Microsoft Lobbies Against Ban on Chinese Optical Transceivers

Microsoft is pressing the Trump administration to drop an expected ban on new Chinese optical transceivers, Reuters reported on Tuesday, citing three people familiar with the matter. The stakes are hard to overstate: China holds roughly two-thirds of the global optical transceiver market, according to Counterpoint Research, led by Zhongji Innolight and Eoptolink.

Optical transceivers are the parts AI data centers cannot run without. They convert electrical signals from servers and switches into light and carry it over the fiber cables that link thousands of GPUs inside a facility. Microsoft was among a handful of firms that met officials from the White House Office of Science and Technology Policy and the National Security Council in September to flag the supply chain problems a ban would cause.

What would the FCC rule do?

Reuters first reported in August that the administration wants to bar imports of new models of Chinese optical transceivers, on concern Beijing could use them to steal data, install malware or disrupt service. The ban is being drafted at the FCC, which oversees U.S. telecommunications — not at the Commerce Department, whose export controls govern chips flowing the other way.

The FCC's instrument is equipment authorization. Electronic devices need FCC approval before import or sale, and companies on its Covered List cannot get it. A rule that took effect on Oct. 13 extended that bar to devices containing logic-bearing components made by Covered List companies. The leading Chinese transceiver makers are not on that list, so a transceiver ban would require a new designation or rule.

Early indications pointed to a new-models-only rule that would protect the installed base, consultant Aman Mahapatra of Tribeca Softtech told Network World in August. Even so, upgrades and cost-reduced versions of today's 800G and 1.6T optics could count as new, Cignal AI noted. Morgan Stanley told clients in October that the administration was weighing a ban limited to Chinese transceivers capable of 3.2 terabits per second, and two of Reuters' sources confirmed that threshold is under consideration. Production of 3.2T parts is not expected to ramp until 2028, with wide installation in 2029.

Why does the industry object?

Microsoft has 35 data centers under construction in the U.S. and 134 more planned, according to Cleanview data cited by Reuters. U.S.-based Coherent and Lumentum make competing products but lack the scale to replace Chinese vendors, a Foundation for American Innovation report cited by Reuters found. Lumentum, for its part, is being acquired by Marvell in an all-stock deal with an implied enterprise value of $115 billion.

The Information Technology Industry Council sent the FCC a letter on Aug. 13 urging it not to add optical transceivers to its blacklist. "It really threatens to arguably grind (the data center rollout) to a halt," ITI general counsel John Miller told Reuters. "Those chips, without optical transceivers literally could just sit there waiting around un-utilized."

Analysts split on the security case. Mahapatra called a transceiver "a comparatively dumb device converting electrical signals to optical and back." Geopolitical analyst Irina Tsukerman countered that firmware and management interfaces in modern modules make the malware concern worth taking seriously.

Is Congress involved?

Pressure is also building on Capitol Hill. In September, a bipartisan group of lawmakers introduced legislation to bar the federal government from equipping sensitive systems with Chinese-made optical transceivers. The lobbying arrives as lawmakers push separately to write China chip export limits into the defense bill, and as the U.S.-China trade truce runs toward Jan. 10. Innolight, meanwhile, has been added to the Pentagon's list of Chinese military companies.

Microsoft declined to comment. The White House, the FCC and the Chinese embassy did not immediately respond to Reuters. The FCC has not said publicly when, or whether, it will issue the ban — leaving the industry waiting on a rule that could arrive, if the 3.2T threshold holds, just as the next generation of optics reaches the market.