Submarines Resurface as Growth Business

Submarines Resurface as Growth Business

Technology, geopolitics make nonnuclear subs attractive again; a Baltic battle

By Daniel Michaels in Kiel, Germany, Christina Zander in Muskö, Sweden and

Robert Wall in London (all in a Wall Street Journal article)

The submarine battle that erupted across the Baltic Sea was about business.

The Swedish government, upset with German ownership of Sweden’s biggest shipyard, last summer compelled ThyssenKrupp AG to sell its Kockums operation to Sweden’s Saab AB. The move, which ThyssenKrupp calls “unfair,” cost the German industrial group a billion-dollar submarine contract and hundreds of skilled engineers.

And Sweden’s maneuver established defense contractor Saab as a new rival in the global submarine market. ThyssenKrupp, the world’s top nonnuclear-sub maker, already feels heat from newly active producers in Japan and South Korea, and from old rivals in France and Russia.

“It means we have to get better and puts pressure on our people,” says Hans Christoph Atzpodien, executive-board chairman of ThyssenKrupp’s industrial-solutions division.

For Saab, which quickly won a first stage of the Swedish submarine contract and is jockeying for foreign orders, Kockums “is a good marriage,” says Gunilla Fransson, head of Saab’s security-and-defense unit. “Saab has for many years been very good at defense exports.”

The Swedish-German sub spat is part of a new current for military contractors: Diesel subs have resurfaced as a growth business, thanks to shifting geopolitics and innovation.

For the first time since the Cold War, the world sub fleet is growing. Driven by changing strategic threats, surging global trade and new technologies, countries are buying or upgrading subs, even as some scale back on land and air equipment.

Stealth makes subs particularly appealing to countries feeling threatened by larger rivals. Vietnam is buying its first subs, from Russia, while Australia, Indonesia, Singapore and South Korea are expanding their fleets—a response, in part, to China’s expansion of its navy with ships including its first aircraft carrier and large nuclear subs.

Iran has said in state-controlled media it is developing conventional subs to enhance its Russian-built fleet. Firm numbers aren’t available—countries guard their military plans—but at least 17 nations have made public plans to create or expand sub fleets.

Submarines are unique among large military equipment for their ability to defend a country, project power and protect themselves. Aircraft carriers embody awesome strength but are expensive and vulnerable. Ground-based aircraft can reach far but require support ranging from refueling planes to spare parts.

In a shift, there is new demand for subs powered by diesel engines and electricity, not just for those with nuclear reactors. The Cold War’s end spurred cuts in the global fleet of diesel-electric submarines, to 256 last year, compared with 463 such vessels 15 years ago, according to London-based International Institute for Strategic Studies.

But in the 10 years through 2024, navies world-wide will double annual spending on conventional subs, to an average $11 billion from $5.5 billion in 2014, estimates Strategic Defence Intelligence, a research firm. Over the past decade, annual sales were just a few billion dollars, analysts say.

Nuclear subs will continue dominating the seas and remain vital to nuclear powers. But they can cost roughly $2 billion, compared with around $500 million for the kind of diesel-electric sub Sweden is ordering.

The Asia-Pacific region will get more than half of all new subs over the next decade, analysts predict. The primary motivation is China’s speedy naval expansion. Countries from Japan to Australia are responding with maritime military buildups that rely heavily on subs.

Growing demand for conventional subs is notable because the U.S., the world’s biggest arms exporter, only makes nuclear military subs—built by General Dynamics Corp. ’s Electric Boat unit and Newport News Shipbuilding, a unit of Huntington Ingalls Industries Inc. —and doesn’t export them. That leaves the market for conventional subs to others.

Aside from Saab, ThyssenKrupp’s rivals include firms such as French warship maker DCNS, Admiralty Shipyard JSC of Russia, South Korea’s Daewoo Shipbuilding & Marine Engineering Co. , and a Japanese partnership of Mitsubishi Heavy Industries Ltd. and Kawasaki Heavy Industries Ltd.

With Saab joining the fray, “The competition in the market is tougher,” says Xavier Mesnet, who markets submarines for DCNS.

Cold War undersea warfare was mainly a cat-and-mouse game between nuclear-powered subs. The Soviet Union, the U.S., Britain and France built giant “boomers” carrying ballistic missiles with nuclear warheads and smaller nuclear-powered “hunter-killer” attack subs to track and destroy the big ones.

Conventional subs were noisy and mainly for coastal defense or muscle-flexing. They could stay submerged for just a few days on battery power, while nuclear subs were limited mainly by food supplies.

The gap is closing. Two years ago, a German Navy 212A Class sub heading to U.S. war games dove into the Atlantic Ocean and stayed under for 18 days, the longest acknowledged duration undersea for a conventional sub. ThyssenKrupp, which built the 212A, says its full capabilities are classified.

Such subs are rewriting naval strategy with advanced fuel cells and batteries that run almost silently on stored chemicals. While lacking nuclear subs’ near-limitless ability to remain submerged, the new nonnuclear subs have an advantage: They can be quieter because they don’t emit the telltale humming of a nuclear-reactor cooling system.

Silence and underwater stamina are making nonnuclear subs harder to track. In 2005, Sweden’s HMS Gotland proved so hard for the U.S. Navy to detect in war games that the Pentagon leased it for two years to assess how to find it, the Swedish Navy says. The U.S. Navy says it regularly conducts exercises with diesel-electric submarines operated by others, declining to discuss specifics of such drills.

Endurance and stealth “will be a very significant change,” says Peter Roberts, a senior research fellow at the Royal United Services Institute, a London think tank, who sees a boom in new-sub sales and in sub-hunting investments. In the Western Pacific, he foresees “a spiral of submarine and antisubmarine warfare.”

The trend was evident in late 2013, when the U.S. chose Okinawa, Japan, for the first deployment of cutting-edge P-8 Poseidon maritime-surveillance jets. Their mission is to track China’s growing, increasingly sophisticated sub fleet. Australia and India, also wary of China’s undersea expansion, are the P-8’s first foreign buyers.

But even P-8s, costing about $200 million apiece, will struggle to find new nonnuclear subs. “Diesel-electric submarines world-wide are becoming increasingly sophisticated in terms of their quieting technology, endurance and armament,” says Commander Brian McGuirk, U.S. Third Fleet Undersea Warfare Officer. That has driven U.S. interest in routinely conducting exercises to refine tactics to find them, he says.

Military planners argue that because one submarine can threaten many surface ships, the potential subsea danger prompts adversaries to spend on defense. A submarine “changes the behavior of other nations and the calculus of their leaders,” said Australian Defence Force Vice Admiral Ray Griggs at a conference in Canberra last year. Australia’s subs “provide us with a strategic weight in a way that no other ADF asset or combination of ADF assets does.”

Australia is preparing to order up to 12 subs, potentially costing $20 billion, to replace its aging fleet of six Kockums-designed subs. Last year, it appeared close to buying Japanese Soryu subs following lobbying from Prime Minister Shinzo Abe for its builders, Mitsubishi and Kawasaki.

That sparked outcry in Australia because of feared job losses at a shipyard there that builds vessels designed by others, including earlier Kockums subs, and after intense lobbying from European leaders, including from German Chancellor Angela Merkel to buy from ThyssenKrupp.

Australian Prime Minister Tony Abbott in February bowed to political pressure, promising “a competitive evaluation process.” Japan, Germany, France and Sweden quickly entered the race, marking Saab’s first face-off with ThyssenKrupp.

Australia eliminated Saab for its lack of experience building subs. Saab’s Ms. Fransson says it “joined the race at a very late stage” and Australia should reconsider its offer.

Another Pacific Rim submarine order helped prompt Sweden to retake Kockums. In December 2013, Singapore—a longtime buyer of Swedish subs—announced it would buy two subs from ThyssenKrupp to be designed and built in Germany.

Furious lawmakers, workers and others in Sweden said ThyssenKrupp’s agreement to sell subs from its Kiel shipyard, rather than Kockums, proved ThyssenKrupp wanted to eliminate its former rival. ThyssenKrupp had acquired Kockums in 2005 through its takeover of German naval group Howaldtswerke-Deutsche Werft, which bought Kockums from its Swedish owner in 1999.

Industry officials had hailed that deal as a step toward consolidation of Europe’s fragmented defense sector amid shrinking military spending. But Swedes bristled after ThyssenKrupp took control because exports from Kockums dwindled, and accused ThyssenKrupp of favoring its German subs over its Kockums boats in export competitions.

Sweden shuns military alliances and defends its independence with strong armed forces supplied by a domestic arms industry. But Sweden doesn’t buy enough arms to support its defense contractors. So exports and foreign cooperation are “very important to Sweden,” says Lena Erixson, director general of the government Swedish Defense Materiel Administration.

“Under ThyssenKrupp,” Ms. Erixson says, “Kockums had a limited opportunity to participate and place bids in different export deals.”

ThyssenKrupp’s Mr. Atzpodien says he couldn’t make competitive export bids for Kockums subs because “the Swedish government would not let us really look into the Swedish technology.” The government owns intellectual property vital to Kockums designs.

In February 2014, two months after Singapore announced its German order, Sweden’s defense minister yanked from ThyssenKrupp a preliminary study to build Sweden’s planned A26 subs and update its current fleet. The A26 study was expected to lead to an order, estimated at roughly $1 billion.

Ms. Erixson’s organization, known as FMV, instead asked Saab to study “a consolidated underwater strategy.” Saab had never built large manned subs but does compete in fighter jets against rivals including Lockheed Martin Corp. , the world’s largest defense company by sales.

FMV in 2013 had pushed ThyssenKrupp to negotiate with Saab to sell Kockums to the Swedish company, but the two couldn’t reach “a common basic view” from which to start talks, Mr. Atzpodien told Ms. Erixson in a letter dated Feb. 18, 2014.

After landing the FMV study, Saab advertised jobs for submarine engineers. Scores of Kockums veterans defected to Saab. Mr. Atzpodien in March 2014 flew to Stockholm to meet Ms. Erixson but their talks yielded no resolution.

Three weeks later, FMV officials, accompanied by armed Swedish military personnel, arrived at Kockums’ headquarters in Malmo, Sweden, to collect plans for Sweden’s A26 sub and other technical information FMV owned. ThyssenKrupp had agreed to release materials, but some staff blocked the transport from leaving. The standoff was resolved but drew headlines.

Ms. Erixson says it is “quite common” for FMV to use military transports for secure shipments. “When it was clear that we couldn’t move forward with ThyssenKrupp, it was important to secure what was owned by FMV.”

Speaking publicly two days after the Kockums standoff, Mr. Atzpodien said Sweden, rather than negotiating, sought to “deprive us of our basic ownership rights.”

A week later, Saab and ThyssenKrupp announced a preliminary deal. With no sub order and fewer engineers, the German company saw no commercial future in Sweden. Saab bought Kockums in June for roughly $39 million.

“The decision to take away our ownership was unfair,” says Mr. Atzpodien, calling it “a painful experience.” ThyssenKrupp “always tried to work together in good faith with the Swedes and create synergies.”

Within weeks of the takeover, Swedish politicians who had justified the maneuver on national-security grounds claimed vindication after suspected Russian vessels surfaced near Stockholm. Last month the Finnish navy dropped explosives in waters near Helsinki after it detected an intrusion.

Saab in January moved to strengthen its naval capabilities, joining with Damen Shipyards Group of the Netherlands to bid for a Dutch submarine order. The pair pledged “to explore future opportunities in the international submarine market.”

Mr. Atzpodien says “it would be naive not to state there is a more competitive environment” with Sweden, Japan and South Korea on the market but ThyssenKrupp’s experience should help maintain its lead. He predicted Saab “will have the same problems” as he did at Kockums because Stockholm “is taking a very active role due to its definition of national interest.”

Saab’s Ms. Fransson says its experience exporting Gripen jets “makes us very competitive” in submarines. Half of Kockums’s top managers are Gripen transplants, she says.

Swedish officials see potential exports to the Netherlands, Canada, Poland and Norway. And Australia hasn’t finalized its order. “If they change their minds regarding the new submarine,” says Ms. Fransson, “we’ll be right there.”