When Making a Great Product Actually Hurts a Company: Enter General Dynamics Corporation

Canada's General Dynamics-built LAV III. Too good for its own good? Source: Wikimedia Commons

According to automotive lore, it was in 1924 that then General Motors (NYSE: GM  ) head Alfred P. Sloan, Jr., first invented the concept of "planned obsolescence" -- tweaking a model's design with annual updates in hopes of goosing car sales as customers upgraded their old rides.

Of course, key to the whole idea of planned obsolescence, is not building your first vehicle so well, as to discourage a customer from ever wanting to replace it. This, apparently, is where a different "general" -- General Dynamics (NYSE: GD  ) -- just went wrong. And so our story begins...

Hoping for obsolescence (but hope is not a plan)
Up in Canada, General Dynamics just got a bit of bad news from the local government. Fourteen years ago, the company began building a new armored vehicle for the Canadian Army -- the Generation III Light Armoured Vehicle (LAV III). Recently, General Dynamics was in the running to sell the Canadians an upgraded, new-and-improved version of the eight-by-eight armored beast, potentially winning $2.1 billion contract for the purpose. (Brit builder BAE Systems (NASDAQOTH: BAESY  ) (LSE: BA  ) was also in the running).

But now it seems General Dynamics will never get that chance.

Drat! We built it too well!
On Friday, Canada's Department of National Defence (yes, we've pointed it out to them that they're spelling it wrong) announced that it has decided not to proceed with plans to buy 108 Close Combat Vehicles, or CCVs.

CCVs had originally been envisioned as a bridge between the country's force of General Dynamics-built Upgraded Light Armoured Vehicles, and the country's German-built Leopard 2 heavy battle tanks. However, in light of Canada's exit from Afghan ground operations, and budgetary concerns that are squeezing governments around the world, Canada included, the Canadian government recently reassessed its needs.

What it found was that "the capabilities of the Upgraded Light Armoured Vehicle III are far superior to what was originally envisioned." Combined with improvements to the Canadian Army's "tactics, techniques and procedures," and "advances in Counter-IED," the Canadian military has concluded that it no longer needs the "medium" armored capability represented by CCV. The LAV III is good enough.

In short, General Dynamics appears to have worked itself out of a job. It built the LAV III too well. Now, it won't get to sell Canada 108 new ones.

What it means to you
For General Dynamics shareholders, you'd think this would come as a disappointment. This single contract, if won, would have sufficed to provide the company nearly one full month's worth of revenues. It could have helped give General Dynamics that last little boost needed to return the company to GAAP profitability. But in fact, it appears shareholders haven't even heard of the loss. General Dynamics shares are actually up nearly one full percentage point since before Canada announced the CCV cancellation.

Suffice it to say, I think that's a mistake. The loss of even a chance at a $2.1 billion contract is clearly a negative for the firm -- not a positive.

Planned obscolence is obsolete
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  • Report this Comment On December 24, 2013, at 1:29 PM, GETRICHSLOW2 wrote:

    They will make it up somewhere else. This company wins contracts left and right. Annual revenue of 30+ Billion.

    The Canadian LAV's can't last forever and in the mean time GD is likely selling them boat loads of parts to maintain them.

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