Who Will Build America's Next Supertank?
Aug 22nd 2011 3:13PM
Updated Aug 22nd 2011 3:14PM
Does the country with the world's biggest military, a country $14.3 trillion in debt, really need to spend $23 billion on a new supertank? Apparently so, and the Pentagon announced last week who's going to build it for us.
On Friday, the Pentagon announced that two teams, out of the three competing to build prototypes of a new "ground combat vehicle" (GCV), will receive development contracts. Lucky Winner No. 1 is an alliance between Northrop Grumman (NYS: NOC) and BAE Systems. (Unsurprising. BAE already builds the Bradley Fighting Vehicle, the vehicle GCV would replace. )
The second winning bidder is a surprise, being comprised of Lockheed Martin (NYS: LMT) and Raytheon (NYS: RTN) -- two firms better known for aeronautical prowess than for ground combat -- and also General Dynamics (NYS: GD) , arguably the biggest name in armored warfare. The only loser so far is a third team that included SAIC (NYS: SAI) and Boeing (NYS: BA) . As for the winners, each team gets a development contract worth roughly $450 million.
Further down the road, the Pentagon plans to purchase more than 1,800 GCVs from whoever comes up with the best design, paying as much as $13 million per GCV, including spare parts. That's $23.4 billion in all.
$23 billion is a pretty big number, but shareholders in the selected companies should not count their winnings just yet. For one thing, the current awards fund only a 24-month "technology development" project. Only after complete designs are submitted would an actual production contract be awarded. Some sources say the whole process could take seven years to complete.
Also, in an era of tight defense budgets, the Pentagon isn't 100% certain it even wants to spend $23 billion on a new armored personnel carrier (APC). Indeed, defense acquisitions head Ashton Carter has instructed the Army to consider alternatives to building a completely new armored mousetrap -- and see if there's something already out there that we might buy instead. For example, rather than build a completely new vehicle, the Army might decide it could get by with a mix of Israeli-designed Namer APCs, General Dynamics Strykers, and BAE Bradleys.
Even if the GCV never gets built, the two key development-contract winners could still come out ahead by offering alternatives to GCV. Heads, General D and BAE win. Tails ... they still can't lose.
Or can they? There's always the possibility that Boeing and SAIC will upset the apple cart by challenging the decision not to award them a contract. Add Boeing and SAIC to your Fool watchlist, and find out if that happens.
At the time this article was published Fool contributor Rich Smith does not own (or short) shares of any company named above. The Motley Fool owns shares of Northrop Grumman, General Dynamics, Raytheon, Lockheed Martin, and SAIC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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