AI and automotive: Rising strategic role of compound semiconductors

Compound semiconductors are moving into the mainstream as industries turn to alternative materials to deliver more power, speed and efficiency than silicon can deliver.

Unlike silicon, which has been the primary chipmaking material for decades, compound semiconductors are built from materials, such as SiC, GaN, GaAs or InP, as enabling components that make high performance possible.

SiC and GaN are leading the way in power electronics, GaAs and GaN are widely used in RF systems, InP and GaAs are key for photonics and lasers, while GaN and GaAs remain critical for lighting and display technologies, such as microLED.

The growing adoption of compound semiconductor devices is clearly reflected at the substrate level, where investment is expanding. Yole Group forecasts that the overall market will grow at a CAGR of 14% between 2025 and 2031, more than doubling from $1.3 billion to $2.8 billion in the latest report, Status of the Compound Semiconductor Industry 2026 – Focus on Substrates and Epiwafers.

Epitaxial wafers (epiwafers) represent another critical layer of the value chain. The open epiwafer market shows the momentum of growth, as epihouses work closely with different players, from IDMs, fabless to foundries. This market is set to grow in parallel with substrates, reaching $2.4 billion in 2031 from $1.1 billion in 2025, as deeply analyzed in the compound semiconductor report as well.

Without doubt, the compound semiconductor industry is accelerating, fueled by AI data centers, EVs, and advanced consumer applications. In today’s snapshot Yole Group’s analysts, Poshun Chiu, Ahmad Abbas, and Roy Dagher, share key insights from the Status of the Compound Semiconductor Industry 2026 – Focus on Substrates and Epiwafers report. The study highlights strong growth in substrates and epiwafers, technology shifts toward larger wafer sizes, and intensifying global competition.

Leveraging deep expertise across power, RF, and photonics, Yole Group provides strategic market intelligence to decision-makers worldwide. At SEMICON China, Yole Group will present its vision through dedicated talks and a Market Briefing.

Data centers emerge as the next growth engine
AI-driven data center expansion is rapidly becoming a major source of demand. The number of servers deployed globally, especially hyperscale systems supporting AI workloads, is expected to rise sharply.

With that growth comes rising electricity consumption, higher cooling requirements, and intensifying pressure to cut CO₂ emissions.

Poshun Chiu, Principal Analyst, Compound Semiconductors, Yole Group, said, "This is where GaN and SiC come in, enabling next-generation PSUs that can achieve efficiencies reaching 98% or more."

At the same time, AI bandwidth use requires faster optical interconnects. The integration of InP lasers into silicon photonics platforms through co-packaged optics (CPO) brings lasers closer to compute chips, reducing power losses and enabling transmission rates to scale from 100G per lane today toward 400G in future systems.

Automotive is set to remain the largest and most established market. In electric vehicles, SiC has become the key material for main traction inverters, enabling efficient power conversion from the battery into the motor drive. GaN is also beginning to penetrate, particularly in onboard chargers and DC/DC systems, where its high switching frequency enables smaller, lighter, and more compact designs.

Vehicle applications increasingly extend beyond power conversion, for lighting and display systems using GaN and GaAs, as well as InP and GaAs lasers in LiDAR for autonomous driving and GaAs-based RF components for vehicle connectivity and communications.

New consumer use cases are also emerging, particularly as the long-delayed microLED commercialization begins to show early traction.

Even though the pace of time to market for microLED has been modified, the first commercial microLED smartwatches using GaN and GaAs entered the market in 2025. Meanwhile, augmented reality is another promising segment, integrating with microLED and potentially SiC as lens in the coming years.

These emerging applications reinforce the expanding footprint of these technologies across consumer and industrial platforms.

Added value balances real challenges
While compound semiconductors deliver clear performance advantages, challenges remain. Devices are still more costly than silicon alternatives, owing to differing levels of maturity in manufacturing platforms, and the complexity of supply chains, with production capacity and raw materials concentrated in specific regions.

Ahmad Abbas, Technology & Market Analyst, Compound Semiconductors at Yole Group, added, "But, adoption continues to expand because the economics are increasingly compelling at the system level and the performance gains are necessary for certain applications."

Going with larger substrate diameters reflects scalability and cost, corresponding to market demands in different applications.

SiC is moving from 6-inch (150mm) substrates to 8 inch, while InP is moving to 6 inch, driven by market requirements and a new wave of tech maturity in the supply chain. The main manufacturing platforms for GaN on sapphire and GaAs are expected to remain at 6 inch while gallium-based microLED substrates remain at 4-inch. There have been early-stage demonstrations of 12-inch wafers, but these are unlikely to reach the market in the short term.

Larger wafers allow more chips to be manufactured on one wafer, higher volume production, and improved cost efficiency, opening the door for silicon foundry players, such as Samsung and GlobalFoundries, to enter the compound semiconductor ecosystem.

China’s growing role in ecosystem competition
As the market expands, competition is intensifying globally, particularly with China, which is increasingly taking leadership in SiC substrates by accelerating technology and scaling production. Today, the target is moving toward the device level.

Roy Dagher, Technology & Market Analyst, Compound Semiconductors, Yole Group, noted: "Chinese technology is improving rapidly. The majority of LED production is in China and Chinese players want to create the synergies to also have microLED reach the level of LED in the coming years."

While Chinese companies have taken the lead in the mobile and consumer industries, they are also making an impact in the automotive and industrial industries.

China’s compound semiconductor supply chain advancement, motivated by US export restrictions as well as domestic demand, is positioning it as a strategic competitor.

Yole Group has built strong core expertise in the compound semiconductor domain and its wide range of applications. Analysts continuously connect breakthrough compound semiconductor technologies, from power to RF and photonics, with major market drivers such as the accelerating AI wave and advanced automotive electronics.