Tuesday, June 2, 2015

Why General Dynamics doesn't like teaming with Huntington Ingalls on U.S. sub production

Jill R. Aitoro, Washington Business Journal
1 June 2015

If you ask the Navy, the teaming arrangement established between General Dynamics Corp. and Huntington Ingalls Industries to build Virginia-class submarines is a big success. If you ask General Dynamics CEO Phebe Novakovic, she'll tell you this: 'We don't like it.'
Novakovic's comments on the arrangement, designed to keep both its Electric Boat and Huntington Ingalls' Newport News shipyards in the submarine-building business, were made in the context of another program - the Ohio Replacement Submarine program, still in the development stage. The structure of that program, which sets out to replace the Navy's Ohio-class ballistic missile submarines, is still being decided by the Navy.
"What I can tell you is this won't look like a Virginia-class teaming arrangement," Novakovic said during the Sandford Bernstein Strategic Decisions conference May 27. "That won't happen. We don't like it, and it's too much risk."         
Under the Virginia-class program, Huntington Ingalls (NYSE: HII) builds the sub's stern, habitability and machinery spaces, torpedo room, sail and bow, while General Dynamics builds the pressure hull, engine room and control room. The two companies alternate work on the reactor plant as well as the final assembly, test, outfit and delivery.
"The Virginia class is an extremely successful program and we'd like to keep it that way, and we're confident in our performance," Novakovic added. "But the Ohio replacement is a significantly larger ship."
As for where the Ohio replacement program stands, General Dynamics (NYSE: GD) spent the last year or so working out agreements with each of its suppliers, including Newport News, which works as a subcontractor to help design and engineer the new sub.
"Those plans are in to the Navy now and they'll consider them in due course," Novakovic said. "We'll capitalize to be able to fulfill our end of production, but this is still new in the program evolution. The Navy has yet to decide on a firm build structure."
As I reported in April, the Ohio replacement program - dubbed by the Navy as it's No. 1 acquisition program in terms of priority - is still in the initial stages, with $1.4 billion included in the fiscal 2016 budget proposal for research and development. The plan is to replace 14 subs with construction starting in 2021 and initial patrol in 2031. The current Ohio-class fleet begins reaching end of life in 2027.
But price is an issue. The Navy estimates that each sub will cost on average almost $7 billion, with a total cost of $79 billion. The Congressional Budget Office thinks it will be more, with the total cost reaching as high as $92 billion because of how they calculate inflation and other factors.

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