3M Putting Emphasis Back on R&D

If 3M (NYSE: MMM  ) is going to achieve its targeted 4%-6% organic revenue growth and 9%-11% earnings-per-share growth over the next five years, the company is going to have to get back to its roots. The lab that turned out the Post-It Note, Scotch Tape, Scotchgard, and thousands of other products must come up with even more innovative solutions to grow the company.  

So far, CEO Inge Thulin has put a plan in place that he thinks will allow for enough freedom to make that happen. He's planning to increase the R&D budget from 5.3% of sales in 2011 to 6% in 2017. That may not sound like a big jump, but it's significant.  

In 2010, 3M spent $1.43 billion on R&D. If we assume 6% sales growth into 2017, the estimated spend that year would be $2.4 billion -- a 67% increase. This is key, because 3M incurs a baseline of spending just to keep its products on the shelves. The Post-It Note went through a huge redesign early last decade; Scotchgard was reformulated to eliminate perfluorochemicals; and hundreds of other products are reformulated or redesigned each year to meet regulatory requirements or save costs.

These projects aren't announced and don't make a line item on the income statement, but they're vital to the company's continuing operations. When R&D budgets get reduced, these projects must go on, which makes new products bear the brunt of any cuts.

Putting a renewed emphasis on growth
Thulin and 3M hope that a higher level of R&D spending will translate to higher organic growth, because researchers will have more time to work on new projects instead of product updates. So where is 3M putting its focus?

  • Identification Tools: Whether it's RFID, passports, driver's licenses, tolling solutions, or license plate recognition, 3M has a solution. As security becomes more of a concern, and technologies allow for identification automatically, these solutions should grow -- and 3M has a broad line to offer. Look for this to be a key area of growth for the company.  
  • Touchscreens: 3M sells components to the touchscreens you use every day, like smartphones and tablets -- but this isn't where it sees big opportunities. 3M touch displays are geared toward more commercial or industrial applications. One 46" Multi-Touch Display (seen here) lets up to 60 fingers -- that's six people, each using both hands -- collaborate on the same screen. Everything from signage to point-of-sale systems to casino gaming is a target for 3M touch screens.
  • Renewable energy: I, for one, can't believe that 3M hasn't put its expertise in films to work advancing what might be the single biggest opportunity on the market today: solar energy. 3M sells some products to solar module makers, but has yet to take a big step into the market. It even posted a 10% decline in renewable energy sales last quarter, while the solar industry boomed. Look for management to put serious effort into gaining a foothold in the solar industry, something 3M is perfectly positioned for if it puts its minds to it.

An increase in R&D spending could bring with it higher organic growth. Let's hope so. With just 2.1% organic local currency growth in the first half of this year, 3M has a lot of work ahead of it.

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