3M CEO: Research Is 'Driving This Company'
In a lab in St. Paul, Minnesota, engineers test solar panels and connectors. A half a mile away, a technician smashes the windows of a car coated with 3M protective film, watching to see if the glass shatters or holds together. Elsewhere, there are scientists working on more aerodynamic products for airplanes, software systems to run a municipality's department of motor vehicles, and light-sensor technology to create new crowns for teeth in under 2 hours.
The labs are a beehive of activity, and they are about to get even busier. Over the next five years, 3M will sharply increase dollars spent on research and development, as the race to create new and better products becomes ever more global and competitive.
"I believe that what is driving this company in terms of return for us is the investment in research and development, and every time we do it we know that we have a competitive advantage," says CEO Inge Thulin, who took over the company in early 2012.
Historically the company spent 5 percent of revenue on R&D, but Thulin intends to spend 6 percent of revenue by 2017. That 1 percent increase may not sound like a lot, but when annual revenue comes in at a whopping $30 billion, it's a significant amount of money: $30 million.
The goal: to increase the number of new products the company creates and, just as importantly, gets onto store shelves.
Generating revenue from ground-breaking science isn't a foregone conclusion.
3M is so singularly focused on making sure science moves from invention to mass production, that the company has an internal measure called the "NPVI," or New Product Vitality Index. The NPVI is the percentage of revenue the company generates from products that didn't exist five years earlier.
In 2008, 25 percent of the company's revenue came from products created in the last five years. Today, that number is 34 percent.
"That's an incredible figure," Thulin said. "We are $30 billion in terms of revenue as a company, meaning over $10 billion of the products we are selling today did not exist five years ago. I wonder if anyone else can say the same."
With the increase in R&D, Thulin expects that number to reach 40 percent by 2017.
Some analysts applaud the move.
"I think it's absolutely the right thing to do" while the global economy is weak, said analyst Brian Langenberg of Chicago-based Langenberg & Co., a firm that does research for hedge funds and others.
"The wrong way to deal with that is to overpay for acquisitions," he said. "The right way to do it is take a look at what you have, build out your emerging markets, your sales footprint and develop new products to address those markets. "
Still, Langenberg rates the company a hold because of the state of the global economy.
"3M, like the rest of the industrial sector, is struggling with a slower economy. They in particular are exposed to a weaker Asian technology complex," he said. "Europe weakened in the first quarter, but stabilized. Still that isn't a driver. In the U.S., there remains moderate growth. We don't see a catalyst to drive earnings above our estimates. We just think shares are fairly valued right now."
Asia Pacific accounted for $9.1 billion of 3M's $29.9 billion in total revenue in 2012. Europe accounted for $6.7 billion. The U.S. is still the company's biggest market, bringing in $10.6 billion in sales in 2012.
Other analysts think the company is too conservative with its use of cash.
"We would likely get more aggressive on the shares if the company can show they have found the right balance between growth and profit pass through, or get more aggressive with balance sheet utilization," said Barclays.
Thulin said 3M will stick to its plan to spend more on innovation. "The company is 110 years old, we have reinvented ourselves many, many times and will continue to do it. So I will say for 3M, research and development is the center of the plan and we will continue to do it."