Microsoft presses to halt proposed Chinese transceiver ban for U.S. AI data centers

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Highlights

Microsoft and other tech firms are lobbying against a proposed U.S. ban on new Chinese optical transceivers, citing risks to 35 ongoing and 134 planned data center projects.
The FCC is considering restricting Chinese transceivers with 3.2 terabits per second capacity, but Morgan Stanley expects broad installation of such products only by 2029.
China controls about two-thirds of the global optical transceiver market, with U.S. manufacturers unable to match the scale of dominant Chinese suppliers like Eoptolink and Zhongji Innolight.

Supply chain concerns shape policy push

As first reported by Reuters, Microsoft has been lobbying the Trump administration to stop an expected ban on imports of new Chinese optical transceivers, according to three people familiar with the matter. The components move data through fiber-optic cables inside data centers and are seen by U.S. officials as a potential security risk because they could be used to steal data, install malware or disrupt service.

Microsoft is part of a wider group of companies and trade organizations warning that the restriction could disrupt data center construction at a time when demand for cloud and AI services is rising sharply. The company has 35 data centers under construction in the U.S. and another 134 planned, according to Cleanview, a market intelligence firm tracking data center development.

The software and cloud company was among a small group that met officials from the White House Office of Science and Technology Policy and the National Security Council in September to highlight the supply chain problems such a ban could create, two of the sources said. John Miller, general counsel at the Information Technology Industry Council, said the restriction threatens to slow data center deployment because companies have already bought AI chips that cannot be fully used without transceivers to connect them.

Ban debate carries broader AI market implications

The Federal Communications Commission, which oversees the U.S. telecom sector, is working on the ban, though it has not publicly addressed the optical transceiver issue. Two of the sources said a threshold under consideration would target Chinese optical transceivers capable of handling 3.2 terabits of data per second.

Morgan Stanley said in an October client note that production of such products is not expected to ramp up until 2028, with broad installation expected in 2029. That approach could give U.S. manufacturers more time to expand production while reducing immediate disruption for major cloud operators and limiting friction with Beijing.

China controls about two-thirds of the global optical transceiver market, according to Counterpoint Research. Chinese suppliers including Eoptolink and Zhongji Innolight hold a dominant position, while U.S.-based Coherent and Lumentum compete in the segment but lack the scale to replace Chinese vendors, according to the Foundation for American Innovation.

Industry resistance is also becoming more public. The Information Technology Industry Council sent a letter to the FCC on August 13 urging the agency not to add optical transceivers to a trade blacklist, and bipartisan U.S. lawmakers in September introduced legislation to stop the federal government from using Chinese-made optical transceivers in sensitive systems.

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