Event Spotlight | FCC Restrictions on Chinese Optical Modules: Can Southeast Asian Capacity Circumvent Them?

💡 Key Takeaways

- The FCC’s regulatory stance on Chinese data center components shows continuity; the inclusion of optical transceivers in regulatory discussions is not unfounded,and should not be dismissed simply by claiming 'a ban is unfeasible.'。

- GenuineThe key divergence lies in the interpretation of implementation criteria: If origin is determined solely under customs rules, Chinese manufacturers’ Southeast Asian facilities have clear room for circumvention; however, if the router industry’s definition of 'production' is applied, overseas facilities can only serve as a buffer and cannot guarantee successful circumvention.

- Once requirements regarding R&D location, end-to-end BOM, and U.S. manufacturing reshoring are layered on top of country-of-origin rules, the industry impact willescalate from 'manufacturing relocation' to 'reconfiguration of technological control', an impact significantly greater than the current market narrative based on Thai production capacity estimates.

- Beneficiaries will be companies with R&D, manufacturing, certification capabilities, and supply chain transparency in non-restricted regions, $Coherent (COHR.US)$ 、 $Lumentum (LITE.US)$ are widely viewed as primary beneficiaries.

Background: Optical modules now under FCC scrutiny

A report on August 4 indicated that the Trump administration and the FCC are drafting restrictions targeting Chinese data center components, specifically naming optical transceivers, aiming towithin 2026announced and implemented. The report also noted that potential measures are more likely to target approvals of future new products rather than already installed or existing models.

In fact, the FCC hasOctober 2025already explicitly sought comments on whether restrictions should be expanded to include components such as semiconductors and optical transceivers, potentially covering entities on the Covered List, and even further discussing entities controlled by a foreign adversary.Therefore, the inclusion of optical transceivers in FCC regulatory discussions is not unfounded.

The market generally believes that the optical module supply chain is too critical, and non-Chinese manufacturers' capacity is insufficient to meet demand driven by AI-related capital expenditures, making a ban unfeasible.However, the FCC's regulatory direction demonstrates clear continuity.：On March 23, 2026,it already incorporated foreign-made consumer-grade routers into the Covered List framework,Julyand subsequently added foreign-produced power inverters and advanced robotics equipment into the Covered List system. The interpretation of 'foreign-produced' can refer to the Buy American Act test.Production capacity in third countries is not automatically equivalent to exemption. Relocating production capacity to Thailand/Malaysia is a key reason behind the market’s relatively optimistic view on risks related to Chinese optical modules,but FCC regulations could extend beyond final assembly location to cover design, control, ownership, and sources of critical components.

Can Southeast Asian production capacity circumvent restrictions: based on customs country-of-origin rules or the Covered List?

Chinese manufacturers have already shifted production capacity to Southeast Asia as a fait accompli. InnoLight Technology (3308.HK) began establishing operations in Thailand in 2019, started production at its Thai factory in 2022, and by Q1 2026, overseas production accounted for 84.8% of total output, with 90–95% of its North American orders shipped from Southeast Asia. For Eoptolink, nearly 100% of products sold to North America are shipped from its Thai factory.The U.S. market has effectively accepted the reality of optical module production shifting from mainland China to Southeast Asia. If future restrictions follow traditional country-of-origin rules, Chinese firms’ overseas facilities stand a strong chance of maintaining market access.

The core issue lies in this: if the FCC does target optical modules,will it regulate based on customs country-of-origin rules or the Covered List?These two frameworks focus on entirely different criteria—customs/tariff rules emphasize HS codes, country of origin, and whether substantial transformation has occurred at the time of import declaration; whereas the FCC equipment authorization framework focuses on whether the device falls under regulated equipment categories.

If new rules apply only customs country-of-origin principles, Chinese manufacturers’ overseas facilities would clearly have room to circumvent restrictions; however, if the FCC adopts for optical modules the same 'production' definition used for routers, overseas facilities could only serve as a buffer—not a guaranteed means of avoidance. The reason is thatThe current model for many Chinese manufacturers isChina-based R&D + Southeast Asia-based manufacturing/testing, rather than a complete end-to-end overseas system.

Applying the same logic as with routers, U.S. manufacturers producing in China would also be affected,Only those companies with production capabilities in non-restricted regions—and ideally also R&D, testing, certification, and supply chain transparency in such regions—would benefit.Crowell & Moring (a law firm specializing in antitrust and international trade) explicitly stated that all foreign-made routers—regardless of whether they are produced by U.S. or foreign companies—are included in the ban,Such rules impose categorical restrictions based on place of production, not the identity of the manufacturer.If the rule extends to design/development,merely relocating final assembly overseas could still result in classification as restricted,particularly since the common model in the optical module industry—'R&D in China, partial processes or final assembly and testing in Thailand/Malaysia'—does not equate to a fully overseas production system.

Another perspective: Negotiation leverage

Another view holds that the ban serves as negotiation leverage ahead of the China-U.S. summit in September, forming part of a broader negotiation strategy. Currently, North American cloud providers are increasingly adopting JDM (Joint Design Manufacturing) or customized co-development models,800G/1.6T high-speed optical modules are supplied by Chinese vendors, accounting for approximately 70% of shipments.If R&D locations become restricted, cloud providers will either need to rebuild design capabilities domestically in the U.S. or shift to the few remaining suppliers capable of offering overseas co-development, which would delay the rollout timeline for new technologies.。

Notably, as early asIn 2019,the early stages of the trade war, optical modules were temporarily restricted but later exempted, as they were deemed to lack data espionage value, andrestrictions would slow down U.S. AI progress.。

Conditional approval mechanisms and real-world thresholds

If the FCC ultimately introduces a Conditional Approval mechanism, its core isU.S. manufacturing and onshoring programs. Referring to router Conditional Approval application requirements, companies must submit detailed BOMs, country of origin for each component, software/firmware sources, locations of manufacturing/assembly/testing, intellectual property details, and U.S. manufacturing reshoring plans.

This is also why $Coherent (COHR.US)$ and $Lumentum (LITE.US)$ they are widely seen as primary beneficiaries, as they are already advancing capacity expansions for InP/lasers/modules in the U.S. Coherent is expanding its 6-inch InP platform in Sherman, Texas, with final module-scale packaging and testing conducted in Ipoh, Malaysia; Lumentum has InP capabilities in San Jose, the U.K., and Japan, with its main module packaging and testing base in Thailand, and announced in 2026 plans to build a new U.S. InP facility in North Carolina, expected to ramp up by mid-2028. Nevertheless, even U.S.-based companies are not entirely free of China exposure—Coherent still uses Chinese subcontractors as backup or overflow production capacity.

We believe thatThe real threshold for Conditional Approval is far higher than simply building factories overseas. Core requirements include: disclosure of equity ownership and beneficial owners, end-to-end traceability of BOMs/software/IP/testing locations, explanation of critical supply chain vulnerabilities, and most importantly,U.S. domestic manufacturing/onshoring plans and quarterly progress reports。

Once the FCC layers R&D location requirements, BOM transparency, and U.S. manufacturing reshoring plans on top of country-of-origin rules, the industry impact willescalate from a manufacturing relocation issue to a restructuring of technological control, with significantly greater disruption than current market narratives based solely on Thai production capacity suggest.。

Ranking of Chinese manufacturers' responses and capabilities

Chinese manufacturers may need to demonstrate that they are establishing an auditable, U.S.-oriented R&D and manufacturing system and are willing to further commit to onshoring.

The chart below outlines each company's capability conditions corresponding to conditional approval: $CIG (06166.HK)$Has the clearest relative advantage in terms of U.S. R&D centers, pilot production certification at overseas multi-location manufacturing facilities, and U.S.-based factories; $ZJ INNOLIGHT (03308.HK)$ Strongest in overseas manufacturing capabilities and North American/international customer certifications, but plans for U.S. reshoring/nearshoring production remain unclear.

Source: Bank of America, DIGITIMES, Morgan Stanley

[Investment Advisory Information]

Yu Shilin, Licensed Representative, CE Number: ATQ882

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