Discussion Questions:

1. Read the following article carefully.  What are the details of the contracts that that the Navy struck with General Dynamics and Huntington Ingalls?
2. Would not it have been better if the Navy had only awarded one contract?  What are the trade-offs associated with one versus two submarine suppliers?

Navy Shipbuilders Share $17.6 Billion Submarine Order

General Dynamics Gets Award to Build Next 10 Virginia-Class Subs, Continuing Partnership With Huntington Ingalls

WSJ – April 29, 2014 12:48 a.m. ET

The U.S. Navy’s two largest shipbuilders will share a record $17.6 billion order for 10 nuclear submarines, expanding what is viewed by military analysts as one of the Pentagon’s most successful weapons-buying programs.

General Dynamics Corp. received the contract award Monday to build the next 10 Virginia-class attack submarines, continuing the work-sharing partnership with Huntington Ingalls Industries Inc. that gives the companies a roughly equal share in program profits.

The award underscores the relative resilience of Navy spending in the face of Pentagon budget pressures, continuing the surge in order activity that lifted General Dynamics’ backlog by $10 billion to $56 billion at the end of the March quarter, its highest level in three years.

General Dynamics also builds guided-missile destroyers, auxiliary ships and commercial vessels. Its marine division has the highest margins of its three military units, with a rise to 10.4% in the first quarter trailing only the 19% at its Gulfstream Aerospace corporate-jet business that drove a 3% rise in quarterly profit and higher full-year guidance.

The latest deal covers the building of two submarines a year, with the block buy expanded to 10 ships from the eight ordered in the previous batch of boats which first entered service in 2004.

General Dynamics, the lead contractor, and Huntington Ingalls each produce parts of the boats in their own yards and alternate completing work on nuclear reactors and final assembly, an arrangement developed in the 1990s to preserve the industrial base for submarine construction.

The multi-boat, multiyear awards are designed to lower production costs, with Virginia-class boats currently costing about $2.8 billion each, according to a recent report from the Congressional Research Service. That is close to the Navy’s long-term price target.

The two contractors had established a reputation for building the Virginia-class subs, which are armed with Tomahawk cruise missiles and torpedoes, on budget and ahead of schedule. They have delivered 10, with eight under construction.

The track record suffered a blow earlier this month when the Navy revealed that the commissioning of the North Dakota would be delayed because of design issues and problems with parts from an outside supplier.

General Dynamics, which is delivering the boat, said last week that the problems wouldn’t affect its margins on the contract, the first to be delivered from the third batch of vessels.

The company said it would start building the first boat of the new order on May 1, with the 10th vessel due to be delivered in 2023.

General Dynamics shares closed down 1.5% at $107.49 Monday, rising to $107.90 in after-hours trade. It is the best-performing defense prime contractor this year, up 12.4%, closely followed by Huntington’s 10.1% gain.

Write to Doug Cameron at doug.cameron@wsj.com