Microalgae have drawn much attention for their potential applications as a sustainable source for developing bioactive compounds, functional foods, feeds, and biofuels. Diatoms, as one major group of microalgae with high yields and strong adaptability to the environment, have shown advantages in developing photosynthetic cell factories to produce value-added compounds, including heterologous bioactive products. However, the commercialization of diatoms has encountered several obstacles that limit the potential mass production, such as the limitation of algal productivity and low photosynthetic efficiency. In recent years, systems and synthetic biology have dramatically improved the efficiency of diatom cell factories. In this review, we discussed first the genome sequencing and genome-scale metabolic models (GEMs) of diatoms. Then, approaches to optimizing photosynthetic efficiency are introduced with a focus on the enhancement of biomass productivity in diatoms. We also reviewed genome engineering technologies, including CRISPR (clustered regularly interspaced short palindromic repeats) gene-editing to produce bioactive compounds in diatoms. Finally, we summarized the recent progress on the diatom cell factory for producing heterologous compounds through genome engineering to introduce foreign genes into host diatoms. This review also pinpointed the bottlenecks in algal engineering development and provided critical insights into the future direction of algal production.