Riding the silicon photonics boom

IN the semiconductor space, one of the hottest growth segments today is silicon photonics.

It is a technology that uses light instead of electrical signals to transmit data within and between chips, enabling faster data transfer, higher bandwidth and lower power consumption.

While silicon photonics had existed for decades, the rapid expansion of artificial intelligence (AI) and increasingly complex data centre (DC) infrastructure has accelerated its development and commercialisation.

As a result, opportunities for companies across the global semiconductor and optical communications supply chains have been created.

In the United States, listed optical technology players such as Applied Optoelectronics Inc (AAOI), Lumentum Holdings Inc and Coherent Corp have emerged as major beneficiaries, with investors placing increasingly high valuations on their capabilities in laser light sources, photonics components and high-speed optical transceivers as DC operators race to overcome bandwidth and power constraints.

The stock prices of these companies went ballistic earlier this year, with AAOI gaining as much as 441% at its peak in May, while Lumentum and Coherent advanced 166% and 97%, respectively.

So where does Malaysia stand in this ecosystem?

“The silicon photonics value chain involves many different components, each requiring specialised capabilities.

“Malaysian companies are already participating in different parts of the value chain, all of which are valuable and essential to high-speed optical data transmission,” industry veteran Tan Eng Tong says.

Within the optical value chain, the involvement of local companies like Inari Amertron Bhd, Nationgate Holdings Bhd and EG Industries Bhd is primarily in manufacturing, particularly photonics packaging, optical component and module assembly, and the production of optical transceivers – a small plug-in device in a network switch or server that converts electrical signals into light for transmission through fibre-optic cables.

Inari is looking to deepen its presence in the photonics segment through its capabilities in laser-chip processing, packaging and testing.

Through its photonics-focused unit, Inari Semiconductor Labs (ISL), the group has developed competencies in wafer certification, chip fabrication, chip-on-carrier assembly and optical subassembly.

In other words, the outsourced semiconductor assembly and test player undertakes processes such as preparing and processing laser wafers, separating them into individual chips through dicing, mounting the chips onto supporting bases, attaching the necessary optical connections and assembling them into optical components before testing their performance.

The group is expanding its photonics manufacturing operations at its P13 and P34 facilities in Penang, with further equipment and facilities planned for financial year 2027 (FY27) to support growing demand.

Analysts expect Inari’s ISL division to emerge as a “structural growth driver”. This optimism is underpinned by rising demand for higher-speed optical interconnect solutions driven by AI-related data traffic growth.

“ISL’s revenue is projected to reach about RM100mil in FY26 with a phased two to four times expansion trajectory in FY27 to FY28.

“The group has allocated RM100mil for ISL’s expansion to support its existing customer’s production ramp and the potential addition of a second chip fabrication customer,” CIMB Research notes.

One of the key factors driving the growth of the country’s silicon photonics industry is the China+1 strategy.

At least three vendors serving a US-based vertically-integrated optics company from China have moved operations to Malaysia, according to Kenanga Research.

NationGate is among the local manufacturers positioned to benefit from this shift. In August, the group indicated that one of its customers planned to relocate about two million sq ft of manufacturing capacity to Malaysia over time.

NationGate is not new to the silicon photonics business, having been involved in optical communications manufacturing for years, building on a longstanding relationship with Finisar, now part of US-based optical communications company Coherent Corp.

Its manufacturing capabilities include assembling transmitter and receiver optical sub-assemblies, attaching optical fibres, precisely aligning components and carrying out optical testing.

“Demand for photonics is huge, and we expect this to remain a key growth opportunity over the next five years. As such, the challenge is not demand, but our ability to expand capacity to meet customers’ requirements.

“We are expanding our manufacturing footprint, with Plants 11A, 11B, 12 and 13 earmarked mainly for our photonics operations.

“We expect the business to start making a more visible revenue contribution in 2027, with stronger growth momentum in 2028 as production ramps up,” a spokesperson of NationGate tells StarBiz 7.

EG Industries is also expanding its involvement in optical transceiver manufacturing, progressing from products with data transmission speeds of 100 gigabits per second (Gbps) in 2022 to 200 Gbps, 400 Gbps and, more recently, 800 Gbps solutions.

Its next target is the 1.6-terabit-per-second (Tbps) optical transceiver, which is currently undergoing initial trial production, with mass production expected to begin in 2027.

The 800 Gbps and 1.6 Tbps labels refer to how much data an optical transceiver can transmit per second, with a 1.6 Tbps module capable of carrying twice as much data as an 800 Gbps module.

EG’s Batu Kawan facility in Penang has developed end-to-end manufacturing capabilities for high-speed optical modules, covering surface-mount technology, chip-on-board assembly, cleanroom optical assembly, testing and packaging.

EG Industries is expanding the second-floor production area at its Batu Kawan facility to accommodate additional high-speed optical module production.

The renovation was completed in August 2026, while installation of automation lines was still under way in September.

Earlier this year, the group secured purchase orders worth US$241.6mil for 800 gigabits optical modules and wireless-access-related products from an existing US customer.

The expansion builds on EG Industries’ partnership with China’s Cambridge Industries Group (CIG) since 2018, where the latter has selected the group as its exclusive manufacturing partner outside China for 800 Gbps and 1.6 Tbps optical modules, involving technology and intellectual-property transfer.

Under the arrangement, CIG provides the optical designs and technology, while EG Industries handles manufacturing, assembly, testing and supply.

The electronic manufacturing services player says in its financial notes that it has “successfully transformed into an advanced electronics manufacturing and technology solutions provider through the expansion of its advanced optical modules and related components business”.

Meanwhile industry veteran Tan says the rapid pace of development means companies cannot afford to rely solely on their existing capabilities, as new approaches to silicon photonics continue to emerge.

“The industry is evolving very quickly. There are several players developing new approaches to silicon photonics, and each has its own way of putting the technology together.

“Companies need to keep developing their capabilities to stay relevant,” Tan says.