China, the FCC, and the Logic of Transceivers

Quinn has joined the ChinaTalk team after studying semiconductor physics at Yale. Reach out to quinn@chinatalk.media to chat energy, BRI, robots, trade, industrial policy, or anything else! Over the past year, the FCC has released a series of restrictions on foreign-made hardware. First came drones, then routers, and then in July, inverters and robots. The newest devices to be considered are optical transceivers, which convert data into light and back within data centers. Following a Reuters report of a draft ban on new Chinese transceivers, markets responded as if it meant a straightforward substitution of supply, and American optics stocks rose while Chinese optics leaders fell. This swap is not that simple. The FCC’s cybersecurity logic is real but far narrower than the rule suggests. After explaining these gaps, I follow the transceiver supply chain from the module and the laser all the way down to the wafer and the metal it relies on. Chinese companies dominate the top of the stack but are reliant on Western companies in the middle. At the very bottom, Chinese control is ingrained, and the U.S.’s dependence on these basic materials will not be shifted by an FCC rule at the top of the stack. ChinaTalk is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber. The Rule On August 4, Reuters reported that the FCC was drafting a ban on import authorization for new models of Chinese optical transceivers to prevent Chinese firms from stealing data, installing malware, or disrupting service. Per the anonymous sources, officials want the rule published and effective by year end, though they cautioned the draft could still be modified or shelved. By the end of the week on August 7, Zhongji Innolight 中际旭创, the largest transceiver vendor globally, suffered a 10-percent drop in its stock price, while Coherent, a leading American transceiver manufacturer, saw its stock price rise 17 percent . The attention to transceivers did not come out of the blue. The FCC has basic authority over any devices that emit radio-frequency energy — including high-speed digital electronics like transceivers that radiate as a side effect — and a 2021 law bars it from authorizing equipment on the Covered List. On July 22, the FCC adopted rules ( published September 11, effective October 13) aiming to close the component loophole for authorization of devices with “logic-bearing hardware components,” including optical transceivers. But this prohibition only reaches components made by companies on the Covered List, which does not include the largest Chinese transceiver vendors. The FCC would either have to explicitly name those companies or implement the draft rule reported by Reuters to add transceivers to the Covered List as a category defined by production location, as it did for drones, routers, power inverters , and robots over the past year. On August 13, the Information Technology Industry Council (ITI), a trade association representing hyperscalers and optics companies, filed an ex parte notice explicitly urging the FCC to avoid adding optical transceivers or any foreign transceiver companies to the Covered List, emphasizing the impact of supply disruptions on data center build-out. No individual optics company, switch maker, or hyperscaler has filed comments arguing about transceivers (ET Docket 21-232, as of Sept. 21). 1 The template for an FCC rule on transceivers is public by way of precedent. When hardware was previously added to the Covered List, “foreign-produced” was defined by the Buy American test, and anything made outside the United States or without mostly domestic content is covered, with the DoW and DHS able to grant conditional approvals for individual producers on a time-bound plan to build in the U.S. The word “Chinese” would never have to appear in the rule. Innolight was included this year on the Pentagon’s Section 1260H list of Chinese military companies, but the restrictions are fairly narrow and bind only the Pentagon. 2 The FCC rule would be the first measure on transceivers to reach the networks that hyperscalers build for commercial customers. The ITI concern and the national security question both hinge on what transceivers actually are. The conversion of electrical to optical signal requires precisely the kind of logic-bearing hardware component defined by the FCC. Inside the Box There’s a temptation to think of data centers as a bigger, faster version of your laptop — but as the size and speed scale, signal flowing through copper wire tends to blur, with one symbol interfering with the next. Imagine standing in an echoey room. If you speak too quickly, your words commingle with the echoes. Shouting does nothing, as the interference is a function of the rate at which you speak, not your volume. For long distances, data centers avoid copper’s loss mechanisms entirely, using optical fiber to transmit signals. But at modern data rates, an optical module draws roughly one hundred times more power than a one-meter passive copper cable . If you use fiber for short stretches, you are paying a power bill for reach you aren’t using. As Arista’s CEO said in a recent call , there exists a philosophy of “copper if you can, optics if you must.” Within racks, copper dominates. Between racks, fiber reigns supreme. 3 At their intersection sits our protagonist, the optical transceiver. A pluggable optical module connects on one end to the switch — the routing center for the rack’s GPUs — and on the opposite end to the fiber. Between, the module holds the requisite hardware for converting an electrical signal into an optical one, namely a laser and a digital signal processor (DSP). Each pluggable transceiver also contains a microcontroller unit (MCU) that controls the DSP, sets the laser, and talks to the switch. On the way back in, the incoming light is converted to a faint current by a photodetector and boosted into a signal that the DSP can read by a transimpedance amplifier (TIA). Along the way between the parts, the light is guided by lenses and filters, and isolators shield the laser from reflections. Innolight puts such passive optics at 10 to 20 percent of a module’s total material cost. While the bulk of the module is built on a silicon substrate, silicon tends to release energy as heat rather than light, so the laser uses indium phosphide (InP), which can be tuned to an ideal wavelength for the optical fiber. As data rates increase, some modules have leveraged silicon photonics (SiPh), integrating waveguides, modulators, and photodetectors directly on the silicon chip. While the laser is still a separate InP component, it is now shared across several lanes, so the module only needs a handful rather than one per lane. In the distance between the switch and the faceplate that the module plugs into, the signal suffers significant loss that must be cleaned by the DSP, which consumes roughly half the module’s power budget. This loss is directly bypassed in some new architectures. In a near-packaged optics (NPO) system, the optical engine is soldered on the board just a few centimeters from the switch. In co-packaged optics (CPO) systems, the switch and optical engine are integrated into the same shared substrate with fewer, more powerful lasers housed in a separate plug-in module. 4 CPO and NPO, however, come at the cost of much more expensive servicing. How to Use an Optical Transceiver for Nefarious Ends Of the three harms officials described in the Reuters article — stealing data, pushing malware to the host, or disrupting service — the only one that’s actually plausible is service disruption. Claims that optical transceivers can be used for espionage are unfounded. Optical transceivers are neither a router nor a robot. A transceiver lies at the very bottom of the network, turning bits into light and light into bits blindly. And hyperscalers encrypt traffic before the data ever reaches the modu