AI Demand for InP Drives Major Semiconductor Capacity Expansion

Indium Phosphide

AI demand for InP is triggering a global investment cycle as semiconductor and photonics manufacturers race to expand indium phosphide wafer capacity. Supply remains tight as AI data centres require increasingly powerful optical interconnects between processors, memory and networking systems.

AI demand for InP has prompted Coherent to plan successive capacity expansions at its Sherman, Texas, facility. The company intends to double production by the end of 2026 and double capacity again by the end of 2027.

AI demand for InP is also accelerating investment in Japan, China and downstream US photonics manufacturing. Long-term supply agreements and customer prepayments show that manufacturers increasingly view access to InP substrates and components as a strategic constraint.

The expansion creates a direct link between AI infrastructure investment and indium demand, pushing a traditionally small specialty metal deeper into the semiconductor supply chain.

Six-Inch InP Wafers Become Strategic for AI Photonics

Coherent's Texas facility is focused on high-volume 150mm, or six-inch, InP semiconductor manufacturing. The company sees the transition from three-inch to six-inch wafers as a major driver of future production efficiency.

Larger wafers allow manufacturers to produce more devices from each substrate and potentially improve manufacturing economics. Coherent has also reported stronger yields from its six-inch lines compared with three-inch production.

The company shipped its first transceivers containing components manufactured on six-inch InP lines during the first quarter.

US industrial policy is supporting the expansion. Coherent has reached a preliminary agreement for up to $50mn in direct funding under the CHIPS and Science Act.

Nvidia has also invested $2bn in Coherent and secured supply through the end of the decade. This highlights how AI companies are moving upstream to secure optical component capacity rather than relying solely on conventional procurement.

Coherent also plans to establish six-inch InP production at another facility in Zurich, further expanding its geographic manufacturing base.

Japan's JX Advanced Metals is pursuing an even larger capacity programme. The company plans to invest up to ¥120bn over four years and increase InP substrate capacity by seven to ten times.

Expansion will include additional production at Isohara Works and new capacity in Hitachinaka. JX is also discussing price revisions with customers as it seeks to build a more sustainable long-term supply model.

Tight InP Supply Extends Into Indium and Optical Manufacturing

China is seeing similar efforts to secure material. AXT's Beijing Tongmei subsidiary has signed a 2027 supply agreement with Nanjing Casela Technologies covering 173mn yuan of InP substrate wafers.

Casela will prepay 50% of the contract value, demonstrating the level of competition for future wafer availability. The agreement also gives the customer priority for additional volumes if capacity allows.

Export restrictions on Chinese InP have added another source of supply uncertainty, increasing the incentive for customers outside China to secure alternative production.

The shortage is also driving investment further downstream. Nokia is expanding its advanced photonic semiconductor test and packaging operation in Pennsylvania by up to ten times.

The facility packages photonic chips into optical modules used in AI and telecommunications infrastructure. Nokia is investing around $30mn alongside federal and state support.

These investments show that the bottleneck extends across the entire photonics chain, from InP substrates and epitaxial wafers to lasers, modulators, transceivers and packaging.

For metals markets, the expansion strengthens the outlook for indium. InP production requires high-purity indium, meaning sustained AI-driven wafer growth could place additional pressure on upstream refining and feedstock availability.

The Metalnomist Commentary

AI is turning indium phosphide from a specialised telecom material into strategic computing infrastructure. The next bottleneck could move upstream from photonic devices to high-purity indium and qualified six-inch wafer capacity.