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The Innovation Magic Is Gone at 3M

By Travis Hoium – Updated Apr 6, 2017 at 8:59PM

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Ten years after Jim McNerney took over as CEO, 3M has become a shell of its former self.

3M (NYSE: MMM) used to be one of the most innovative companies in the world. It invented the concept of masking tape, revolutionized office products with the Post-it Note, and made the films that made possible the thin LCD display on which you're probably reading this article.

But the company seems to have gone astray since Jim McNerney implemented Six Sigma across the organization in 2001. The innovation machine has screeched to a halt and the investment 3M is making in the future seems half-hearted and misguided.

Just look at 3M's home page to see how little has changed in 20 years. Featured products include Post-it Notes, Scotchguard, and Scotch Tape; lines invented 33, 59, and 70-odd years ago, respectively. You may buy Filtrete or Nexcare products from 3M, but these product lines neither revolutionized nor dominate the market. These are the type of safe, albeit profitable bets 3M has been making for more than a decade. In following this strategy, I worry 3M may at the same time be losing the magic of its past.

Mini bets on the future
Take the company's investment in renewable energy for example, something I have pushed in my time as a Fool (and my time as an engineer at 3M). Solar energy leaders like First Solar (Nasdaq: FSLR) make thin-film solar panels with industry-leading technology driven by research and development. Film, technology, and research in an energy industry ready to be revolutionized. This should be right up 3M's alley.

But 3M has decided to take a supplier role, making products that "enable" new technologies instead of revolutionizing the sector itself. This worked in the 1990s in optical films, but in recent years the optical film business has turned into its slowest-growing business because low-cost competitors have learned to make products that are nearly as good as 3M's for less money.

This is a tough sell in an industry where costs can mean life or death. SunPower (Nasdaq: SPWRA) may be able to justify 3M's high-end solar products for its high-efficiency panels, but will competitors be able to justify the cost? Evergreen Solar (Nasdaq: ESLR) is struggling to survive because of high costs and Chinese competitors like ReneSola (Nasdaq: SOL) are feverishly trying to cut costs to keep up. Being a solar film supplier doesn't sound like the high-tech, high-margin world 3M wants to be in.

The future library
For more proof that 3M is living in a bubble while the world passes it by, look at the company's release about the 3M Cloud Library this week. 3M has invested countless millions of dollars on library technology (you read that correctly, library technology), at a time when fewer books are being printed and content is moving online.

3M is making an effort to catch up, pushing its 3M Cloud Library, an online collection of books. The concept gives readers three options:

  • 3M Discovery Terminals allow library patrons to browse content from electronic kiosks.
  • 3M eReaders can be checked out just like a book at the library.
  • For those with PCs, Macs, iPads, Nooks, and Androids, 3M is making an app so patrons can check out a virtual book from the library.

I feel like I just took a step back in time three years, to a day before Apple (Nasdaq: AAPL), Amazon, and Google (Nasdaq: GOOG) all offered intuitive book readers for their mobile devices. Maybe the library "virtual rental" is a revolution I'm not seeing, but it looks to me like 3M is building toy houses with Lincoln Logs while Apple is building castles out of granite.

I could go on about half-hearted and misguided investments 3M has made in the past decade, but I think 3M's reputation tells us enough. BusinessWeek had 3M ranked as the 13th most-innovative company worldwide in 2000. In 2010 it didn't even make the list of the top 50 most innovative companies.

If I were CEO
But I'm not here just to criticize 3M's innovation factory. I'm also here to provide suggestions for what I would like to see as an investor.

  • Increase R&D spending: In 2000, 3M spent 6.58% of revenue on R&D; in 2010, that number had fallen to 5.38%. R&D covers regular changes in products required by regulators or for cost reductions, so each dollar cut comes straight from new product potential.
  • Stop hiring CEOs from the outside: McNerney was brought in to clean up 3M's operations and in the process killed a lot of innovation. You could argue that George Buckley has done a better job, but he hasn't exactly inspired the next Post-it Note.
  • Teaching the Chinese doesn't help anyone: 3M is an R&D company, and moving manufacturing to China or other parts of Asia only teaches low-cost countries how to make high-tech products. This isn't good for the long-term viability of 3M or the U.S.

The ride can't last forever
None of this means 3M is a bad investment; it is a Motley Fool Inside Value pick. It just means 3M has lost the magic it once had and has become a value stock. It's too bad, because with the right moves, this could be a growth stock once again.

Interested in reading more about 3M? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on the stock.

Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of First Solar, Apple, 3M, Amazon.com, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

3M Stock Quote
3M
MMM
$124.64 (-3.41%) $-4.40
Alphabet (A shares) Stock Quote
Alphabet (A shares)
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Apple Stock Quote
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AAPL
$144.22 (-2.63%) $-3.89
First Solar Stock Quote
First Solar
FSLR
$165.62 (-3.39%) $-5.81

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