Morgan Stanley said in a research note published on Aug. 4 that a potential U.S. restriction on new Chinese data-center components would favor non-Chinese optical module suppliers, with Coherent likely to be the largest beneficiary by scale. The bank also said Lumentum’s laser business could benefit indirectly if supply tightness in electro-absorption modulated laser, or EML, components lasts longer. Its main point was more restrained: near-term implementation would be difficult, and capacity and supply-chain bottlenecks would slow any market-share transfer.
Reuters reported on Aug. 4 that the Trump administration and the Federal Communications Commission, or FCC, are preparing to restrict new Chinese data-center components from entering the U.S. market. Optical modules were specifically mentioned. In Morgan Stanley’s view, that would be positive for the non-Chinese optical module supply chain, though the timing of the upside remains constrained by operational realities.
The bank said current capacity at non-Chinese suppliers, along with the pace of customer certification, limits how quickly share can move. At the same time, the proposed ban removes what the market had treated as a margin ceiling for non-Chinese vendors. That leaves a longer-term structural benefit in place, even if it takes time to show up.
Coherent seen as the clearest direct beneficiary
Morgan Stanley said Innolight and Eoptolink together account for about 50% of the optical module market. If restrictions take effect, that portion of demand would have to shift to non-Chinese suppliers. The bank identified Coherent as the biggest winner, saying its vertical integration gives it a better chance to absorb incremental demand. Applied Optoelectronics and Fabrinet were also cited as companies with the ability to take on additional volume.
Lumentum has less direct exposure to optical modules, but Morgan Stanley said it is one of the major global suppliers of EML lasers. If Chinese optical module makers are blocked from the U.S. market, non-Chinese module vendors would need to expand output, which would lift demand for EML lasers. The bank said that would extend the current tightness in EML supply and create an indirect benefit for Lumentum.
Ciena and Corning were described as more limited beneficiaries. Morgan Stanley noted that Ciena is more exposed to telecom than to data centers, while Chinese optical fiber is already not widely used in U.S. data centers.
Capacity and certification still constrain a fast shift
The bank said cloud companies have spent the past several years trying to diversify their supplier base, but current demand levels remain too high for non-Chinese vendors to fully replace the roughly 50% share held by Chinese companies. Even where alternative suppliers have already been certified, Morgan Stanley said they still would not be able to close the gap quickly.
That leaves the substitution trade difficult to realize in the short term. Morgan Stanley’s central view is that execution would face major obstacles at first, while any structural benefit would need more time to play out.
Two bottlenecks could shape the outcome
Morgan Stanley raised two practical concerns about the feasibility of the proposed restriction.
The first is insufficient capacity. The bank said current non-Chinese production is not enough to meet demand linked to AI capital spending. Even if cloud operators completed supplier qualification work over the past few years, the replacement base still cannot fill the demand gap in the near term.
The second is dependence on China for InP substrates. Indium phosphide, or InP, is the core substrate material used in lasers and photodetectors for high-speed optical modules. If non-Chinese suppliers want to expand module production, they first need access to InP substrates. Morgan Stanley said the main global supply of those substrates comes from the Chinese company AXTI, or AXT, Inc.
The article noted that Lumentum announced a new supply agreement last week, while Coherent’s CEO joined a Trump delegation on a visit to China several months ago, with securing InP substrate supply listed as one of the goals. Morgan Stanley said InP would become a critical bottleneck if the ban is implemented.
Path of implementation remains unclear
Morgan Stanley also said one possible solution could involve Chinese cloud companies buying U.S. components in order to reach some form of higher-level balance, but it added that the eventual path of implementation remains highly uncertain.
Optical modules are a core component in AI data centers, and Chinese suppliers account for about half of shipments, according to the note. If the restriction is enforced, Morgan Stanley expects a short-term supply shock. Over a longer period, it said, the structural benefit to the non-Chinese supply chain would gradually become clearer.
This article is based on a third-party sell-side research report and public market information. The cited ratings, target prices, earnings forecasts and related views are those of Morgan Stanley analysts and represent their institution’s position only.