Why 3M Feels Right At Home In China

American businesses have been tripping over themselves, and each other, to strengthen their hold on the Chinese market. But not 3M (MMM ). The Minnesota manufacturer has already been there for two decades. With a sales office in Shanghai, 3M in 1984 became the first U.S. corporation to establish a wholly owned subsidiary in China. Its first products: sandpaper, electrical tape, and Scotch-Brite kitchen scrubbers.

Today, 3M is selling goods worth nearly $500 million annually in China, from industrial gear and components for consumer electronics to respiratory masks and the latest in Post-it Notes. Sales should hit $1 billion by 2007, predicts Kenneth Yu, managing director of 3M's operations in Greater China. Add in Taiwan and Hong Kong, and sales already approach $1 billion, which makes Greater China 3M's fastest-growing market. As for profits, with $1.37 billion in operating income last year, Asia already is 3M's No. 1 profit-making region, ahead of even the U.S. "Pretty eye-popping," says industry analyst Mark R. Gulley of Banc of America Securities (BAC ).

Investing successfully overseas is nothing new to 3M. Although it began in the American heartland in 1902 as a sandpaper maker, 3M prides itself for going into international markets well ahead of the pack. The company started selling products outside the U.S. in 1929, and set up shop in Japan through a joint venture with NEC Corp. in 1953. Selling into more than 200 countries, 3M derived 58% of its 2003 revenues of $18.23 billion from foreign markets. Asia sales, at $4.33 billion in 2003, were two-and-a-half times sales in Latin America, Africa, and Canada combined, at $1.65 billion.

Of all its non-U.S. markets, though, China is clearly the most promising, say company executives and analysts. China's economy is growing at a rapid 9% clip, its factories fueling demand for lots of older industrial goods that have become slow sellers in the U.S., such as abrasives and adhesives. Meanwhile, more and more of 3M's customers, from auto makers to consumer-electronics outfits, are flocking to China. And those customers are demanding that 3M relocate more of its operations there to stay in the supply chain. Also, China's labor costs are so low that it often makes more sense to make products there and export them, rather than produce the same goods in the U.S. or Europe for local consumption.

3M's own numbers confirm the company's geographic shift. Employment and capital spending are falling in the U.S. and Europe, while both are rising in Asia. 3M Chairman and Chief Executive W. James McNerney Jr. concedes he has heard some grumbling about the new tilt. But he argues that he must build up operations in China to keep up with his competitors. "We follow the growth," McNerney says. "We're in a global marketplace, and being in China in an important way is important."

3M is doing more than just exploiting China's cheap labor. Although it has three manufacturing plants there, as well as 14 sales and service offices, its newest push is to expand its research and development laboratory in Shanghai. The facility now employs more than 100 people, and Jay V. Ihlenfeld, 3M's senior vice-president for R&D, says he wants to triple that payroll as soon as he can. The aim is to customize products for the local market and work hand in hand with other manufacturers in China to come up with new export products.

Televisions and other consumer-electronics products figure prominently in 3M's expansion plans. 3M accounts for more than 75% of the world supply of the ultrathin optical films used to enhance the picture and brightness in flat-screen TVs, computer monitors, laptops, and cell phones, estimates analyst Gulley. 3M also has 75% of the market for lenses in rear-projection TVs, he says. As manufacturing of these products begins to migrate to China, 3M's sales should grow proportionately -- and more R&D work will move to China as the company seeks to maintain its lead and fat margins. The lesson is clear: a pioneering spirit can pay off.

By Michael Arndt in Saint Paul, Minn., with Frederik Balfour in Hong Kong

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