Demand for AI data centers is bursting with Lumentum (LITE.US) optical component orders scheduled to 2029

The Zhitong Finance App learned that as technology companies scramble to build high-speed AI data centers, Lumentum (LITE.US) optical components are almost “sold out”, and orders are scheduled for early 2029. Lumentum CEO Michael Helston said in an interview in Tokyo on Friday that the company will not be able to meet about 70% of the demand for some products next year, and will not be able to meet 30% of the demand for others by 2028. Just six months ago, Helston also said that Lumentum is expected to sell out production capacity by 2028.

Earlier this year, Lumentum and competitor Coherent (COHR.US) each received an investment of $2 billion from Nvidia (NVDA.US). The company supplies advanced indium phosphide devices that enable high-speed cloud computing and data transmission. Analysts on average expect Lumentum's sales to more than double this year.

“We're really trying to catch up and increase production capacity as fast as possible, but we're far behind what our customers need,” Helston said. “Our production capacity has been completely sold out, and there is no sign of abating.”

Supply is tight and production expansion competition highlights the value of Japan's supply chain

With the rise of a boom in data centers and other AI infrastructure construction around the world, some investors are becoming more wary of rising costs and debt. To ease the concerns of key suppliers, big tech companies are providing guarantees for long-term agreements.

According to reports, the US is considering banning the import of new Chinese optical transceivers, and supply restrictions in this industry may be further intensified. According to Counterpoint Research, Lumentum and Coherent will not be able to fill the gap.

To meet surging demand, Lumentum, headquartered in San Jose, California, has increased the production capacity of its main plant in the Tokyo metropolitan area by 12 times over the past two years. The company plans to invest at least $350 million in the plant and nearby facilities. Additionally, the company has expanded production capacity at its Carswell plant in the UK.

Helston said that in order to expand the product line, the company needs to consider acquisitions. “I think maybe within the next year, we would like to add new capabilities in addition to our current capabilities,” he said.

It takes three to five years for companies like Lumentum to build new production capacity. However, Helston said that hyperscale cloud vendors have agreed to take part of the capital expenditure risk. “These hyperscale cloud vendors are willing to invest in this.”

Silicon photonic technology using optical data transmission is expected to replace copper interconnect technology in data center clusters to meet the growing demand for faster transmission speeds for AI hardware. Optical networks also help the system reduce heat generation and power consumption.

Japan has a number of companies with expertise in indium phosphide semiconductors, optical fibers, and silicon photonics, including Fujikura, Sumitomo Electric, Furukawa Electric, Hamamatsu Photonics, Mitsubishi Electric, and Hitachi High-Tech.

Lumentum obtained technology partly derived from Japan through the acquisition of Oclaro Inc. in 2018, and Oclaro inherited Hitachi's optical research results. Today, its factory in Sagamihara is one of the most advanced indium phosphide device production sites in the world, and can provide stable, high-quality products.

Earlier this year, Israel's silicon photonic device foundry operator Tower Semiconductor Ltd., completely took over a 300mm plant in Uozu, Toyama Prefecture, in central Japan, and plans to expand photonic device shipments.