Navigating the Bottleneck: Supply-Chain Constraints in the 1.6T Networking Era

The networking industry is in the early throes of a jump from 400/800G towards 1.6T links. Hyperscalers, cloud providers, telcos and AI infrastructure builders are all chasing ever-higher port densities and throughput to feed massive models and distributed storage fabrics. That growth brings a new generation of optical transceiver modules — smaller, faster and more complex, but also exposes fragilities in the semiconductor and photonics supply chain. Two of the most critical choke points are: (1) supply of advanced optical transceiver modules designed for 1.6T interfaces, and (2) constrained availability of the most advanced 3nm DSP (digital signal processor) chips used inside PAM4/coherent transceivers. This post explains why those constraints exist, how they propagate through the ecosystem, and practical ways industry players can respond.

1. Quick primer — what is a 1.6T optical transceiver and why DSPs matter

A “1.6T” optical link refers to transceivers and switch ports that support 1.6 terabits per second per lane (implemented as 8 × 200G lanes in an OSFP224 form factor). To achieve that data rate in compact module sizes, vendors combine high-speed SerDes, complex PAM4 signaling, laser sources, photodetectors, and crucially a powerful DSP inside the module that implements equalization, PAM4 decoding, forward error correction (FEC), and various optical compensation algorithms.

These DSPs are specialized mixed-signal ASICs that marry extremely fast digital logic with analog front-end interfaces. For reach, power efficiency and error correction at 1.6T densities — particularly in short-reach data-center optics and longer-reach DWDM links for AI clusters — vendors increasingly target the most advanced process nodes (e.g., 3nm) to pack performance into low power and small silicon area. The net effect: the whole 1.6T module business becomes tightly coupled to advanced foundry capacity and packaging/test resources that support those DSPs.

This transition from 400/800G to 1.6T is still early commercially but rapidly accelerating as AI infrastructure rollouts continue.

2. Why 3nm DSPs are a bottleneck — supply and demand drivers
3. Concentrated advanced foundry capacity

Only a handful of foundries can reliably produce at 3nm: TSMC and Samsung are the market leaders. Demand for 3nm has exploded because flagship smartphone SoCs, elite AI accelerators, and high-end networking DSPs all want the density and power efficiency that node offers. That competition means wafer starts and reticle slots are heavily oversubscribed and prioritized toward the highest-margin, largest customers (think smartphone SoC customers and big hyperscalers). Industry reporting has indicated that 3nm capacity has been running at or near full utilization as early adopters booked large volumes.

1. Multi-industry competition pulls the same capacity

3nm fabs don’t distinguish cleanly between “phone SoC” and “optical DSP” customers on their execution floor. Apple, Nvidia, large CPU/SoC customers and major IDMs often have multi-year commitments that soak capacity. Optical DSP vendors—many of which are smaller players relative to smartphone houses—must accept allocations after those large customers, which can cause long lead times and constrained supply.

1. Complexity of yield and qualification at bleeding-edge nodes

Even when a wafer slot is available, new designs at 3nm require long qualification cycles (yield tuning, IP validation, thermal/EM testing). Networking DSPs for optics also have analog front-end requirements (TIA, CDR loops) that complicate porting to a new node. That lengthens time-to-volume and can further delay usable supply.

1. Packaging and advanced test capacity are separate chokepoints

Beyond wafers, advanced packaging (flip-chip, 2.5D/3D interposers, BGA) and high-volume test/assembly are limited, particularly in regions with CHIPS funding ramping but production timelines measured in years. Even if wafers arrive on schedule, packaging/test slots (and the skilled labor to run them) are additional constraints. Recent investments aim to expand packaging capacity, but these projects take multiple years to meaningfully change throughput.

3. How the DSP shortage ripples through optical transceiver supply

The limited supply of 3nm DSPs affects different parts of the optical module value chain in predictable ways:

• Module vendors (OEMs/ODM) find lead times lengthening for 1.6T modules. Since DSPs are a core BOM item, DSP shortages cause partial production lines to idle even when lasers, substrates and other optics are in stock.
• Pricing pressure emerges: constrained DSP supply increases bargaining power of DSP vendors and foundries, pushing module prices up — at least until alternative designs or nodes scale.
• Design tradeoffs and fragmentation intensify: some vendors accept older-node DSPs (5nm/7nm) with higher power or lower performance, or split product lines between silicon photonics and discrete optics — both of which complicate inventory and logistics.
• Longer qualification & interoperability testing: When buyers accept alternate DSPs or firmware variants, each change requires requalification in switches/routers and extra interoperability testing — delaying deployments.
• Delayed adoption curve: Enterprises and carriers may phase the move to 1.6T more slowly if supply risk is deemed too high, which can push some momentum back into iterative 800G/1.2T builds.

Analysts expect strong demand for PAM4 and coherent DSPs driven by AI and cloud network upgrades, but supply constraints mean capacity growth will lag demand at first.

4. Other module supply-chain vulnerabilities beyond DSP wafers

While the 3nm DSP shortage is front-page, optical transceivers consist of many specialty subcomponents, each with its own fragility:

• Lasers and modulators: High-quality DFB lasers, EMLs and silicon photonics modulators are themselves sourced from a limited set of suppliers. Lead times for certain laser wavelengths or package types can extend when demand spikes.
• Optical filters/passives and ceramic substrates: Specialized packaging materials are subject to the same sourcing and logistics constraints (raw materials, freight).
• Test equipment capacity: High-speed electrical and optical testers (capable of characterizing PAM4 at 1.6T) are expensive and in limited supply; test house scheduling can become the rate-limiting step.
• Software/IP licensing: DSPs often require proprietary IP cores and firmware teams for tuning; rapid shifts between suppliers impose firmware development cost and time.

All these amplify the impact of DSP scarcity and make the overall module ramp fragile.

5. What large vendors are doing

Major networking and silicon suppliers are visibly investing to capture the optical roadmap for AI and cloud:

• Broadcom has continued to expand its optical interconnect portfolio to meet AI infrastructure needs, tightening the vertical integration between switch ASICs and optical module ecosystems. That approach can give large silicon houses some leverage in managing supply to prioritized customers. Broadcom
• Foundries and packaging houses have announced capacity expansions or long-term contracts to de-risk supply, but those projects—like advanced packaging plants—take years before they substantially increase throughput.

These moves reduce systemic risk over time, but they do not eliminate short-term allocation issues.

6. Practical mitigation strategies for vendors, buyers and network architects

While macro factors (foundry capacity, global demand) are largely out of a single player’s control, stakeholders can adopt specific strategies to blunt the impact:

For module manufacturers like T1Nexus

1. Flexible multi-node support: Design systems to accept DSP variants across nodes (3nm/5nm) where possible — with the tradeoff of slightly higher power or reduced margin — so production isn’t pinned to a single silicon source.
2. Multi-sourcing and long-lead purchasing: Negotiate multi-supplier contracts and place forward orders for DSPs; while costly, it’s insurance against allocation.
3. Design for late-stage substitution: Engineer BOMs and mechanical interfaces so a different DSP or optical subassembly can be substituted late in manufacturing with minimal rework.
4. Invest in firmware portability: Maintain modular firmware and abstraction layers so that switching DSP silicon requires minimal re-engineering.

For hyperscalers / cloud providers and large buyers

1. Pull model vs push model: Decide whether to accept vendor-managed inventory or pull stock via consignment to prioritize customers financially and logistically.
2. Portfolio strategy: Mix vendor priorities—use fully-featured 1.6T modules where needed, and fall back to aggregated 800G builds for less latency-sensitive or internal traffic patterns.
3. Work with suppliers on co-development: Large buyers can negotiate priority access via co-investment in tooling, packaging lines or advanced packaging partnerships

7. Roadmap and technology alternatives

Several technical strategies can ease pressure or provide alternative performance curves:

• Silicon photonics (SiPh): Integrating more photonics functionality on silicon platforms can reduce reliance on discrete lasers and modulators — but SiPh supply chains are also nascent and have their own ramp challenges.
• Co-packaged optics (CPO): Moving optics closer to switch ASICs reduces electrical interface complexity and power per bit, but it demands even tighter co-engineering and different thermal/packaging capabilities.  Realistically CPO is not ready for rollouts in the near-term.
• Algorithmic improvements: More sophisticated DSP algorithms can eke additional performance out of older nodes, though with increased power/area tradeoffs.
• Rate-matching & multiplexing: Network designs can use aggregated parallel lanes or XDR (extensible data rates) techniques as stopgaps until module supply normalizes.

8. What to expect in the near term (12–24 months)

• Persistent tightness early, easing over time: Given foundry and packaging lead times, expect constrained DSP supply and spot-price volatility for the next 12–24 months while capacity expansions and qualification cycles play out. Reports in 2024–2025 indicated 3nm utilization was very high and early customers had pre-booked much of the capacity — a leading indicator of tight near-term availability.
• Diverging supplier strategies: Larger vertically integrated suppliers will prioritize their key customers and capture more of the 1.6T roadmap; smaller specialized optics vendors may pursue node-agnostic designs or silicon photonics routes.
• Market segmentation: Expect a stratified market where some customers pay premiums for guaranteed 1.6T parts, while others migrate with hybrid solutions (e.g., denser 800G aggregation) until supply stabilizes. Market forecasts already mark strong growth potential for the 1.6T optical module market, but note that ramp timing will be influenced by supply constraints.

9. Checklist for procurement and engineering teams (quick actionable items)

• Audit your BOM for single-source advanced components (especially 3nm DSP SKUs).
• Engage DSP vendors early and secure allocations or multi-year purchase agreements.
• Prioritize firmware modularity so silicon swaps are less disruptive.
• Test alternate optics early: validate 5nm DSP variants in lab environments.
• Revisit network designs to determine where 1.6T is truly necessary vs. where aggregated 800G or 1+1 redundancy suffices.
• Monitor foundry and packaging announcements (capacity builds, funding) for changes to lead-time risk.

10. Closing — balancing ambition with pragmatism

The step to 1.6T networking is inevitable: AI training clusters, cloud fabrics and backbone links will demand that bandwidth. But the path is not purely technical — it is logistical and economic. The limited supply of 3nm DSPs is a visible manifestation of a broader truth: the cutting edge of networking depends on a delicate chain of wafer fabs, packaging houses, IP licensors, photonics suppliers and test infrastructure. Shortages at any link create systemic friction.

The good news is that the industry has options: smarter procurement, multi-sourcing, silicon photonics, packaging investment, and firmware portability can significantly reduce the risk of the 1.6T transition. Companies that pair ambitious network roadmaps with realistic supply-chain engineering will be the ones who can both capture performance gains and avoid being tripped up by ephemeral semiconductor allocations.

The T1Nexus Advantage – as a smaller scale (<10M units per year) manufacturer of Optical Transceiver Modules, our integrated supply chain already has order commitments for 1.6T DSP deliveries starting in early 2026.  This supply guarantee along with our competitive pricing and lifetime warranty offers peace of mind to customers in our ability to deliver the highest speed parts in 2026.

Contact us to get in the 1.6T game early.

1.6T is not just for large hyperscalers when you have a trusted optics partner like T1Nexus