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Russian laser chap lights up US

Valentin Gapontsev, come on down

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TechScape Valentin Gapontsev and his company IPG Photonics is a rising star in the laser industry.

Approaching $100m in 2005 revenues and sporting investors such as Merrill Lynch, Apax Partners, TA Associates, and Robertson Stephens and Marconi (which invested $95m in 2000), IPG Photonics is one hot company.

The future is very bright for an enterprise whose ground-breaking technology is providing more and more applications and utilisations for increasing numbers of divergent industries. Customers include such global brands such as Sony, Gillette, Boeing, Raytheon, Toyota, and NASA.

How did it get this way? How has it grown at more than 300 per cent over the last few years?

The answer is by risk-taking.

Moscow-born Gapontsev studied Physics in Lvov, West Ukraine. Following a stint with a company that made the power supply for a transmitter, he joined Soviet (now Russian) Academy of Sciences (RAS), a vast organisation of institutes, scientific think-tanks and research centres.

Although founded by Peter the Great in 1724, this research network was originally set up to provide competitive military technologies and has successfully morphed into a high-potential maze of extraordinary technology and scientific development - which is very attractive to Western investors and customers.

Joining RAS in 1964, Gapontsev then dedicated his life to laser research and development.

After the fall of the Soviet Union, and seeking to be independent of the new Russian state and state institutions, he started the enterprise which would later become IPG Photonics. Shortly thereafter, the first experimental results were achieved, leading, at the request of Italian telco Italtel, to the first real product in 1992. Gapontsev and IPG quickly won three research contracts worth $750,000 - an enormous amount of money for a Russian company at the time.

“I worked in Russia until 1994,” Gapontsev says. "It was clear that in Russia they didn’t have any real business opportunities, high tech wasn't interesting and so the market was in the West. No one believed that in Russia one could make a good quality product; production had to be in the West.

“Due to the disorder of rules in Russia at the time we couldn’t give any warranty that we will ship tomorrow because the situation in Russia was not predictable.”

Italtel’s then offered a directorship to Gapontsev. After being turned down, the two parties found an alternative way to work together - establish a manufacturing facility outside Russia.

Though it was not easy for a Russian scientist to open business outside of Russia, luck was on Gapontsev's side, and he promptly nailed another client, Dornier, who made products for airspace and was looking for a transmitter. Dornier’s customer, NATO, needed this for an obstacle-warning system for helicopters.

Quick approval was given from a German minister, but only on the condition that the research and development work was done in Germany as NATO work could not be outsourced. Gaspontev was encouraged to establish a company in Germany, and he did so shortly thereafter.

After a short but devastating period of upheaval with partners and fellow scientists, Gapontsev says, “Italtel was destroyed by strong competition.”

Within months, IPG developed more than 20 different new products. At this time sales were around $2m per year.

By 1995, IPG was working with 20 different companies as an OEM for specialty products. Lucent was creating applications using IPG amplifiers, and Reltec (sold to Marconi later) started buying IPG amplifiers. In 1997 to 1998, Reltec alone bought more than 400 amplifiers from IPG.

Around this time, IPG gained the reputation of a top OEM supplier.

Reltec produced boxes for BellSouth in the US, a huge potential customer for IPG. But with extreme swiftness, BellSouth stopped ordering from IPG citing "bad economics" and the company's inability to "replace coaxial cable fast enough".

Are we surprised? No.

This was getting frighteningly close to the Tech Wreck and NASDAQ decline. The telcos, which had been spending like it was going out-of-style, abruptly stopped. Replacing copper wire with fiber optical lines was exceedingly expensive, ridiculously hard, and in the end absurd given the inexorable advent of wireless communications.

So Gapontsev did what nobody dared to do at the time: invest in his own business by making his own diodes. Instead of buying from JDS Uniphase, IPG could now cut its manufacturing expense radically, expand its profit margins and not be dependent upon a competitor for a key component.

Gapontsev’s “vertical integration” strategy was now in place.

The IPG headquarters were still in Germany … but not for long.

Gapontsev said, “IPG had to move to the US, because a lot of business is based there, and many barriers exist if you’re not. For many German companies it's very difficult to sell to the US at all. Even the Japanese have a challenge in selling to the US from Japan.”

Meanwhile, the company was growing in leaps and bounds. IPG saw an opportunity to establish a beachhead in the US when IPG customer Galileo announced it was selling its amplifier unit. IPG bought it, and more than 10 Galileo people joined IPG Photonics.

Since moving to the US, expanding operations, and starting to manufacture fibre lasers, IPG now has tens of applications and many competitors, though all in low-power fiber-lasers. IPG singlehandedly "owns" the high-power fiber-laser marketplace. The company gets about 69 per cent of revenue from materials processing, 14 per cent from telecom, 12 per cent from specialty applications, and five per cent from medical applications.

With a growth rate averaging 60 per cent per year over the last few years, IPG Photonics is looking unbeatable.

One of IPG’s core objectives has been to make lasers ubiquitous. Creating new uses and new applications for its customers has been key for Gapontsev and it shows in IPG's growth.

Did you know that lasers can be used in ship and automotive building where they weld and cut steel plates—both from one laser? Did you know that lasers were used in the building construction sector to drill holes in a California hospital to insert steel for earthquake protection? Did you know that lasers are used in the energy, natural resource and drilling industries where they are widely used to weld pipeline, dismantle nuclear reactors and operate underwater too?

There are also other applications in medical devices (e.g. wrinkle removal, eye surgery, etc.), consumer goods (welding razor blades), marking (lower-power lasers used in the manufacturing and printing sectors), silicon-cutting, and of course for manufacturing of the disk drives on our computers.

The transportation applications are also immense. Lasers are applied increasingly in the aeronautical and aerospace fields to drill “mini-holes” and for welding - thereby reducing drag, making planes lighter and improving fuel efficiency.

Still involved in the technical side of the business "more than 50 per cent", Gapontsev's vision for fibre lasers is to introduce them to many applications where existing lasers cannot be used, replacing mechanical processes, and expanding the entire laser market.

Bill Robinson may be reached at bill@relentlessmarketing.com.

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