No topic has dominated recent industry discussions more than the trade war and the impact tariffs may have on the explosive growth of AI and optical component shipments.
Current Status of Optical Component Tariffs
Optical transceivers are subject to the general 10% tariff on all goods imported into the U.S. However, they are currently exempt from the 245% ad valorem tariff imposed on Chinese goods, and also from tariffs on other countries once the 90-day delay period expires—per Executive Order 14257. This order exempts several classifications of goods, including those under Harmonized Tariff Schedule number 8517.62: “Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus.” Specifically included is subcategory 8517.62.0090, “other,” which a 2019 ruling definitively classified pluggable optics under.
Sampling the Industry’s Sentiment
Cignal AI surveyed a group (N=10) of industry leaders for their views. All responses were anonymous, as most companies have yet to formalize their positions.
We began by presenting two scenarios, allowing respondents to suggest alternatives if they disagreed:
- Option 1: Core AI infrastructure (GPUs, CPUs, switches, etc.) will be minimally affected by tariffs and purchased at forecast rates. Optical components will follow suit, albeit at higher prices.
- Option 2: Everything becomes more expensive. While capex spending holds steady, the volume of optical components—and other equipment—declines.
Key Takeaways:
Responses were varied but generally pessimistic about sustaining current growth. The most common concern: uncertainty is more damaging than tariffs, making supply chain planning difficult. As a result, many expect near-term purchasing slowdowns while awaiting clearer direction over the next quarter. The outcome—Option 1 or Option 2—will hinge on how quickly uncertainty is resolved.
- Option 2 Dominates: Most respondents lean toward Option 2. Capex likely won’t rise enough to absorb tariffs, so procurement will decrease. Timelines vary, but many expect changes within one to two quarters.
- Cautious Optimism: Some believe Option 1 is achievable, assuming future tariff exemptions help keep AI deployment on track with only moderate capex increases. The competitive urgency of the AI race remains unchanged.
- A Third, Darker View: A few predict that if tariffs persist or rise, hyperscalers could cut back aggressively to preserve cash, triggering a broader market downturn. This view is rare but notable.
- Manufacturing Diversification: Many expect optical manufacturers to shift production to other regions—a process that will take time. Short-term, this could cause inventory build-ups and supply fluctuations over the next year.
- Regional Fragmentation: Some see regions like the EU favoring local manufacturing, potentially fragmenting the global supply chain.
- Recession Scenarios: One respondent noted that a general recession would hit telecom operators hardest. Hyperscalers, with strong cash reserves, may continue spending—supporting a slightly more optimistic outlook.
For now, due to ongoing uncertainty, Cignal AI is not revising its optical transceiver shipment forecasts. We are still awaiting Q4 2024 results from Chinese manufacturers (see 4Q24 Interim Optical Component Report) and expect to publish our final Optical Components Report, including updated forecasts, by month-end.
Have thoughts to share? Reach out to us—anonymously if you prefer. This is a complex, evolving topic, and we welcome your input.