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General Dynamics Closing in on Blockbuster $17 Billion Sub Deal: Report

By Lou Whiteman - May 13, 2020 at 3:52PM

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The Navy wants to buy two Columbia class subs at once.

The Pentagon reportedly has asked Congress for authority to issue a bulk order for the first two Columbia-class ballistic missile submarines, a deal that would be worth as much as $17.7 billion for lead contractor General Dynamics (GD 0.93%).

The Columbia is a key cog in the U.S. military's nuclear deterrence strategy and is expected to be the most expensive Navy program ever, with a total estimated construction budget surpassing $115 billion. The Navy intends to buy 12 Columbia class submarines to replace its aging fleet of Ohio-class boats, with hopes to have the first Columbia on patrol by 2031.

A Virginia-class sub on the water at sunset.

Image source: General Dynamics.

The Pentagon would like to order the first two boats simultaneously as a way to lower the price by ensuring a steady stream of work at the shipyards, according to a Defense News report. Ordering two subs at once would also allow General Dynamics and key subcontractors including Huntington Ingalls (HII -0.18%) to order components and raw materials in bulk, bringing down their overall cost.

The request comes at a time when the Pentagon is feeling pressured to find savings, a push that could intensify in the months to come as Congress is forced to account for trillions in unanticipated COVID-19 pandemic spending.

At the same time, the Navy has expressed concerns about the health of its dwindling industrial base. Over the past 60 years, 14 defense-related new construction shipyards have closed and another three have left the defense industry, while only one new shipyard has opened. Eight of those yards closed or stopped doing military business during the post-Cold War drawdown.

Although it is tough to craft industrial policy that will encourage new entrants into the shipbuilding business, the Navy can use bulk orders to try to end what has been a boom/bust business. Huntington Ingalls has also argued in years past that bulk orders for major programs like aircraft carriers and subs can help minimize layoffs between ships, helping to grow the overall workforce and cut down on retraining costs with each new order.

The Navy has earmarked $14 billion for the lead Columbia-class sub, and $9.3 billion for the second, but military leaders believe they can get that total cost down below $20 billion via the two-boat order, according to the report.

Lou Whiteman owns shares of General Dynamics. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$233.97 (0.93%) $2.15
Huntington Ingalls Industries, Inc. Stock Quote
Huntington Ingalls Industries, Inc.
HII
$226.94 (-0.18%) $0.40

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