War in Ukraine Complicates IPG’s Business Operations | Business | March 2022

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OXFORD, Mass., March 22, 2022 – Fiber laser maker IPG Photonics remains operational at its main Russian plant, affirming its commitment two and a half weeks ago to continue production at the facility, located outside of Moscow. The company is also continuing production at other facilities that are part of its Russian operations.

The main complex near Moscow is also used to ship components to subsidiaries. IPG’s Russian operations supply components for the company’s main facilities in Germany and the United States, as well as finished products for the Chinese market.

The Chinese market is IPG’s largest, accounting for between 40% and 50% of its sales, said Mark Miller, principal analyst at Benchmark Group, which covers IPG and the hardware technology industry. IPG’s Russian operations supplied approximately $100 million in finished goods for the Chinese market in 2021.

While the Russian operations are functional, the company is increasing its manufacturing capacity and inventory of critical components in Germany and the United States, as well as qualifying third-party component suppliers. The decisions are intended to accommodate the logistical shift of additional manufacturing responsibilities and reduce reliance on its Russian operations.

To preserve cash, IPG suspended other capital investments in Russia other than for maintenance and non-hardware.

The company identified the possibility that it would enact those contingency plans nine days before the outbreak of war, when it announced its 2021 fourth quarter and annual earnings report on Feb. 15. In remarks prepared at the time, Chief Financial Officer Timothy Mammen said the company was monitoring the situation and considering plans to mitigate any potential business disruptions.

Longer delivery times, higher shipping costs possible

Since the Russian invasion of Ukraine, the company has identified the possibility of sanctions affecting its business. If sanctioned, the company said it would face increased inbound and outbound shipping times and costs. He added that the inability to move components to or from Russia could significantly affect sales.

IPG management has indicated that it believes it can reduce the risk of sourcing components from Russia in six to nine months.

“They can probably make the transition. They have also built up large stocks in Russia of these components,” Miller said. These inventories cover several months of critical inventory.

Adjusting component sourcing would, however, lead to increased manufacturing costs, in addition to logistical considerations. Nearly 2,000 of its employees, representing nearly a third of its workforce, are based either in Russia or Belarus.

“If they manufacture outside of Russia, the costs will be higher for them,” Miller said. These costs would have consequences over time.

IPG’s relationship with Russia is extensive and long-standing. IPG was founded by Russian physicist Valentin Gapontsev in 1990. The company and its founder before it are synonymous with fiber laser R&D in Russia. IPG continues to rely on Russia for many facets of its business, including component development, R&D and management. The ability to manufacture low-cost components in Russia remains an advantage, Miller said.

On March 3, IPG announced that it had withdrawn its earnings guidance for the first quarter of 2022 published on February 15, citing the evolving nature of the situation in Ukraine. The now retracted forecast predicted modest growth. In his remarks prepared for the February 15 earnings report, IPG CEO Eugene Scherbakov said 2022 would be a year of transition for IPG.

“It wasn’t a great prospect for IPG for the year,” Miller said. “They talk about 3% to 6% revenue growth. They basically walked away from that guidance.

Regarding direct sales to Russia, the March 3 release indicated that sales to Russian customers have traditionally been nominal, totaling approximately $30 million in 2021. IPG’s current cash balance in Russia is less than $1 % of its total current cash. Russian operations are self-financing.

As of press time, IPG has not responded to Photonics Media’s outreach.

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