Key Points
- The AI computing boom has created a severe shortage of Faraday rotators, tiny but essential upstream components for optical modules, with demand more than double the supply.
- Production of Faraday rotators is complex, requiring continuously running high-temperature furnaces, and restarts can take up to six months.
- The shortage was exacerbated by leading Japanese manufacturer Granopt reducing capacity, exposing a vulnerability due to limited mass-production capabilities outside a few Chinese manufacturers like CASTECH (Fujing Keji 福晶科技).
- While upstream prices rose by 50% last year, the impact on final optical module costs is limited as rotators are low-cost components. Tier-1 manufacturers like Innolight (Zhongji Xuchuang 中际旭创) are largely unaffected due to existing inventory and diversified supply chains.
- China’s rare earth export controls introduced this year add significant uncertainty, potentially impacting U.S. and Japanese manufacturers reliant on these resources and accelerating the trend for domestic substitution within China.
- Current Supply-Demand Ratio: Demand is more than double (2x) the current supply.
- Upstream Price Surge: Prices increased by 50% over the last cumulative year.
- Production Lead Time: Furnace restarts for crystal growth can take up to 6 months.
- Future Outlook: 1.6T modules expected for large-scale deployment by 2026.
- Procurement Targets: Major overseas clients targeting 20 million units for 2026.
The artificial intelligence revolution is heating up data centers worldwide.
But there’s a problem brewing in the supply chain.
As companies race to deploy more computing power for AI workloads, they’re running into a bottleneck with a critical optical component that most people have never heard of: Faraday rotators.
And right now, the world doesn’t have enough of them.
What’s a Faraday Rotator, and Why Should You Care?
Faraday rotators are tiny but essential upstream raw materials used in optical modules—the technology that powers data center communications.
Here’s the thing though: they’re not easy to make.
The production process requires high-temperature furnaces that must run continuously to maintain product performance and parameter stability.
If a furnace shuts down and cools, manufacturers face a brutal restart cycle:
- Crystal growth calibration
- Full process parameter debugging
- A timeline that can stretch as long as six months
Translation: it’s not like flipping a light switch.
Once production stops, restarting is a serious undertaking.
Why the Global Supply Chain Just Hit a Speed Bump
Here’s what triggered the alarm bells:
Granopt, a leading global manufacturer of Faraday rotators based in Japan, recently reduced its production capacity.
That single move has exposed a major vulnerability in the global optical module supply chain.
Right now, only a small handful of domestic Chinese manufacturers—like CASTECH (Fujing Keji 福晶科技)—can mass-produce Faraday rotators and the supporting magneto-optical crystals they require.
The result?
Capacity remains localized and relatively low.
Meanwhile, on the downstream side, this shortage is hitting small-to-medium optical module manufacturers the hardest.
But here’s the plot twist: Tier-1 giants aren’t sweating it.
Companies like Innolight (Zhongji Xuchuang 中际旭创) and Accelink Technologies (Guangxun Keji 光迅科技) remain largely unaffected.
Why?
Early long-term contracts and sufficient stockpiles.
Demand Has Exploded—Supply Hasn’t Kept Up
The numbers tell the story.
According to LightCounting, an industry research firm: current demand for optical modules is more than double the supply.
Let that sink in.
Demand is literally outpacing supply by 2x.
Here’s what’s driving this gap:
- 800G modules remain in robust demand as AI infrastructure scales
- 1.6T modules are expected to enter large-scale deployment in 2026
- Major overseas clients have already revised their 2026 procurement plans upward to 20 million units
The acceleration of global computing power centers—from last year into this year—has led to explosive growth in the optical module market.
But upstream material manufacturers?
Their expansion speed has lagged behind.
They simply haven’t matched the growth rate of overall demand, resulting in periodic shortages.
When Supply Gets Tight, Prices Rise
The math is simple: less supply + more demand = higher prices.
And that’s exactly what happened.
According to industry sources, the price of Faraday rotators rose significantly last year, with a cumulative increase of 50%.
But here’s the silver lining:
While these components are essential for optical module production, they’re actually relatively low-cost parts.
They account for a very low percentage of the total cost of an optical module—usually in the single digits or lower.
So even with a sharp 50% price increase, the pressure passed downstream is limited.
That’s why the Tier-1 players aren’t panicking.
There’s Another Wild Card: China’s Rare Earth Export Controls
In January of this year, China implemented rare earth (Xi Tu 稀土) export controls.
This move has serious implications for the global Faraday rotator supply chain.
Here’s why it matters:
U.S. and Japanese companies have advanced technology and hold the lion’s share of the market.
But they lack the advantage of rare earth resources.
According to industry leaders, if they can’t secure the necessary rare earth raw materials, their production capacity will inevitably suffer.
This is adding significant uncertainty to an already tight supply situation.
Who’s Stepping In to Fill the Gap?
Let’s look at the players positioning themselves for the domestic substitution wave.
CASTECH (Fujing Keji 福晶科技)
CASTECH focuses on laser crystals and non-linear optical crystals.
They’re one of the few listed domestic firms capable of mass-producing high-end TGG/TSAG magneto-optical crystals and are a primary candidate for domestic replacement of overseas Faraday rotators.
On March 25, their Board Office revealed:
“The company has a layout in magneto-optical crystal products, including Faraday rotators. These products are comparable to U.S. and Japanese equivalents. However, this business currently accounts for a small portion of revenue—about 1%—and is only supplied in small batches.”
On expansion?
They’re playing it flexible: “We would adjust capacity based on market conditions.”
In-Light (Tengjing Keji 腾景科技)
In-Light is a precision optics manufacturer producing components used in optical communications (Guang Tongxin 光通信) and fiber laser chains.
Recently, they announced successful mass production of large-size pure YVO4 yttrium vanadate crystals—a critical upstream material.
Dongtien (Dongtian Wei 东田微)
Dongtien focuses on precision opto-electronic thin-film components.
Optical isolators—which rely on Faraday rotators as a key upstream raw material—are part of their optical communication business.
They’ve completed their optical isolator production line and are actively expanding through capacity optimization and staffing.
But here’s the key: they don’t produce the rotators themselves.
They purchase them externally based on production needs.
Xiamen San-U Optronics (San-You Guandian 三优光电)
A New Third Board listed company, San-U Optronics has self-developed optical isolators.
However, they haven’t entered the Faraday rotator manufacturing segment and rely on external procurement.
The Tier-1 Players: “We’re Fine, Thanks”
Meanwhile, the big dogs aren’t losing sleep over this shortage.
Innolight (Zhongji Xuchuang 中际旭创)
On March 26, Innolight’s Board Office stated:
“Our production and operations are currently unaffected by the supply of rotators. Our supply chain is stable, and we have prepared inventory in advance to meet future demands. Customer orders are proceeding normally.”
They added: “Faraday rotators account for a very low percentage of our costs. In addition to purchasing from U.S. and Japanese suppliers, we have implemented a diversification strategy that includes multiple domestic manufacturers.”
Translation: They’re diversified, they have inventory, and they’re not worried.
HGTECH (Huagong Keji 华工科技)
HGTECH uses an outsourcing model for all materials.
To counter periodic shortages, they coordinated with suppliers early.
Currently, they’re shipping 400G and 800G products in bulk, with 1.6T products transitioning from small-batch trials to full mass production.
Accelink Technologies (Guangxun Keji 光迅科技)
Accelink noted that as a high-volume purchaser, they have long-term agreements that prioritize their supply.
“The shortage will not affect our normal production plans,” a representative stated.
Period.
So What’s Really Going On Here?
Industry analysts suggest the “lack of panic” among giants is due to three factors:
- High inventory levels accumulated in advance
- Low value of the component (even if prices double, impact on final module cost is negligible)
- Technical barriers for Faraday rotators are not insurmountable—future supply will depend on the pace and rhythm at which domestic Chinese manufacturers choose to release new capacity
Some market perspectives even suggest this shortage could be interpreted as “hunger marketing.”
The real story?
The logic of tightening overseas supply accelerating domestic substitution appears sound.
As AI computing infrastructure demands more optical modules, and international suppliers face capacity constraints and rare earth headwinds, the window for Chinese domestic manufacturers to capture market share is wide open.
The question isn’t whether they’ll step in.
It’s how fast.
And that’s the real bottleneck worth watching in the optical module supply chain.
