Coherent's latest financial report reveals that the yield of 6-inch indium phosphide (InP) wafers continues to improve, with the capacity doubling plan completed at 80%. This is not an isolated technical improvement but marks the official transition of the global optical chip industry from the &#34;3-inch era&#34; to the &#34;6-inch mass production era.&#34; This breakthrough shifts indium phosphide from &#34;supply rigid scarcity&#34; to &#34;yield-driven cost inflection point,&#34; providing a core material foundation for the generational leap of AI data centers from 800G to 1.6T/3.2T, and from pluggable optical modules to CPO co-packaged optics.
The year 2026 will be a critical watershed year for the indium phosphide industry.
<h2>1.</h2>
Core conclusion: The &#34;singularity&#34; of indium phosphide has arrived, marking the last piece of material puzzle for AI optical interconnects.
In Coherent's Q2 fiscal report for FY 2026, it disclosed that the yield of 6-inch indium phosphide (InP) wafers exceeds that of the 3-inch production line, with single wafer chip output exceeding 4 times and costs halved. This signifies that the indium phosphide industry has officially entered a &#34;Moore's Law&#34; moment similar to silicon-based semiconductors.
① Technological economic mutation: For a long time, InP has been limited by wafer size (mainstream being 2-3 inches) and fragility, resulting in high costs. Coherent's breakthrough pushes InP from &#34;noble material&#34; to &#34;industrial mass production,&#34; significantly reducing the transmission cost per Gbit.
② The rigid constraint of AI computing power: As Nvidia GPU clusters evolve to 1.6T/3.2T interconnects, copper cables approach physical limits, making the transition from copper to optical inevitable. Whether it is EML (electro-absorption modulated laser) or silicon photonics (SiPh) CW light sources, InP is an irreplaceable physical foundation.
③ Extreme monopoly on the supply side: Currently, only Coherent has achieved high-yield mass production of 6-inch InP globally, while competitors like Lumentum have fully allocated their production capacity. This supply-demand mismatch will grant leading manufacturers strong pricing power and influence over the industry chain.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6faf56a0-f3eb-4c09-a787-28c2d4e8d961.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/6faf56a0-f3eb-4c09-a787-28c2d4e8d961.png"/>
The indium phosphide industry is at the early stage of a super prosperity cycle characterized by &#34;rising quantity and price.&#34; Coherent, as a leader with the dual moat of &#34;6-inch process + high yield,&#34; will enjoy excess profits; while domestic manufacturers capable of breakthroughs in 6-inch substrates and epitaxy (such as Yunnan Zheye/XinYao Semiconductor, Sanan Optoelectronics) are expected to benefit from the urgent demand for domestic alternatives.
Based on the data disclosed by Coherent, we have constructed the following cost-benefit model—production cost benchmark (100%) &lt; 50% (compared to 3 inches) cost halved, significantly reducing unit chip costs and greatly enhancing gross margin space. Yield industry average level &gt; 3-inch production line yield inversion is the most critical breakthrough. Typically, larger wafer yields are harder to control, but Coherent has broken this rule
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/9684c5af-d272-4261-b8b2-dee6e4ef2ded.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/9684c5af-d272-4261-b8b2-dee6e4ef2ded.png"/>
The yield of 6-inch wafers exceeding that of 3-inch wafers is a counterintuitive technological breakthrough.
Due to the brittleness of InP materials, processing large sizes is prone to breakage. This achievement at Coherent's Sherman factory in Texas signifies that they have mastered unique stress control and epitaxial growth processes, establishing a very high technical barrier. Coherent has clearly stated its plan to double its internal InP capacity by Q4 2026, with 6-inch capacity accounting for 50% at that time.
<h2>II. Why is it important? The &#34;Light Heart&#34; of AI Computing Power</h2>
The scarcity of indium phosphide lies in the explosive growth of demand, making it the &#34;light heart&#34; of AI computing clusters.
Because at rates of 1.6T and above, InP is an unavoidable physical material. The interconnection rate within data centers is accelerating its migration from 800G to 1.6T.
① EML Solution (InP-based): At a single-channel rate of 200G, InP-based EML lasers are currently the most mature and optimal solution. Coherent has explicitly pointed out that the 1.6T optical modules in the first half of the year are primarily based on EML and silicon photonics technology.
② Silicon Photonics Solution (SiPh): Even with silicon photonics solutions, silicon itself does not emit light and must use high-power continuous wave (CW) lasers as external light sources. The best material for high-power CW lasers remains indium phosphide.
Therefore, regardless of whether the technical route is EML or silicon photonics, indium phosphide (InP) is a &#34;shovel-selling&#34; business with rigid demand. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8ce93484-cf6d-4ff0-b4ed-8b6e1c6d2996.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8ce93484-cf6d-4ff0-b4ed-8b6e1c6d2996.png"/>
From the perspective of industry catalysts, Coherent revealed in a conference call that it has received a massive CPO order from a leading AI customer, expected to generate initial revenue by the end of 2026. Given the requirements of CPO for InP, the optical engine is packaged together with the switching chip, which demands high-temperature resistance and power stability from the laser. The introduction of CPO will significantly increase the demand for high-quality InP CW lasers, and since CPO is used not only for Scale-out but also begins to penetrate Scale-up networks, the potential TAM (Total Addressable Market) is severely underestimated. <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/541179c8-f437-426e-8d18-25b0533cac41.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/541179c8-f437-426e-8d18-25b0533cac41.png"/>
The supply-demand imbalance of InP in the industry is expected to continue until 2026 or even 2027
Global monopoly and China's breakthrough in the indium phosphide industry chain show a high degree of concentration, forming a situation of &#34;one superpower and many strong players&#34; alongside &#34;domestic substitution.&#34;
From a global perspective, Coherent is currently the only mass producer of 6-inch InP, operating under an IDM (Integrated Device Manufacturer) model, covering everything from substrates, epitaxy, chips to modules. Its cost advantage (halving the cost of 6 inches) will give it absolute initiative in future price wars. Lumentum is another major player, but its production capacity is currently limited, with all InP wafer factory capacities already allocated. It is significantly lagging behind Coherent in the transition speed to 6 inches.
From China's perspective, the life-and-death speed of domestic substitution is critical because InP is the core material for optical chips and involves the foundation of AI computing power, facing extremely high geopolitical risks. Coherent's expansion of InP production, funded by the U.S. CHIPS Act, further confirms its strategic position. Although there are already 6-inch production lines domestically, there is still a gap in yield and large-scale production stability compared to Coherent (with yields exceeding 3 inches).
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ef323353-1ca6-4710-9805-65afc83ce49d.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ef323353-1ca6-4710-9805-65afc83ce49d.png"/>
<h2>III. What to focus on next? Core links and key event nodes</h2>
Based on the above analysis, we construct a three-tier value pyramid for investment in the indium phosphide industry: <img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/99fe5a89-a492-4147-b029-5dd6979c7345.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/99fe5a89-a492-4147-b029-5dd6979c7345.png"/>
① First tier: Core beneficiaries of the global supply chain (strong short-term certainty)
<ul>
<li>
AXT (AXTI.O): The only company in the world mass-producing 6-inch InP substrates, with its production base in China, directly benefiting from domestic expansion and overseas order spillover. It plans to raise $100 million by the end of 2025 to expand capacity, with a current market value of about $1.5 billion.
</li>
<li>
Coherent (COHR.O): Leading in yield for global 6-inch production lines, with large orders from CPO, and an expected EPS exceeding $8 by 2027, with a target price of $245 from JP Morgan. It is a technological benchmark in the industry with high strategic importance.
</li>
</ul>
② Second tier: Domestic substrate and epitaxy pioneers (medium-term growth potential)
<ul>
<li>
Yunnan Tin Company: Its subsidiary, Xinyao Semiconductor, is the most advanced company in domestic 6-inch substrate progress, with Huawei HiSilicon's verification being a key catalyst. It is a rare domestic integrated enterprise of &#34;upstream resources + midstream substrates.&#34;
</li>
<li>
Sanan Optoelectronics: A leader in the compound semiconductor platform, with a monthly production of 10,000 6-inch InP substrates in Wuhan, the largest production capacity in the country. It has large-scale manufacturing capabilities and a customer base, expected to achieve scaled revenue first.
</li>
</ul>
③ Key event nodes (to be closely monitored in 2026)
<ol>
<li>Q2-Q3: Coherent's production capacity doubles and reaches full production</li>
</ol>
The progress of the company's 6-inch production line capacity ramp-up and yield data will be key indicators to test the &#34;6-inch economics.&#34;
<ol>
<li>Mid-year: NVIDIA Rubin platform technical details released</li>
</ol>
The specific architecture of the CPO, light source solutions, and supplier list will directly impact the expectations of the indium phosphide industry.
<ol>
<li>Second half of the year: Domestic 6-inch substrate bulk orders materialize</li>
</ol>
After Huawei HiSilicon's verification, whether Xinyao and Sanan can obtain large-scale procurement orders will mark the transition of domestic substitution from &#34;verification&#34; to &#34;volume production.&#34;
<ol>
<li>Throughout the year: Trends in metal indium export management policies</li>
</ol>
If substantial export controls to Japan are implemented, the global indium phosphide supply chain will be forced to restructure, and companies with integrated domestic resource capabilities will gain opportunities for value reassessment.
<ol>
<li>By the end of 2026: Verification of 1.6T optical module shipment volume</li>
</ol>
Whether the shipment target of 20 million units predicted by Nomura can be achieved will serve as a touchstone for testing the true strength of AI computing power demand.
In summary, indium phosphide is no longer just a sub-label of &#34;upstream materials for optical communication,&#34; but a key raw material in the process of AI computing power upgrades. The golden window for the indium phosphide industry has opened. This &#34;invisible champion,&#34; once hidden deep within the optical communication industry chain, is stepping into the spotlight of AI computing power upgrades.

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Coherent's latest financial report shows that the yield of 6-inch indium phosphide wafers continues to improve, and the capacity doubling plan has been completed by 80%, marking the transition of the optical chip industry from the "3-inch era" to the "6-inch scale mass production era." This breakthrough pushes indium phosphide towards a "yield-driven cost inflection point," providing core materials for the upgrade of optical modules in AI data centers. The year 2026 will be a critical year for the indium phosphide industry, and Coherent's technological breakthroughs will reduce transmission costs, granting leading manufacturers strong pricing power. The indium phosphide industry is currently in the early stages of a super boom cycle characterized by "simultaneous increase in volume and price."

- Coherent's latest financial report reveals an 80% completion of its 6-inch indium phosphide (InP) wafer production capacity, marking a significant shift from a 3-inch to a 6-inch mass production era.  
- This transition enhances the cost-effectiveness of InP, making it essential for AI data centers as they evolve towards higher interconnect speeds, particularly with upcoming 1.6T and 3.2T technologies.  
- The industry is witnessing a "super boom" cycle, with Coherent positioned as a leader, while domestic firms are expected to benefit from increasing demand for InP as a critical material in AI applications.

Indium Phosphide: AI Computing Power Upgrade, Key Material for the Era of Optical Chips