Is America Building the Wrong Kind of Submarine?

Once upon a time, nuclear power was cool. Today, it's just expensive -- and kind of dangerous. Is there a lesson in this for the U.S. Navy?

Jun 28, 2014 at 11:18AM

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USS Barbel (SS-580). Lead boat in the last class of US-built diesel-electric submarines. Photo: Wikimedia Commons

"We all want progress, but if you're on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive." --C.S. Lewis

When it comes to military technology -- and military naval technology in particular -- most people would probably agree that "the future is nuclear." The most advanced aircraft carriers in the world are American, and they're all nuclear-powered. The fastest, most powerful submarines are nuke boats built by American defense contractors General Dynamics (NYSE:GD) and Huntington Ingalls (NYSE:HII) as well.

Follow the leader
The U.S. Navy currently possesses 72 active submarines -- all nuclear-powered. Following America's example, navies from Russia to France to England to even China and India have opted to add nuclear-powered submarines to their fleets. And why wouldn't they? Doesn't nuclear offer "progress" over previous generations of diesel-electric powered submarines?

You'd think so. But as C.S. Lewis pointed out, sometimes to progress, you have to admit to having made a mistake, reverse course, and get back on the right track. More and more often these days, foreign navies are coming to the conclusion that nuclear-powered submarines were the wrong way to go -- and believe it or not, that diesel is actually "the future."

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Nuclear fast-attack submarine USS Virginia (SSN 774) at sea. Photo: Wikimedia Commons

To get ahead, first go Down Under
Take Australia for instance. Earlier this month, Australia signed an agreement with Japan whereby the two nations will begin working together to develop a new class of stealth submarines -- powered by diesel-electric engines.

Using the same "air-independent propulsion" (AIP) diesel-electric systems developed by Japan for use in its Soryu-class submarines, Australia aims to replace its current fleet of six aging Collins-class subs with a round dozen based on a new design. Larger than the current Collins-class boats, Australia's new subs will be capable of carrying everything from cruise missiles to unmanned underwater vehicles to special operations troops. According to DefenseNews.com, this will permit "a major regional enhancement of Australia's capabilities" and deployment "into South China Sea and beyond."

Australia hopes to have the new boats in the water by 2030 and has budgeted up to $33 billion for the project, which it calls "Project Sea 1000."

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Japanese Navy Soryu-class submarine JS Hakuryu (SS-503), visiting Pearl Harbor (of all places). Photo: Wikimedia Commons

$33 billion? That's a lot of money
Yes, it is. Luckily for Australia, Project Sea 1000 may end up costing only a fraction of the budgeted sum. You see, it costs American taxpayers about $2.7 billion to have General Dynamics or Huntington Ingalls build us a Virginia-class nuclear fast-attack submarine. Building a dozen of them would yield a price tag of $32.4 billion -- about what Australia had braced itself to pay.

But Japan's Soryu-class subs, upon which Australia may base its new boats, cost only $540 million apiece to produce -- just 20% the cost of a new nuke boat. At 3,000 tons displacement, the Soryus are about half the size of a Virginia-class sub -- so pound-for-pound, Australia's still getting a good deal.

A good deal for U.S., too?
Is this something the U.S. should try to get in on? Over at the Pentagon, this is a question that's being asked more and more often.

As budgets come under pressure, the prospect of replacing a few of our older nuke boats with modern diesel-electrics that cost five times less has some appeal. This is especially true among Navy strategists who argue diesel-electric boats aren't just cheaper than nukes. When equipped with an AIP engine, diesel-electrics can outperform their nuclear cousins in stealthy movement, are particularly hard to detect (and kill) in shallow coastal waters (such as you'll find off the coasts of Korea, China, and Iran for example), and with improvements in range, can now travel silently and underwater for weeks at a time.

The upshot for investors
Arguments like these make a lot of sense to Navy tacticians. They make a lot of sense for taxpayers concerned over the burgeoning size of the U.S. defense budget -- and they should make sense for investors as well.

America hasn't built a new diesel-electric submarine for its fleet in 55 years -- and a lot of things can change over a half century. Over that time, America's Nuclear Navy has become wedded to the idea that "nuclear is better," but globally, defense market analysts at AMI International say there's a market for about 300 new diesel-electric submarines waiting to be built over the next 20 years -- 100 of them in the Asian and Pacific markets alone. At $540 million a pop, that's a $162 billion opportunity.

That's a lot of money for U.S. submakers General Dynamics and Huntington Ingalls to be leaving on the table -- waiting to be scooped up by companies like ThyssenKrupp, DCNS, and Mitsubishi Heavy, which do build diesel-electrics. And that's not even counting the billions that could be earned building diesel-electrics for the U.S. Navy, should it decide to walk back its commitment to nuclear.

Once upon a time, America was pretty good at building diesel-electric boats. For the sake of the taxpayers, and for the sake of the shareholders of these companies, maybe we should think about getting good at it again.

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Nuclear or non-nuclear, America's defense contractors will be building submarines for a very long time to come, earning profits, and paying them out as dividends to their shareholders. Why do we care? The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. 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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