China’s AI suppliers can’t keep up as component shortages bite

Published Wed, May 13, 2026 · 02:03 PM

[BEIJING] China’s artificial intelligence hardware suppliers have a problem: keeping up with insatiable demand for their products.

Capacity constraints and a tightening supply of critical components threaten to throttle the brisk growth seen early this year, and not for a lack of AI demand.

“I believe these capacity bottlenecks are unlikely to be resolved anytime soon, certainly not within 2026, which means companies may continue to fall short of the market’s optimistic expectations,” said Xiang Xiaotian, director at Shanghai Chengzhou Investment Management.

Optical communication makers have emerged as investor favourites to lead sector outperformance, even as they face severe “growing pains”, according to a Guosheng Securities note. This includes global scaling complexities and the rapid pressure of technological shifts and supply chain limitations.

South-east Asian countries, such as Thailand and Vietnam, are currently the top choices for factory locations as geopolitical tensions persist, though there are local workforce constraints. Production line proficiency also lags behind Chinese standards, Guosheng analysts said.

Supply bottlenecks

To mitigate supply-side friction, firms have engaged in aggressive strategic stockpiling of optical and electronic chips, printed circuit boards, and passive components.

Leading optics maker Zhongji Innolight saw first-quarter prepayments climb more than 10-times to 1.5 billion yuan (S$221 million) as it booked materials costs in advance. AI server supplier Foxconn Industrial Internet told investors on an earnings call that it stocked up on raw materials in advance to ensure “smooth mass production and delivery”.

The shortages are already impacting output.

“Due to the pace of production ramp-up by suppliers, there are still some shortages of certain materials, which has had a certain impact on related products,” Suzhou TFC Optical Communication said on an earnings call in April.

Peer Eoptolink Technology expects constraints to ease gradually from the second quarter, with the supply chain stabilising in the second half of the year.

While some firms delivered robust – and in some cases, record-breaking – first-quarter results, others fell short of lofty analyst estimates. Still, stocks were relatively unscathed. That indicates the market may still not have priced in these procurement risks.

“Despite some first-quarter earnings clearly missing optimistic expectations, share prices did not fall much on the day, some even edged higher, suggesting the market is largely overlooking these concerns,” said Xiang at Shanghai Chengzhou Investment Management.

Shares of AI chipmaker Cambricon Technologies and Zhongji Innolight jumped on the back of earnings reports, which showed quarterly profits surged.

Others, such as Eoptolink Technology, missed estimates due to foreign exchange losses. Foxconn Industrial Internet posted a record quarterly profit, though it missed expectations because of a higher proportion of server consignments.

Printed circuit board manufacturer Victory Giant Technology Huizhou, which also missed estimates, flagged that a time lag for “production line break-ins” is inevitable before its new Thai facility reaches full capacity.

In the optics space, those who can scale production faster will have an advantage in securing orders, Bloomberg Intelligence analyst Sean Chen said. Companies with stronger research and development capabilities will benefit the most from rising AI investments, he added.

In the long run, Chinese AI infrastructure is set to continue outperforming on stronger margins as robust demand for hardware continues, HSBC Qianhai analysts led by Neal Chen wrote in a note.

Technological developments and the launch of DeepSeek-V4 could also boost demand in the domestic computing value chain, they said. BLOOMBERG