Exclusive-Microsoft presses Trump to scuttle expected ban on Chinese data center technology

By Alexandra Alper

WASHINGTON, Nov 10 (Reuters) - Microsoft has been pressing the Trump administration to halt plans to bar Chinese imports of a key component used in AI data centers, three people familiar with the situation said. 

Reuters reported in August that the Trump administration wants to ban US imports of new models of Chinese optical transceivers, which allow data to travel over fiber-optic cables at the speed of light within data centers. The concern is that they could be used by Beijing to steal data, install malware or disrupt service at US data centers. 

Microsoft has 35 data centers under construction in the US and another 134 planned, according to Cleanview, a market intelligence company which tracks data center development. It is one of a group of companies and trade groups making the case to the Trump administration that such a ban could irreparably damage the US edge over China in the AI race by further slowing the data center rollout, the sources said. 

The cloud and software company was one of a handful of firms that met with officials from the White House Office of Science and Technology Policy and the National Security Council in September to flag the supply chain challenges that any such ban would present, two of the sources said. 

"It really threatens to arguably grind (the data center rollout) to a halt," said John Miller, general counsel of the Information Technology Industry Council (ITI), a tech lobbying group, which has publicly urged the administration not to move forward with a ban.

He said many cloud companies have already purchased the AI chips needed for the buildout. "Those chips, without optical transceivers literally could just sit there waiting around un-utilized until you actually have the transceivers to essentially connect them together," he added.

Some data centers need millions of optical transceivers to connect servers, routers and switches. 

The Federal Communications Commission, which oversees the US ‌telecom industry, is working on the ban.

The efforts by Microsoft and other firms, which have not been previously reported, show how the agency’s deliberations have set off alarms in an industry scrambling to meet surging demand for cloud and AI services despite a growing backlash by consumers over rising energy costs and water use.

Microsoft declined to comment. The White House, the FCC and the Chinese embassy in Washington did not immediately respond to requests for comment.

US COMPETITORS LACK SCALE

China boasts two-thirds of the global market for optical transceivers, according to Counterpoint Research. Chinese firms like Eoptolink and Zhongji Innolight, which was added to the Pentagon’s list of Chinese military-backed companies, dominate global supply, counting top American hyperscalers among their customers.

US-based Coherent and Lumentum produce technology that competes with them but lack the scale to replace Chinese vendors, according to a report by the Foundation for American Innovation.

ITI sent a letter to the FCC on August 13 calling on the telecoms watchdog to "refrain from adding optical transceivers" to a trade blacklist, emphasizing the "potential effects that supply disruptions could have on data center deployment and US AI leadership."

Morgan Stanley said in an October client note that the Trump administration was considering barring Chinese optical transceivers capable of handling 3.2 terabits of data per second, whose production is not expected to ramp up until 2028, with widespread installation expected in 2029.

Such a threshold could avoid antagonizing US companies and Beijing while giving US optical companies time to expand production.

The FCC has not addressed the optical transceiver issue publicly, but two of the sources said the 3.2 terabit per second threshold is under consideration.

Lawmakers may not want to wait. In September, a bipartisan group of US lawmakers introduced legislation to bar the federal government from equipping sensitive government systems with Chinese-made optical transceivers.