The rise of great power competitors to the United States might be a boon for America’s defense conglomerates. Companies like General Dynamics, which builds hardware ranging from Virginia and Columbia class nuclear-powered submarines to Abrams main battle tanks, could stand to benefit from renewed great power competition.
“I have long said that I like the positioning of our platform, defense platform businesses because they tend to be somewhat countercyclical,” Phebe N. Novakovic, Chairman and CEO General Dynamics, told investors. “In a hot war, the tactical forces received the preponderance of the funding and that was true certainly in the hot wars of Iraq and Afghanistan. When we wind down from active intense conflict than the strategic forces, which in our case is the Navy, tend to receive more funding.”
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Novakovic’s contention seems to be borne out in the Pentagon’s new National Defense Strategy and its spending patterns. “What we have is a little bit of a combination of both that we need to grow the fleet for the obvious threats that we’ve in the North Atlantic and Pacific, and the Army needs to recapitalize based on -- it's had a number of years over a decade of the consumption of its material, but it needs to not only replace but upgrade that material and they put the money behind it,” Novakovic said. “So I like, I think, we’re well-balanced.”
The company is already gearing up to meet the increased demand. “In response to the significant increased demand from our Navy customer across all three of our shipyards, we're investing in each of our yards,” Novakovic said. “We will spend $1.7 billion in CapEx [capital expenditures] at Electric Boat over the next several years in anticipation of increased production on the Block V Virginia submarine and the new Columbia ballistic missile submarine. As you may recall, Block V is a significant upgrade in size and performance requiring additional manufacturing capacity.”
More Navy submarines also means that General Dynamics will need to hire more workers. “We also have increased our internal training programs as well as our public-private partnerships with Connecticut and Rhode Island, to meet our need for skilled trade,” Novakovic said. “Over the last two years alone, we have hired and trained 4,600 highly capable employees. We were also investing over $200 million in CapEx at Bath and NASSCO to meet the Navy's demand for more destroyers and auxiliary ships. So suffice it to say, we are poised to support our Navy customers as they increase the size of the fleet.”
General Dynamics is not exactly speculating about the possibility of a better business climate. “We have always been very disciplined about our capital deployment and you can expect in this instance that we have planned our investments as close in time to the returns as possible,” Novakovic said. “The Navy understands that. There are contractual provisions in all of our contracts that provide for harmonizing across to better optimize the investment with the returns. We are not speculative of the nation needs to fund the submarine force in particular.”
In the long run, both the taxpayer and investors should benefit from General Dynamics’ investment. “Our investments are twofold,” Novakovic said. “One, they clearly make us more efficient, but it also helps the affordability for the Navy. So it's a win-win for both us and the Navy and we’re in very close contact and have been completely aligned with the Navy with respect to the quantum and the timing of our investments and we fully understand the need for a reasonable return.”
Dave Majumdar is the defense editor for The National Interest. You can follow him on Twitter: @davemajumdar.