The hardware layer of the AI revolution is facing significant supply pressures. While much of the public discourse focuses on GPU architecture and software optimization, the physical reality of high-speed data transmission relies on III-V compound semiconductors—specifically gallium arsenide (GaAs) and indium phosphide (InP). These materials are critical to modern infrastructure, and their supply chains are currently subject to intense geopolitical scrutiny and export restrictions.
Export controls and the Q2 price surge
The supply of GaAs and InP substrates has become increasingly volatile as China implements export controls on key metals. According to reporting from CNYes, these restrictions are widely viewed as countermeasures to U.S. technology limitations. The result is significant shipping pressure for Taiwanese epitaxial wafer fabs, which must navigate these constraints to maintain their production schedules.
The volatility reached a tipping point in the second quarter of 2026. Some epitaxial wafer factories have already raised prices for GaAs products during this period. This price hike is driven primarily by the rising cost of raw gallium, which increases the overall cost of producing GaAs substrates. For the firms that rely on these materials for power amplifiers (PA) and optical components, the cost of the raw substrate is no longer a stable variable.
The situation is further complicated by ongoing conflict in the Middle East. While some firms maintain they can still meet shipping demands, they acknowledge that war-related disruptions have exacerbated an already tight supply environment. In this climate, comprehensive supply chain planning has become very important for maintaining operational continuity.
The race for AI and LEO infrastructure
The demand for these materials is not static; it is being driven upward by two primary catalysts: the expansion of AI data centers and the proliferation of low-earth orbit (LEO) satellite constellations. Both require the high-frequency signal transmission capabilities that only compound semiconductors can provide.
Industry insiders indicate that two global giants, Nvidia (NVDA) and SpaceX, are aggressively securing material supplies to ensure their hardware roadmaps remain on track. These companies are actively grabbing materials to secure a position in the market and ensure they have the necessary components for upcoming product cycles. This high level of demand from industry leaders places significant pressure on the mid-stream Taiwanese firms that actually grow the crystals and manufacture the wafers.
For AI infrastructure, the focus is on optical communication. As data centers move toward higher bandwidths to support larger language models, the demand for InP-based optical transceiver modules is surging. This creates a scenario where the scaling of AI hardware is closely tied to the availability of the substrates needed to move data into and out of the processors.
How Taiwanese foundries are hedging risk
Taiwanese firms are responding with a mix of capital expenditure and aggressive negotiation. WinSemi (3105-TW), a leading global player in GaAs wafer foundry services, is increasing capital investment in its 6-inch GaAs production lines. This expansion is a direct response to the surging demand for optical transceiver modules.
To protect margins against raw material spikes, WinSemi is leveraging its market position. The company stated that its standing as a top-tier global foundry provides it with sufficient bargaining power to renegotiate pricing with customers if raw material costs fluctuate significantly. This approach allows the firm to maintain product profitability despite the volatile costs of raw inputs.
Similarly, IET (4971-TW), which focuses on InP, is seeing increased demand for its PIN epitaxial products used in AI data center information transmission. The company is currently negotiating mass production orders with several major firms. To meet these timelines, IET is actively lobbying substrate suppliers for larger supply quotas to ensure they can keep pace with the delivery schedules of their AI-sector clients.
What to watch
The stability of the semiconductor supply chain now depends on whether diversification can outpace geopolitical friction. Observers should monitor two specific indicators: whether the price of raw gallium continues to climb through the remainder of 2026, and if the pre-emptive buying by firms like Nvidia and SpaceX creates a secondary shortage for smaller hardware innovators.
Furthermore, the ability of Taiwanese foundries to maintain profit margins will depend on how much of the material cost increase the market is willing to absorb. If the cost of GaAs and InP substrates rises too sharply, it may force a shift in hardware design or a desperate search for alternative materials, though few currently match the performance of III-V compounds in high-frequency applications.