The chip war between the U.S. and China keeps escalating, as China’s new regulation would reportedly take effect soon. This time it has a new target – rare-earth materials. According to the reports from Nikkei and Tom’s Hardware, the new regulation would be effective on October 1, asserting state ownership over its rare-earth materials critical for semiconductor production.

This measure aims to protect national and industrial interests, though it is seen internationally as a strategy in the ongoing trade dispute with the U.S., the reports noted. By prohibiting unauthorized access to or disruption of rare-earth resources by any individual or organization, the regulation signifies the state ownership over crucial rare earth metals like gallium and germanium.

The regulation, with its large scope, encompasses the entire rare-earth element supply chain, including mining, smelting, processing, distribution, and export.

Starting from October, 2022, the U.S. has launched a series of export controls, targeting to limit China’s access to advanced semiconductor technologies, while tech giants including Intel, Qualcomm and NVIDIA are not allowed to ship some of their most cutting-edge chips to China. Now a new development seems to emerge, as the White House is said to consider additional restrictions on China’s access to gate-all-around (GAA) transistor technology as well as high-bandwidth memory (HBM), according to reports from Bloomberg and Tom’s hardware.

China’s latest move may be a reaction to U.S. export regulations on advanced wafer fabrication equipment, the reports stated.

It is worth noting that as of 2023, China accounted for approximately 70% of global rare-earth element production, according to the reports. Particularly in the case of gallium, which is essential for power ICs, China dominates around 94% of global supply.

While the production of high-performance components such as CPUs, GPUs, and memory may not be severely affected, restrictions on gallium nitride (GaN) and gallium arsenide (GaAs) could notably affect power chips, radio frequency amplifiers, LEDs, and other critical applications, the reports said.

On the other hand, China’s upcoming regulation on rare earth metals may have other impacts. The reports noted that gallium and germanium, being not scarce, has been maintained at low price levels in China, which makes mining them elsewhere relatively unprofitable. The new restrictions, therefore, have influenced the prices of these metals, prompting companies in other countries to initiate extraction projects, potentially reducing China’s market dominance in the long run.

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In the bustling tech bazaar, the iPhone 14 Pro and AirPods 3 are pioneering the tech industry by incorporating InP(Indium phosphide)-based EEL(Edge Emitting Laser). These devices are leveraging the unique attributes of long-wavelength technology for skin detection, which is a strategic move that highlights the gradual emergence of InP material in the consumer market.

Historically, data communication and telecom industries have acted as the primary fuel for the InP market, their demand for backbone network photoelectric and 400G/800G optical modules in data centers has been consistent. However, as the quality and refinement of 6-inch InP single-crystal growth technology advance, we see a reduction in production costs, thus unlocking a gateway to consumer applications.

Emerging Dual Frontiers: Consumer and Photonic Applications

Apple and other savvy smartphone OEMs are contemplating the introduction of long-wavelength InP-based EEL in their next-gen products. This would be used for physiological sensing in proximity sensors or possibly to replace the currently used 940nm GaAs-based VCSEL(Vertical Surface Emitting Laser) in 3D sensing.

Simultaneously, the evolution of autonomous driving is nudging automotive laser radars towards the 1550nm wavelength, a departure from the former 905nm. This shift promises increased detection range and improved protection for human eyes.

In the realm of photonics communication technology, a more significant growth driver stems from the trend of high-end EML(Electro-absorption Modulated Laser) replacing traditional DFBs(Distributed-feedback laser).

As next-gen data center applications are steered towards 400G/800G transmission speed solutions, EML laser chips promising high bandwidth performance and high yield will take the spotlight. They are anticipated to realize the high-speed transmission characteristics of single-wavelength 100G.

It is also worth noting that as fiber-optic access in the PON (Passive Optical Network) market gradually upgrades to the 25G/50G-PON solution, there is an evident trend towards integrated solutions combining laser chips and SOAs (Semiconductor Optical Amplifiers). This shift is driven by the increasing demands for higher transmission rates and output power, leading to the replacement of discrete DFB solutions.

Supply Chain Over-centralization: A Precursor to a Sellers’ Market?

This cornucopia of application scenarios signals tremendous market potential for InP-based components. However, one must question whether the supply chain is prepared for this windfall.

One of the concern is that the industry chain’s over-centralization might usher in a seller’s market situation.

InP substrate materials and epitaxial silicon wafers pose a high technological threshold and are primarily monopolized by few manufacturers, particularly those from Europe, the U.S. and Japan.

• The InP substrate material market is highly monopolized by Sumitomo Electric Industries, AXT, and JX NMM, which collectively account for 90% of market share in 2020.
• The epitaxy process is the crux of photonic chip production, with tech prowess directly impacting product performance and reliability. Key suppliers capable of providing InP epitaxy silicon wafers include IQE, Lumentum, and Sumitomo, among others.
• In terms of photonic chip technology, its value lies more in added functionality, necessitating process integration. This gives rise to IDM giants dominating the market. For instance, Lumentum, Sumitomo, and Mitsubishi dominate the 25G DFB laser chip market.

While the influx of newcomers from China is seen in the lower-tech optical module packaging sector, the core technologies upstream are still held firmly by international industry leaders, posing a challenging breakthrough for newcomers in the short term.

The growing interest in the market for this technology indicates that end-product manufacturers developing new applications based on InP will inevitably need to double down their efforts to ensure the stability of long-term supply. It remains to be seen whether the singularity of the supply chain will further restrict the proliferation of emerging applications in the end market.