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Keep your subs out of shallow seas unless you control the air.
In short, flood the English channel with bombers and you'll chip away at the Royal Navy because the AI has no idea how to properly take care of its Navy. Put your subs out to the deep oceans to sink their convoys of oil and troops. Once you've chipped away enough, you can Sealion either through the Channel or go East and invade from Denmark/Norway into NE/Scotland.
AI UK almost never properly defends its coastline. I've literally landed unopposed, marched into London, and THEN fought a land battle.
This works because oil starvation cripples naval forces which make them sitting ducks for torpedo attacks.
It's best to start early with this tactic, give your naval sub captains the skill for reduced visibility and torpedo visibility, find out which countries your enemy is importing oil from, and park your subs on the supply line starting from THEIR coast, not the enemies. This allows you to save manpower and IC, and prevents interruption. You can use the same tactic to block other imports like tungsten and steel, which will cripple their ability to produce more ships.
Subs and tac bombers are super effective, and can operate in deep water where the RAF can’t go.
NAVs and cheap mine layers work well and are actually cheaper than subs. Minelayers get you the naval superiority, and the RN can’t deal with NAVs.
There are other ways though. It is possible to build a surface fleet which can take on the RN without help from the air, but…. I don’t believe it to be possible to do this before USA enters the war.
The strength of the RN is their battleships. These can be defeated by destroyers with torpedos coupled with cruisers. It can also be defeated by super heavies (my favorite). Even just straight up 1936 battleship technology is far superior to the first generation technology the brits have. Carriers also super effective.
All tactics are viable, but mining destroyers and NAVs is the cheapest.
All Navys are very interessting since 1.6 and DLC "Man the Guns".
The only way is to improve what you have all the time of the Survace Navys there. And build up new Ships are possible [like 2 Battleships and 3 Heavy Cruisers in Germany].
Upgrading in Guns, Technology (like Radar, Fire Control etc.), AA and Armor etc. was and is atm. the best way to get an passable Surface-Navy.
1. Improve your existing Panzerschips [Graf Spee, Deutschland and Scheer] with new Techs and Weapons [Radar and Fire-Controll-Systems are a must have]
2. Improve your light Cruisers of the K-Class [Königsberg, Köln, Karlsruhe] with new Techs and Weapons; they are very good Patrol and Security-Ships in Norway- / German Coasts, East-Sea
3. Improve your light Cruisers of the Leipzig-Class [Leipzig, Nürnberg] with new Techs and Weapons; they are a little bit better then the K-Klass and are much more usefull for security of the Trade-Lines farer from the Coasts; but not so good as whished; I use them on the northern Trade-Line over Britain.
4. Improve your light Cruiser of the Emden-Class [Emden] with new Techs and Weapons; I use it as Experimental-Ship for new Weapons, Technology, Armor-Upgrades etc. It´s the oldest new Ship you have in the German Navy, which limits his Working-Era.
Like the K-Class it´s good for such Patrols- / Securuty-Duty and as Test-Ship / Practice Ship.
5. Like the light Curiser Emden the old 2 Line-Ships [Schlesien, Schleswig-Holstein] are good in the East-Sea-Duty and as Test-Ships / Practice-Ships. Use them for Coast-Bombardment too to get an easyer Landing from Sea.
Upgrades there are Guns, AA, Fire-Controll and Radar; downgrade the Armor to Battle-Cruiser to get more speed
6. Upgrade your Minelayers with everything, esp. AA, Secondary Guns, light Armor, Radar and Fire Controll-Systems.
7. Don´t forgett your Torpedo-Boats, which get upgraded very fast!
Then the new buildup-Programm:
Most of the Surface-Ships are already there; 2 new Battlecruisers / Battleschips [Scharnhors-Class], 1 new heavy Cruiser [Admiral Hipper] and the 16 new Destroyers [1934 (4x) / 1934 A-Class (12x)]
Build them up before the War starts.
The same with the new Subs of Type II and VII. They will be your workhores later on, esp. in Training and sinking enemy Ships / Convois.
Like the Comrads said already, Type VII and later IX can be upgraded with Snorcels. Therefore they loose the Heavy Gun and have only Torpedos and AA-Guns left.
I make smaller Groups of the Subs, like in History.
f. e.: Type II A [Training], Type II B / C / D [more advances Variants Step by Step as Coast-Ships to sink enemys and laying Mines]
f. e.: Type VII A [Training], Type VII B [Test-Ships / Training], Type VII C (later C/41) [Attack-Ships against Convoys and enemy Ships], Type VII C/42 [the max. latest Variant of Attack-Ships of that Type]
Naturally the German Navy had never Aircraft-Carriers, but they were in WIP, so why not build up then and bring up 2 of the Graf Zeppelin-Class and the 2 never finished Admiral-Hipper-Classes as light Carriers.
Atm. that´s the best you have from 1.6 "MTG" up to now 1.10.7 "BftP".
I don´t know what get changed with 1.11 "Barbarossa" and the DLC "No Step Back" in the Navy with Buildup and R & D, but there are changes to the existing "MTG-System we have now".
In some Parts it should get purged to get an easy to manage Part like the Tanks get now and get combined like the Tank-System with AA, Guns, Engines, Armor etc. But there we have no further Infos.
Dont produce carriers, battle ships, light cruisers they are bad and bb and carriers cost too mucu to be effecient