Developing Markets Are Important For 3M’s Growth and Margins

by Trefis Team
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3M (NYSE:MMM) has a significant global presence with two thirds of its revenues coming from international operations. Of its international operations, developing economies like Latin America, Greater China, Southeast Asia, Middle East and Africa are of most importance. 3M believes that by 2017, these geographies would together contribute 80% towards the expected growth of $6 billion in the international markets. [1]

The high growth rates and high margins in the developing markets make them very attractive and very important for 3M’s growth. This explains the growing emphasis that 3M has been placing on developing markets. In 2003, developing markets accounted for 21% of 3M’s revenue. By 2013, their contribution increased to 35%. 3M expects developing markets to account for 40%-45% of the overall revenues by 2017.

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High growth rates in developing markets help 3M achieve target growth rates

Growth rates in developed economies are generally slower than that of developing economies. In 2013, output from developed economies grew 1.3% whereas for developing economies it grew 4.7%. [2] In 2014 and 2015, developed economies are forecast to grow 2.2% and 2.3% respectively. Developing economies are expected to outpace growth in developed economies by more than twice. In 2014 and 2015, developing economies are forecast to grow 2.2% and 2.3% respectively.

3M offers a wide variety of products that cater to every phase of a country’s economic evolution. Hence, its growth is highly correlated with economic growth of the market. Higher growth rates in developing economies will help 3M fulfils its forecast revenue growth rate of 4% to 6% for the overall company in 2014. The growth will majorly come from developing markets where 3M expects to see local currency revenue growth rates of 8% to 12%. [3] In comparison, developed markets are expected to grow at only 2 – 4%.

Developing markets command higher margins for 3M

As a consequence of their business model and the use of Lean Six Sigma, 3M is able to generate higher margins and return on invested capital from its businesses in the developing markets. The way 3M builds out its business and operations in developing markets leads to low initial costs since the spending on manufacturing and research and development is low. As they build out in these regions, they are able to sustain the high margins by focusing on leaner operations which lead to lower selling, general and administrative expenses.

In the first quarter of 2014, 3M had an operating margin of 22%. The management stated that developing markets such as the U.S. and West Europe had lower margins compared to the overall company. [4] The primary drivers for the overall higher margin were volume growth and margins of developing markets.

Weak emerging market currencies pose a threat to revenues

Despite the high growth rates and high margins, developing markets may have a considerable negative impact on the 3M’s revenues due to their weak currencies. In 2013 and the first quarter of 2014, weak emerging market currencies tempered the company’s organic local currency revenue growth by 1.6% and 2%, respectively. [5] Therefore, it is essential that 3M manages the currency fluctuations effectively so as to counter the impact of weaker developing market currencies.

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Notes:
  1. 3M’s International Operations Presentation, December 17 2013, www.3m.com []
  2. World Economic Outlook, April 2014, www.imf.org []
  3. 3M’s CEO Hosts 2014 Outlook Meeting Conference (Transcript), December 13 2013, www.seekingalpha.com []
  4. 3M’s (MMM) CEO Inge Thulin Presents at Sanford C Bernstein Strategic Decisions Conference (Transcript), May 28 2014, www.seekingalpha.com []
  5. 3M’s First Quarter 8-K SEC Filing, April 24 2014, www.3m.com []
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