The artificial intelligence boom is creating a new bottleneck that threatens to derail AI infrastructure growth. Lumentum CEO Michael Hurlston warned at the RAISE Summit that indium phosphide (InP) shortages will be worse than memory constraints, as reported by Business Standard. The compound semiconductor material, which emits light and is essential for AI datacenter transceivers, optical amplifiers, and co-packaged optics engines, faces a supply-demand imbalance that exceeds 30% according to Hurlston. The scale of the challenge is unprecedented, with Lumentum's telecom customers previously deploying hundreds of lasers now requiring hundreds of millions of lasers, representing what Hurlston calls "no small feat" to ramp from thousands to millions of wafers in non-silicon materials.
The artificial intelligence boom is creating significant investment opportunities beyond traditional chipmakers like Nvidia. According to reports from Business Standard, photonics—the technology behind lasers, fiber-optic communication and optical chips—is emerging as a key investment theme for the next decade. Nvidia has invested billions of dollars in companies such as Coherent and Lumentum, both of which develop photonics technologies used in AI networking. The technology powers critical applications including fiber-optic internet, laser manufacturing, medical imaging equipment, and LiDAR sensors for autonomous vehicles. Despite the supply challenges, Lumentum and Coherent have each sold off over 20% despite components being sold out, as investors underestimate the severity of the InP shortage.
As reported by Business Standard, AI models requiring thousands of chips to communicate instantly are creating bottlenecks with traditional copper wiring. Technology companies are increasingly adopting optical interconnects that transmit information using lasers and optical fibers. According to market research firm MarketsandMarkets, demand is being driven by sectors including 5G telecom, quantum computing, defence, industrial automation, and healthcare. The technology is particularly valuable because light can carry significantly more data while consuming less power than conventional electrical connections. Every laser inside an AI datacenter transceiver, every pump laser feeding an optical amplifier, and every co-packaged optics engine next to a GPU relies on InP, making this shortage particularly acute for AI infrastructure.
According to Business Standard, Europe's share of the photonics market has fallen to 15% over the last two decades, while China's share has tripled to more than 30%. Daiva Rakauskait?, managing partner at VC fund Aneli Capital, warns that this represents a strong catalyst for Europe's photonics leaders to build on the region's scientific and engineering strengths. The leading European companies from defence, manufacturing and other industries including Mercedes, Bosch, and Volkswagen issued a joint statement last year urging to strengthen photonics capabilities. Some challenges were addressed in the Chips Act proposal, which listed integrated photonics as a key enabling technology.
As reported by Business Standard, Earlier this month, Defiance launched Europe's first dedicated photonics ETF, listed on the London Stock Exchange and Borsa Italiana, giving public market investors exposure to companies operating across the photonics value chain. The investment opportunity is expanding beyond venture capital, with the sector representing a way for investors to participate in the AI infrastructure story beyond semiconductor companies. For Indian investors, exposure is currently more likely through global semiconductor, networking equipment and industrial technology companies, or international funds focused on next-generation technologies.
