How China Can Power 3M’s Growth In The Future

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3M Company

3M (NYSE:MMM) has had a presence in China since 1984 when it was the first wholly-owned foreign enterprise that was set up outside the Shenzhen economic zone. The company has grown to over $3 billion in sales from the region, and continues to see the country as an attractive growth opportunity. 3M has a solid footing in the country as a result of its base in the infrastructure and manufacturing business. Improvements in the safety, healthcare, and retail businesses in China have helped to spur the growth of these businesses of 3M as well, which currently represent over $1 billion of its $3 billion China portfolio. The company has been able to achieve this by using scale to drive growth in its domestic-oriented business that can ensure sustainable growth even in the future. Below we’ll highlight the sectors that 3M is focusing on in China.

We have a $210 price estimate for 3M, which is below the current market price.

1. Automotive

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The automotive industry has witnessed modest growth globally, with the growth in China production outpacing the overall growth, albeit at a lower rate than in prior years. After enjoying a robust rate of growth for over a decade, the Chinese automotive market had started to cool down in 2015. However, a number of steps undertaken by the government, such as tax cuts, have stimulated the growth. According to the China Association of Automobile Manufacturers, the production and sales of automobiles in 2016 were 28,119,000 and 28,028,000 units respectively, up 14.5% and 13.7% year on year. In the future, a growing and richer middle class, and the potential of Tier 2 and Tier 3 cities, can be expected to drive growth. 3M manufactures over 400 products pertaining to this segment, such as auto body fillers, adhesives, cleaners, waxes, polishes, which can be expected to grow as the industry continues its strong march.

The data for the chart above has been sourced from IHS Markit. The chart has been made using our new, interactive platform.

2. Safety and Security

3M aims to provide safer work environments for Chinese workers, and in this regard, its portfolio of hearing protection, fall protection, and SCBA (Self-Contained Breathing Apparatus) through its new acquisition of Scott Safety, can be considered to be the next horizon of safety awareness for China. In 2014, China overtook the US as the largest safety and security market in the world, and the growth has not slowed down yet. The demand for this segment is expected to improve with the growth of the infrastructure spending in the region. China alone is expected to need $28 trillion in infrastructure investment by 2040, which is more than half of Asia’s total needs and 30% of global needs.

3. Healthcare

Developing countries bear the brunt of food-borne diseases, with high levels of hazards reported in the food available there. A number of studies have shown a higher prevalence of such diseases in developing economies, as compared to high-income countries. 3M can be considered to be a leader in developing innovative solutions to help the food and beverage industry to optimize the quality of their products. The company manufactures food and beverage testing products to ensure the achievement of the highest food safety and quality standards. It also develops environmental monitoring programs to identify and eliminate sources of potential contamination. The company’s Health Care segment is strong and growing at a high pace. It is expected to grow at a CAGR of 5% to 8%, driven by growth in the developing economies.

4. Retail

Many consumer-related companies, such as 3M, have realized they need China to drive their growth in the future. The major factor that will power this improvement is the rise of the urban middle class, which has been helped by the increase in incomes and growing urbanization. The per-household disposable income of urban consumers is set to double, from $4,000 to $8,000, between 2010 and 2020. Currently, the “mainstream” consumers, well-to-do consumers with an annual disposable income of between $16,000 and $34,000, form a very small part of the population. By 2020, they are expected to account for 51% of the urban population. Hence, 3M is concentrating on building brands and launching new products that resonate with the emerging urban-middle class consumer in the country.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions in the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for 3M.
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