The fundamental structural vulnerability originates from China’s positioning at low-margin downstream assembly links in the global CPO value chain. All critical upstream technologies remain monopolized by suppliers from the United States, Europe and Japan. High-speed DSP chips are dominated by Broadcom and Marvell; advanced EML laser chips and indium phosphide substrates lack large-scale, commercially viable domestic alternatives within China. NVIDIA and Google jointly formulate industry-wide technical parameters and upgrade roadmaps for next-generation CPO architectures. Chinese manufacturers are limited to packaging, assembly and passive component production, with limited pricing power and no sustainable technological moat to shield their market share from clients’ procurement adjustments.

Extreme customer concentration brings notable operational fragility to the whole sector. Innolight books more than 86% of total revenue from overseas customers, while Eoptolink and Taichenguang generate over 75% of top-line revenue from North American buyers. For nearly all A-share CPO-related listed firms, the top five overseas clients account for more than 70% of annual total revenue. Such heavy reliance on single regions and counterparties leaves domestic manufacturers exposed to unilateral changes in purchasing strategies from large U.S. tech and cloud enterprises.

North American technology firms have put tangible capital spending and capacity strategies into practice to reduce long-term reliance on Chinese component suppliers, rather than merely releasing conceptual strategic statements. In the past two fiscal years, NVIDIA has allocated over $7 billion in capital expenditure to U.S.-based optical enterprises including Coherent and Lumentum, scaling domestic production lines for critical CPO optical engines to build geographically separated supply chains less dependent on mainland production bases. Meanwhile, Google has accelerated internal development of its proprietary OCS optical switching architecture to cut external optical module procurement volume, lowering long-term reliance on third-party vendors through internal technological iteration.

All major North American cloud hyperscalers have formally adopted the China+1 dual-sourcing framework to mitigate geographic concentration risks. New long-term supply contracts and high-margin next-generation CPO orders are prioritized for manufacturing sites in Southeast Asia and Mexico, while mature mid-range and low-end optical module orders are gradually shifted away from mainland China. Beyond direct order migration, a less noticed risk arises from aggressive offshore capacity expansion by leading Chinese optical module companies, paired with intentional structural design for overseas subsidiaries to avoid consolidation in parent companies’ A-share financial statements.

On the surface, building factories in Thailand, Malaysia and Mexico helps enterprises evade tariffs and meet localization requirements set by overseas clients. In reality, layered equity structures, differentiated voting rights and introduction of external third-party shareholders effectively isolate high-margin offshore assets from listed parent entities. While such accounting arrangements satisfy immediate cross-border regulatory and commercial demands, they trigger continuous value dilution for public shareholders over time. As profitable international businesses expand independently, domestic listed entities may gradually degrade into low-margin domestic production platforms, excluded from revenue upside brought by global AI capital expenditure expansion.

This strategic shift echoes Apple’s well-documented supply chain restructuring, which serves as a valuable reference for judging the trajectory of the CPO sector. OFILM once invested massive fixed assets in customized production lines tailored to Apple’s manufacturing standards, with revenue highly concentrated on smartphone component orders. After Apple removed the firm from its approved vendor list for strategic reasons, OFILM suffered sharp profit declines and a substantial market cap shrinkage. For more than a decade, Apple has steadily transferred assembly and component production capacity out of mainland China to India and Vietnam, reflecting the strong unilateral bargaining power Western original equipment manufacturers hold to adjust supplier rosters. Since AI computing infrastructure is deemed strategically sensitive technology across North America and Europe, supply chain geographic rebalancing is likely to advance at a faster pace than the restructuring seen in consumer electronics supply chains.

We recognize strong near-term order visibility and revenue growth potential for optical module manufacturers amid ongoing global AI capital expenditure cycles. Even so, equity markets have not fully priced in multi-year structural pressures from supply base diversification facing China’s optical component suppliers. Confined to low-value assembly links with insufficient self-sufficiency in core optical chips and system architectures, these firms face prolonged risks of marginalization or gradual exclusion from high-priority global AI supply chains.

For global institutional investors, reasonable valuation judgment requires adjusting valuation premiums driven solely by North American order backlogs to reflect risks from progressive supply chain restructuring. For Chinese industry participants, offshore factory construction and financial reporting adjustments alone cannot resolve fundamental industrial security challenges. Long-term competitive advantages must come from targeted R&D investment in high-speed optical chips, proactive customer diversification to lower dependence on North American revenue sources, and construction of domestically independent optical interconnection ecosystems for local computing infrastructure. By easing external constraints in technology and customer concentration, China’s optical communications industry can improve resilience amid recurring global supply chain adjustments initiated by international technology buyers.

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