2026.10.02 | Substack | Optical | Optics: FCC Transceiver Rules

Investors have been discussing yesterday’s strength in optics stocks, particularly Lumentum and Coherent. The gains have been attributed to a widely discussed note reporting a senior legal team’s view of how the FCC may frame restrictions on Chinese-built optical transceivers.

We examine the context for that note and the potential effects on suppliers.

Three Preliminary Observations

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• First, there is no public draft of the proposed transceiver rules. The note appears to relay an external senior legal team’s account of discussions with the White House and the FCC.
• Second, earlier Covered List entries identified equipment from specific entities, while more recent additions use broader origin-based categories, such as routers produced abroad and foreign-produced power inverters. Under that approach, the definitions matter and remain under discussion. As we explain below, we expect U.S. optics and component companies to benefit under either of the interpretations being discussed.
• Third, other policy developments also warrant attention:
• The bipartisan Communications and Technology Transparency Act of 2026 was introduced in the House on September 16

and announced by its sponsors on September 23. It proposes changes to the Covered List framework. If enacted, it would limit future additions to technology or services produced or provided by entities controlled by a foreign adversary, constraining the broad foreign-origin approach. That prospect could encourage supporters of origin-based listings to act sooner.

• On September 25, a bipartisan bill called the Securing National Security Systems from Chinese Optical Transceivers

Act was introduced in the Senate. Its objective is narrower: to prevent covered Chinese optical transceivers from being procured for the federal government’s most sensitive national security systems. The bill expressly names InnoLight and Eoptolink.

Possible Framework for FCC Restrictions

The reported discussions in Washington suggest that restrictions on Chinese optical transceivers would most likely be phased in at the 3.2T generation. The initial 3.2T ramp is expected in 2028, with broader adoption around 2029; LightCounting puts this at late 2028 to early 2029.

One framework reportedly under discussion would allow Chinese-built transceivers to remain eligible for import if components from U.S.-based companies account for at least 65% of BOM value. We see this as positive for Coherent and Lumentum, given the potential for stronger demand and pricing for their high-speed lasers. Chinese module makers could continue supplying customers while sourcing more components from U.S. companies.

Details and timing remain open. The reported proposal appears intended to preserve the existing 800G/1.6T installed base and supply arrangements while influencing the 3.2T supply chain.

Business Implications

If FCC restrictions broadly follow this framework, the outcome could be better than the market feared and may benefit the leading Chinese module makers:

1. A 65% U.S.-company BOM threshold would largely reflect the leaders’ existing sourcing, in our view. In 800G/1.6T

modules shipped to the U.S. today, DSPs come from Broadcom and Marvell, EMLs and CW lasers from Lumentum and Coherent, silicon photonics PICs are fabricated at Tower, and TIAs and drivers come from MACOM, Semtech and MaxLinear. We estimate that U.S.-company content is already well above 65%. Under the reported framework, eligibility would depend on component sourcing, which is already established for the leaders.

1. This could strengthen InnoLight’s and Eoptolink’s positions. In our view, second-tier players hoping to reduce

costs through Chinese lasers would lose that route in the U.S. market. A workable technical standard would replace entity-level risk, apart from the separate Section 1260H risk, while leaving the full 1.6T cycle unaffected.

1. Lumentum and Coherent could benefit in two ways: the policy would support demand for their high-speed lasers

without requiring them to expand lower-margin module assembly. Lumentum has said that module margins are below laser margins, so this framework could reduce the need to scale that business.

1. For suppliers outside both China and the U.S., including Sumitomo Electric and Mitsubishi Electric in EMLs, ST in

silicon photonics PICs, and MediaTek in DSPs, Chinese-built modules could still use Japanese EMLs or European PICs. The likely effect would be to make U.S. parts the safer choice for incremental orders, without eliminating these suppliers from the market. Other sales channels, including modules assembled in the U.S. or allied countries and the Chinese domestic market, would remain unaffected under this reading.

1. Japanese substrate makers, including Sumitomo Electric and JX, would also benefit, in our view. This assumes that

substrates are not counted separately in the module-level calculation and that their customers, Lumentum and Coherent, gain demand.

1. Beyond InnoLight and Eoptolink, we see a negative outcome for Chinese suppliers. In our assessment, Chinese laser

chip makers such as Yuanjie would lose access to U.S.-bound modules, leaving the domestic market and no exemption to pursue.

1. For InP substrates, Chinese suppliers such as Yunnan Germanium and Guangzhi Technology could face greater difficulty

qualifying at overseas laser makers. AXT is a U.S. company, but export licensing for its China-based production gives Beijing a readily available means of retaliation.

The analysis remains uncertain because there is no published text. Three definitions are still open: the basis for calculating the 65%, what qualifies as a U.S. company, and what qualifies as U.S.-made.

The FCC’s July treatment of power inverters and advanced robotic devices provides a stricter precedent. It draws on the Buy American domestic-end-product test, which generally requires U.S. manufacturing and domestic components exceeding 65% of total component cost for deliveries in 2024–2028, rising to 75% from 2029. Manufacturer nationality alone does not satisfy that test. Exceptions and their application under the FCC framework require separate analysis. Applied strictly to the current transceiver supply chain, this could leave very few products eligible.

Lumentum’s EMLs are mostly fabricated in Japan. Tower is headquartered in Israel, with part of its main silicon photonics production in Israel and Japan. Even Lumentum’s and Coherent’s own transceivers would be foreign-produced under a strict manufacturing-location test: Coherent’s datacom module assembly is centered in Wuxi and Malaysia, while Lumentum’s module business came with Cloud Light, which manufactures in China and Thailand.

We believe the largest single block of transceiver capacity outside China today is InnoLight’s Thailand plant. This concentration of production is a strong reason to expect conditional approvals and a long phase-in under a strict interpretation. It also supports our expectation of the less restrictive U.S.-company-content approach. Until the text is published, the difference between those two approaches remains central to the analysis.

Under either interpretation, we expect U.S. optics and component companies to benefit. A U.S.-company-content requirement would support demand for their parts directly. Under an onshore-manufacturing requirement, we see them as the suppliers best positioned to seek conditional approval and present the U.S. expansion plans agencies would likely favor. We therefore expect stronger demand and pricing for Lumentum’s and Coherent’s high-speed lasers, a more secure position for Broadcom and Marvell in DSPs, and additional demand for MACOM, Semtech and MaxLinear in TIAs and drivers. AXT could also benefit from higher laser demand, subject to the export-licensing risk discussed above.

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