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$22B Navy Contract Highlights Why GD’s Electric Boat Is One Of The Most Valuable Franchises In U.S. Defense

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This week’s announcement that the Electric Boat unit of General Dynamics will receive the biggest shipbuilding contract in Navy history underscores the unique role that “EB” (as it is often called) plays in U.S. defense. The contract provides $22 billion for construction of nine Virginia-class attack submarines, an amount that could increase to $24 billion if the Navy exercises the option for a tenth sub.

This isn’t the first time Electric Boat has received the biggest naval shipbuilding contract ever. The $17 billion contract for the last “block” of Virginias, awarded in 2014, was also described at the time as unprecedented in size.

When you combine the latest Virginia-class submarine contract with plans for Electric Boat to build twelve Columbia-class ballistic missile subs between 2021 and 2035, it is clear that EB sites in Connecticut and Rhode Island will be thriving for many years to come. General Dynamics management estimates sales of the unit will double over the next decade.

The Columbia-class ballistic missile boats must commence production in 2021 so they can replace Ohio-class subs that begin retiring in 2027. The Ohio class hosts the most survivable leg of the U.S. nuclear deterrent, and its replacement is the Navy’s top modernization priority.

Meanwhile, the Navy must continue production of the Virginia at a rate of two per year to head off a dangerous decline in the number of multi-mission attack subs which collect intelligence and counter the maritime strategies of hostile countries. The Navy’s warfighting requirement is for 66 nuclear-powered attack subs, but at the moment it operates barely 50, and planners estimate that the number could fall as low as 42 in the next decade because Cold War subs are retiring faster than they can be replaced.

The bottom line is that the Navy can’t delay or decrease construction plans at Electric Boat without undermining national strategy. EB and its submarine-building partner Huntington Ingalls Industries are likely to generate record revenues as Navy outlays for submarine construction exceed $10 billion annually in the middle of the next decade. This number dwarfs expected spending for other categories of warships (for instance, aircraft carriers are programmed to get about $2 billion in construction funding annually).

Just on the basis of scale, it could be argued that Electric Boat is the second most valuable military franchise in American defense, after the Lockheed Martin-Pratt & Whitney F-35 fighter program. The Pentagon’s most recent estimate of total program acquisition costs for the F-35 is about $380 billion in today’s dollars, whereas the projected cost of the Virginia class and Columbia class is about $260 billion in current dollars. In other words, over a quarter trillion dollars.

But scale is just one facet of the EB story. Few warfighting systems have a more predictable funding profile going forward. Although each of the military services has bold plans for purchasing a new generation of warfighting systems thanks to infusions of money from the Trump Administration, surges in weapons spending have a way of petering out after a few years. However, nobody expects the Navy to buy fewer submarines than are in its current shipbuilding plan. The undersea warfare program is as close to a sure thing as the Pentagon’s current modernization agenda provides.

And then there is the special role that Electric Boat occupies in Navy history. Unlike the shipyards of Huntington Ingalls, which build a variety of warship types, Electric Boat builds only submarines. It delivered the U.S. Navy’s first sub in 1900, it delivered the first nuclear-powered sub in 1954, and it delivered the first ballistic-missile sub in 1959. EB is by far the most accomplished builder of undersea warships in the world, which is why it is prime contractor on both the Virginia and Columbia classes. It is almost unimaginable that the Navy could or would go elsewhere to buy its stealthiest warfighting system in the future.

General Dynamics is my oldest consulting client, having first hired me way back when the Cold War was still in full swing. So I have seen Electric Boat in good times and bad—including when there were almost no boats under construction during the Clinton years and shipyard workers were departing in droves to work at the nearby Foxwoods casino. It has been a long, long time since the business outlook has been this positive.

Of course, challenges still lie ahead. Executing construction of two different submarine classes at the same time will test the acumen of managers, and even though Virginia has been in production for well over a decade the latest block (Block V) will introduce major changes to the design. In addition to acoustic and other upgrades, a missile module will be inserted in the center of the hull to triple each sub’s land-attack capability.

That modification is necessary because the first four Ohio-class subs that retire will be cruise missile carriers converted after the Cold War from their nuclear deterrent role. The Navy must compensate for the loss of that non-nuclear land-attack capability by shifting the mission to the Virginia class. However, when you transform an attack sub displacing 7,800 tons of water into one displacing 10,200 tons to accommodate a new missile module, it has extensive engineering consequences.

So it is almost as though Electric Boat will be building two new classes of submarines in the next decade, not one. The Navy and EB have given a great deal of thought to how workloads and skills can be balanced to accommodate construction plans, including shifting final assembly of more attack subs to Huntington Ingalls. If everything works out as planned though, it appears Electric Boat is entering its most prosperous period since the Reagan years.

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