Growth In Domestic Consumption And Demand For Healthcare In China Presents Growth Opportunity For 3M

3M (NYSE:MMM), a multinational conglomerate, derives a considerable portion of its revenues from markets outside the U.S. China is one such market from where 3M generates around 10% of its revenues. 3M believes that China presents a strong growth opportunity given its increasing demand for healthcare and consumer products. In 2013, China accounted for around $3 billion of 3M’s revenues. ^[1] 3M expects growth in revenue from China to outpace the company’s overall growth by three times over the next few years.

3M has already established a significant presence in China through its products that cater to infrastructure and manufacturing industries. It has three subsidiaries, twenty manufacturing plants and distribution centers and two research and development (R&D) centers in the greater China region. 3M intends to grow in the region by focusing on sales from locally manufactured products and R&D.

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China’s Shift Towards Domestic Consumption Will Be Beneficial For 3M’s Consumer Products

China’s economy, traditionally based on growth driven by infrastructure investments and exports, is now trying to shift towards a more consumption-oriented growth. ^[2] This is because many economists believe that infrastructure development and exports cannot sustain long-term growth in an economy and that China’s infrastructure and export-based growth might have run its course. Domestic consumption offers a much stable and sustainable growth prospect. 3M wishes to capitalize on China’s initiative to rebalance its economic growth model towards domestic consumption. This will help drive revenues for 3M’s consumer products in China.

Healthcare Reforms In China Will Help Bolster 3M’s Health Care Segment Revenues

China introduced healthcare reforms in 2009 and since then has been able to provide medical insurance to around 95% of the population. ^[3] The reform has also helped increase demand for healthcare in the country. Additionally, driven by China’s substantial growth over the past decade, a strong middle class has emerged in the country with increasing disposable incomes. This middle class population drives demand in healthcare products as they move towards improving their standards of living.

3M is well-positioned to benefit from this trend given its vast portfolio of healthcare products which includes medical tapes, cleansers, wound dressings, antiseptics, surgical clippers and oral care products. 3M is already facing high demand for its face masks in China, which in December 2013 were completely sold out.

Local Manufacturing And R&D Will Help Bolster Growth

3M’s strategy to increase penetration in China is based on focusing on local manufacturing and increasing focus on R&D. More than 50% of 3M’s sales in China are generated from locally manufactured products. ^[4] Local manufacturing presence enables 3M to take advantage of low interest rates and cheap labor available in China. This helps reduce costs and improve margins. Focusing on local manufacturing will also help 3M compete with local competitors.

3M generated 38%, 41% and 43% of its revenues in China in 2010, 2011 and 2012, respectively, through products developed in the past five years. ^[4] 3M’s focus on R&D enables it to provide customers with new and innovative products that generate higher margins as they are priced at a premium. This will help 3M sustain a base level of organic growth in China.

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1. 3M Sees China’s Sales Growth Triple Global Pace CEO Says, March 18 2014, www.bloomberg.com [↩]
2. China’s Growth Quickens, but What About Consumption?, October 18 2013, blogs.wsj.com [↩]
3. Healthcare reform rolls on: What’s next?, November 10 2013, www.china.org.cn [↩]
4. 3M’s International Operations Presentation, December 17 2013, www.3m.com [↩] [↩]