Investing in Naval Power

The U.S. military is adjusting to a new way of doing business – with defense contractors, foreign governments and personnel. More than just wartime technology has changed from the last century to the present; wartime preparedness has as well.

Two timely developments involving the U.S. military highlight the new approach – a contract for 10 Virginia-class nuclear powered attack submarines, and a deal with the Philippine government for long-term U.S. presence on its islands.

What is this new 21st century approach to warfare? Will this be better or worse for defence contractors and their workers, for the military and its troops?

Choosing the Tortoise Over the Hare

If military preparedness in the 20th century were compared to the parable of the Tortoise and the Hare, most militaries operated like the hare – in sudden spurts of starts and stops. The pattern was to commit resources and ramp up military production when conflict arose, and then scale back production and disband units when the situation calmed back down.

That harelike run-and-stop approach to production and deployment was seen in both World Wars, the Korean and Vietnam wars, the Israeli-Arab wars, and even in smaller scaled conflicts such as U.N. missions in the former Yugoslavia and elsewhere. The reason was mostly financial. Governments would commit funds and resources to wartime objectives only when a conflict arose. In periods of peace, the war machine would be shut down – or scaled back significantly – returning the national focus back to the economy and other non-military pursuits.

But while the start-and-stop approach seemed to be more practical, many would argue that in actual practice it really wasn’t – neither militarily nor financially.

From a military standpoint, scaling back deployments and shutting down military bases overseas meant that each time a new conflict arose, you’d be starting from scratch all over again. As was proven in the storming of Normandy in June of 1944, in the retaking of the Philippines in October of that same year, and in the entering of Korea and Vietnam, trying to enter a theatre of war after a conflict has already begun is costly – in lives, equipment and time.

Imagine how much more quickly those and other conflicts would have been resolved if a military presence in their regions had been maintained after each region’s previous wars (at the end of World War I in Europe, and at the end of the Second World War in the Pacific)?

The same holds true from an economic perspective. Shutting down equipment production entirely may save money in the immediate term, but only ends up being much more costly when trying to ramp up production as the next conflict flares up.

What is more, during those periods of inactivity, important technical skills are lost as knowledgeable and experienced workers are released into civilian sectors. Retraining workers each time a new conflict arises loses valuable time, especially given today’s much more complex systems which require far more education and training than last century’s technology.

The tortoise had it right. He had momentum, continuous motion, and was not lulled into a sleep that only caused him to lose valuable time. At the dawn of this new century, the U.S. military is proving that neither will it be lulled into a sleep between conflicts. The awarding of a contract for the next generation attack submarine and a return to the Philippines shows what wartime preparedness in the 21st century is going to look like.

Slow and Steady Wins the Arms Race

The U.S. Navy’s $17.6 billion order of ten new Virginia-class nuclear powered attack submarines from the project’s main defence contractors General Dynamics (NYSE: GD) and Huntington Ingalls (NYSE: HII) marks the military’s new approach to production. Instead of ordering large batches of new equipment to be built ASAP, often with large gaps of little or no production in between orders, the filling of this new purchase is to be extended over ten years – just one sub each year.

The greatest benefit of the decision to stretch production out over longer periods of time is to the laborforce. Although they won’t be employing as many workers as they would have if the order were to be filled ASAP, they will at least be keeping the same people employed for longer.

This increases stability, not only for the workers and their families who can now settle down for longer before looking for work again, but also for the contractors who can streamline operations for better budgeting control. Less training and re-training saves years of education and millions in costs, resulting in a lower price per sub and saving taxpayer money. Running one factory at steady production is much more efficient than running three factories in fits of starts and stops.

Shares of General Dynamics and Huntington Ingalls rose on the news of the order, gaining 4% and 6% respectively. Both companies are already highly profitable, with an EBITDA (earnings before interest, taxes, depreciation, and amortization) of 11.1% and 14.9% of their market caps respectively, compared to other defence giants Lockheed Martin’s (NYSE: LMT) 10.8% and Boeing’s (NYSE: BA) 8.6% EBITDA over their respective market caps. The $17.6 billion order represents 46.3% of GD’s and HII’s combined annual revenues, spread out over 10 years.

There is just one concern with this continuous running approach: keeping up with advancing technology. The old approach of filling orders as quickly as possible meant that the military was getting the most advanced piece of equipment with the latest technology available at the time. But now, stretching production out over an entire decade results in the delivery of partially antiquated equipment by the end of the order.

Rest assured, the contractors and the military have already thought about that. These latest subs, for instance, will be built using upgradable components that can be removed and reinstalled with the latest advancements in technology as new discoveries are made. Out with the old, in with the new, all without losing a beat or a step in the race for an ever-ready military.

Over There – To Stay

Following up on that new approach to maintaining an ever-ready stance before conflicts arise is an arrangement President Obama finalized with the government of the Philippines during his recent visit.

“The deal will allow U.S. military units to rotate through three to five Philippine facilities,” informs The Diplomat Magazine, “and to stage equipment and munitions there for combat and disaster relief missions… The U.S. presence will be constant while the units anchoring it change.”

As considered before, we can only imagine how much the last century’s wars would have been diminished if a military presence been maintained during the peacetimes between conflicts. In fact, chances are very high that such a presence close to potential hotspots might have even prevented wars from flaring up in the first place.

If maintained properly, that is.

Governments must also be aware that too much presence too close to a foreign power’s comfort zone might actually provoke conflict.

But why the Philippines and why now? Does the agreement for ongoing U.S. presence there mean that there presently exists the potential for a conflict in Southeast Asia?

Well, we just don’t know; and that’s the whole point of preparedness, isn’t it? The problem with trying to maintain a presence before conflicts arise is that you just don’t know where the next one will take place. All you can do is focus on the places where tensions are high, Southeast Asia being one of them.

For a few years already, China has been adding to his holdings in and around its seas, “appropriating” islands, atolls, and even stretches of open water with no land. As far as China is concerned, anything close enough to its soil – be it land or water – is part of its domain.

To reinforce its novel views on what constitute territorial waters, China advised the world it will conduct joint naval drills with Russia in the East China Sea later this month. “These drills are regular exercises held by China’s and Russia’s navies,” China’s Defence Ministry announced in statement posted on its website.

What is their purpose this time? “To deepen practical cooperation between the two militaries, to raise the ability to jointly deal with maritime security threats,” the Ministry made clear.

The Wake-Up Call is Loud and Clear

Both the U.S. government and military heard that call loud and clear. The alarm clock rings for the hare to awaken and assume the stance of the tortoise.

New submarines with an emphasis on continuous production to keep labor skills sharp and the defence sector humming; new treaties with foreign nations to maintain active bases with troops and supplies perpetually on the ready. This is the new face of wartime preparedness in the 21st century.

Gone are the days of gearing up and down, all too often with delayed response times that result in falling behind in the race. Perpetual readiness is the new stance. If it’s handled right, it should be less costly in production, financing and lives. If it’s handled right.

Joseph Cafariello