Written by: Rita

Reuters reported on August 4 that the Trump administration and the FCC are preparing to restrict the entry of new Chinese data center components into the U.S. market, with optical modules being specifically mentioned. Morgan Stanley noted in a report released that day that this potential ban is beneficial for the non-Chinese optical module supply chain, with Coherent (COHR) being the largest beneficiary, and Lumentum's (LITE) laser business also benefiting from the ongoing tight supply of EML. However, Morgan Stanley's core judgment is that the short-term execution faces many difficulties, as capacity and supply chain bottlenecks will limit the speed of share transfer, and long-term structural benefits will take time to realize. The current capacity and certification progress of non-Chinese suppliers limit the rapid transfer of market share, but the ban alleviates previous market concerns about the profit ceiling of non-Chinese manufacturers.

Coherent benefits directly, Lumentum benefits indirectly

ZTE and New Era collectively hold about 50% of the optical module market. Once the ban is implemented, this portion of demand will be forced to shift to non-Chinese suppliers. Morgan Stanley believes Coherent is the biggest beneficiary, as its vertical integration capability allows it to more quickly accept incremental demand, and Applied Optoelectronics and Fabrinet also have the ability to absorb incremental demand.

Lumentum has a smaller direct exposure to optical modules, but it is one of the major EML laser suppliers globally. If the ban prevents Chinese optical module manufacturers from entering the U.S. market, non-Chinese module suppliers will expand their capacity, leading to an increased demand for EML lasers. Morgan Stanley believes this will prolong the tight supply situation of EML, which is an indirect benefit for Lumentum. Ciena and Corning's level of benefit is limited, as Ciena primarily operates in the telecommunications sector rather than data centers, with the use of Chinese optical fibers in U.S. data centers being minimal.

Morgan Stanley also pointed out key constraints: the capacity and certification progress of non-Chinese suppliers limit the rapid transfer of market share. Over the past few years, cloud providers have been seeking diversified suppliers, but under the current demand intensity, the capacity of non-Chinese manufacturers cannot fully replace the approximately 50% share of Chinese manufacturers.

The ban faces two realistic bottlenecks

Morgan Stanley raises two key questions about the feasibility of the ban, with these two bottlenecks directly determining whether the alternative logic can be realized in the short term.

First, insufficient capacity. The current capacity of non-Chinese suppliers cannot meet the demand from AI capital expenditures. Even though cloud providers have completed the certification of alternative suppliers over the past few years, these suppliers cannot fill the demand gap in the short term.

Second, reliance on InP substrates from China. Indium Phosphide (InP) is the core substrate material for lasers and photodetectors in high-speed optical modules, and non-Chinese manufacturers must first obtain InP substrates to expand their optical module production. However, the major global suppliers of InP substrates come from the Chinese company AXTI (AXT, Inc.). Lumentum just announced a new supply agreement last week, and Coherent's CEO visited China with Trump's delegation a few months ago, partly to ensure the supply of InP substrates. Morgan Stanley believes that if the ban is implemented, InP substrates will become a key bottleneck.

Morgan Stanley also pointed out that a potential solution may involve Chinese cloud manufacturers purchasing U.S. components, thus reaching some form of balance on a higher level, but the final execution path still carries high uncertainty. Optical modules are core components of AI data centers, and Chinese manufacturers account for about half of the shipment volume. If the ban is truly enforced, it will cause a supply shock in the short term, while in the long term, the structural benefits of the non-Chinese supply chain will gradually materialize.

Disclaimer

This article is a compilation and interpretation by Chao Xiang Research of third-party brokerage research reports (Morgan Stanley, August 4, 2026), combined with publicly available market information.

The ratings, target prices, earnings forecasts, and related judgments quoted in this article are the views of the broker's analysts, representing the stance of their respective institutions and do not represent the views of Chao Xiang Research, nor do they constitute any investment advice. The market carries risks, and decisions should be made independently. This article should not serve as the basis for buying or selling any securities.