War in Ukraine Complicates Business Operations for IPG

Fiber laser manufacturer IPG Photonics remains operational at its major Russian plant, affirming its commitment two and a half weeks ago to continue production at the facility, which is located outside Moscow. The company is also continuing production at other facilities that are a part of its Russian operations.

The primary complex near Moscow is also used to ship components to affiliates. IPG’s Russian operations supply components for the company’s major facilities in Germany and the U.S., as well as finished products for the Chinese market.

The Chinese market is IPG’s largest, representing 38% of its sales in 2021. IPG’s Russian operations supplied approximately $100 million of finished products for the Chinese market in 2021.

While the Russian operations are functional, the company is increasing manufacturing capacity and inventories of critical components in Germany and the U.S., as well as qualifying third-party components suppliers. The decisions aim to address the logistical shift of added manufacturing responsibilities, and to reduce reliance on its Russian operations.

To preserve cash, IPG suspended further capital investments in Russia other than for maintenance and nonmaterial items.

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

Increased lead times, higher shipping costs possible
Since the Russian invasion of Ukraine, the company has identified the chance for sanctions to hit its business. In the event of sanctions, the company said it would face increased lead times and incoming and outgoing shipping costs. It added that the inability to move components to or from Russia may materially affect sales.

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

“They can probably make the transition. They’ve also pulled up significant inventories in Russia of these components,” said Mark Miller, an analyst covering IPG and the hardware technology industry for the Benchmark Company. Those inventories span several months’ worth of critical inventory.

The adjustment of shifting components sourcing would lead to higher manufacturing costs, however, in addition to logistical considerations. Nearly 2000 of its employees, representing almost one-third of its workforce, are based in either Russia or Belarus.

“If they manufacture outside of Russia it is going to be higher costs for them,” Miller said. These costs would have consequences over time.

IPG’s connections to Russia are considerable and longstanding. 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 components development and R&D. The ability to manufacture components at low cost in Russia remains an advantage, Miller said.

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

“This was not a great outlook for IPG for the year,” Miller said. “They’re talking 3% to 6% top-line growth. They basically pulled away from that guidance.”

As for direct sales to Russia, the March 3 release said that sales to Russian customers have traditionally been nominal, totaling around $30 million in 2021. IPG’s current cash balance in Russia represents less than 1% of its total current cash. The Russian operations are self-funding.

As of press time, IPG did not respond to Photonics Media outreach.

*This article has been updated for accuracy to reflect the percentage of annual sales to China (38%), as well as the withdrawal of the full year 2022 guidance.