As General Dynamics starts building two submarine classes simultaneously this year, the defense contractor is focused on showing shareholders and lawmakers that it can ramp up production while keeping costs in check.
General Dynamics Electric Boat, the company’s submarine subsidiary based on Groton, Conn., is in the process of ramping up production of the latest generation of fast attack subs – the Virginia-class Block V – while also starting production of the next generation of ballistic missile subs – the Columbia-class.
To accommodate building two submarine classes simultaneously, General Dynamics has been steadily upgrading its operations and expanding its workforce. Company-wide, in 2019 General Dynamics spent $987 million on capital expenditures – investing in new equipment and workforce development – which was slightly less than what company officials expected, they told analysts during a conference call Wednesday.
“We expected the 2019 CapEx to be closer to 3 percent of sales, but it came in slightly lower as we prudently managed these investments,” Jason Aiken, the chief financial officer of General Dynamics, said during the call.
A year ago, when describing what to expect, USNI News reported Aiken told analysts that General Dynamics was prepared to spend $1 billion on upgrading equipment and making yard improvements. In 2020, Aiken said he expects capital expenditures to equal between 2.5 percent and 3 percent of annual sales.
By being prudent with the way it invests in upgrading its yards and expands its workforce, General Dynamics officials hope to also ease congressional concerns about the overall costs of each submarine program.
“So, suffice it to say, that we are poised to support our Navy customers, as they increase the size of the fleet, and deliver value to our shareholders, as we work through this very large backlog,” Phebe Novakovic, the chief executive of General Dynamics, said during the call.
The Navy plans to buy 12 Columbia-class submarines in a program estimated to cost $109 billion, according to a November 2019 Congressional Research Service report. However, the report also states lawmakers are already becoming concerned about program cost increases. As of June 2018, the Government Accountability Office reported the Columbia-class would cost $103 billion.
GAO also warns even the current cost estimate is unrealistic, according to an April 2019 report. GAO estimates program costs could balloon to as much as $144 billion because the Navy is being overly optimistic about Columbia-class production cost savings as the production line matures and because the service is underestimating labor costs.
“Without an updated cost estimate and cost risk analysis, including a realistic estimate of savings, the fiscal year 2021 budget request may not reflect funding needed to construct the submarine,” the GAO report states.
During the protracted negotiations between the Navy and Electric Boat to build the Block V Virginia-class submarines, cost concerns and the ability to build both the Virginia class and Columbia class at the same time were among the sticking points. While the number of subs potentially covered by the contract varied – toggling between 10 and 13 – in the end, the Navy settled for a $22.2-billion deal to buy nine boats with an option for a 10th.
With two very large programs, it’s natural for the customer – the Navy – and the payer – Congress – to be cost-conscious, Novakovic acknowledged. But both submarine programs are in high demand, so she does not think either program is at risk of being dramatically curtailed.
“With respect to classes of our submarines, there is real warfighter demand on Virginia. And then on Columbia, that is a national program and it can’t wait,” Novakovic said. “These are very secure platforms because they are in demand. They are in current demand, and they will be in future demand; there are certain imperatives.”