-level pricing, capacity, or earnings sensitivity.
- Comparison
- Along with Sumitomo Electric and AXT, it belongs to the first global tier and is overall ahead of domestic peers.
- Risks
- If export restrictions or downstream demand change, supply-demand dynamics and price elasticity may shift.
- AXT (AXTI US)The expert listed it as one of the first-tier global InP wafer manufacturers.
- Strengths
- It has a relatively high industry position in global InP wafer supply.
- Weaknesses
- The report marks it as Not rated and does not provide financial forecasts or a target price.
- Comparison
- Together with Sumitomo Electric and JX Metal, it forms the leading global group in InP wafers.
- Risks
- Changes in InP demand, pricing, and supply constraints will affect industry chain judgments.
- Yunnan Germanium (002428 CH) / Vital MaterialsThe expert listed them as leading InP wafer manufacturers in the Chinese market.
- Strengths
- They hold leading positions in China's InP wafer market and benefit from demand for domestic substitution.
- Weaknesses
- The expert pointed out that Chinese manufacturers have lower single-crystal pulling yields and weaker process control stability than global peers.
- Comparison
- Compared with the first global tier, domestic manufacturers still have gaps in yield and stability.
- Risks
- If yield improvement is slower than expected, the large-size InP supply gap and customer qualification progress may remain constrained.
- IQE (IQE LN) / Landmark (3081 TT)The expert classified them as third-party epitaxial wafer foundries.
- Strengths
- They are positioned as epitaxial wafer foundries and can serve multiple types of downstream customers.
- Weaknesses
- The expert believes third-party foundries have weaker pricing power than IDM players.
- Comparison
- Compared with IDMs such as Coherent and Lumentum, they have weaker control over customers and pricing under their business model.
- Risks
- If IDM in-house production capacity improves or price competition intensifies, foundry margins may come under pressure.
- Coherent (COHR US) / Lumentum (LITE US)The expert classified them as IDM epitaxial wafer suppliers.
- Strengths
- The IDM model gives them stronger pricing power relative to epitaxial foundries.
- Weaknesses
- The report marks them as Not rated and does not provide earnings forecasts for individual companies.
- Comparison
- Compared with foundries such as IQE and Landmark, IDMs have greater advantages in customer relationships, internal capacity, and price negotiations.
- Risks
- If epitaxial wafer supply eases or downstream optical module demand fluctuates, pricing power may change.
- Aixtron (AIXA DE)The report uses its G4 MOCVD equipment as a reference for EML/CW epitaxial output.
- Strengths
- MOCVD equipment performance is listed by the expert as one of the key barriers in epitaxial growth.
- Weaknesses
- The report does not discuss Aixtron's own orders, revenue, or valuation.
- Comparison
- Equipment performance directly affects epitaxial wafer output efficiency, with CW output about 20% higher than EML.
- Risks
- Equipment parameters, process adaptation, and customer expansion pace will affect actual output.
- Wuhan Jiufengshan LaboratoryThe expert said it is a key participant in the development of 6-inch epitaxial wafers in China.
- Strengths
- It holds an important position in China's development of large-size epitaxial wafers.
- Weaknesses
- China's development of large-size epitaxial wafers is still at an early stage.
- Comparison
- Compared with mature small-size epitaxial wafers, large 6-inch epitaxy requires higher standards for equipment and process parameters.
- Risks
- There is uncertainty around R&D progress, yield ramp-up, and mass-production validation.
Key data
- China 2-inch InP wafer priceCNY850-880/pieceThe expert said this price rose from CNY500-600/piece at the end of 2025 to the current level.
- China 3-inch InP wafer priceCNY3200/pieceThe expert said this price rose from CNY1800/piece at the end of 2025 to the current level.
- China 2-inch EML epitaxial wafer priceCNY60-70k/pieceThe expert said this price rose from CNY40k+ at the end of 2025.
- China 3-inch CW epitaxial wafer priceCNY70k+/pieceThe expert said this price rose from CNY50k at the end of 2025.
- Overseas 2-inch epitaxial wafer priceUSD10-20k/pieceThe expert said overseas prices are significantly higher than the CNY60-70k/piece range in the Chinese market.
- Monthly EML output of Aixtron G4 equipmentabout 350-400 pieces/monthThe expert said monthly CW output is about 20% higher than EML because CW lasers require fewer epitaxial growth cycles.
- 100G EML output corresponding to a 2-inch epitaxial wafertheoretical maximum 10k units, actual about 2k+ unitsActual output is affected by cutting loss, yield, and packaging loss.
- Supply-demand status of large-size InPshortage of 3-inch and above for Chinese customersThe expert attributed the shortage to export controls between China and Japan and the fact that global suppliers dominate large-size supply.
Impact & implications
For the AI optical communications supply chain, shortages and price increases in InP wafers and epitaxial wafers imply that upstream manufacturers with high yields have stronger pricing power, and IDM players may hold an advantage over foundries in the epitaxial wafer segment. For the Chinese market, domestic substitution is supported by demand, but in the short term key bottlenecks still need to be overcome in single-crystal pulling, cleaning and surface treatment, epitaxial stability, and mass production of large 6-inch wafers.
Risks
- The expert interview sample is limited, and the judgments on pricing, output, and supply-demand are based on expert views and may not be the same as company-disclosed data.
- Chinese manufacturers still lag global peers in single-crystal pulling yield, process control, and epitaxial stability, creating uncertainty around the pace of domestic substitution.
- Export controls between China and Japan have led to tight supply of 3-inch and above InP, but policy changes could alter the supply-demand landscape.
- Large-size epitaxial wafers such as 6-inch require higher standards for equipment and process parameters, creating substantial risks in mass-production ramp-up and yield improvement.
- This report does not provide a target price, earnings forecast, or complete valuation framework for any single company, so investment mapping requires separate validation together with company fundamentals.
What to watch
- Whether availability and delivery lead times for 3-inch and above InP wafers for Chinese customers improve.
- Whether prices of 2-inch and 3-inch InP wafers, EML epitaxial wafers, and CW epitaxial wafers continue to rise.
- Progress in yield, stability, and customer qualification among domestic InP and epitaxial wafer manufacturers.
- Development progress of 6-inch epitaxial wafers, especially related progress at Wuhan Jiufengshan Laboratory.
- MOCVD equipment capacity and process efficiency, particularly the output difference of Aixtron G4 in EML and CW applications.
- Changes in pricing power between IDM players and third-party epitaxial wafer foundries.