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Playing the Allies for the first time (on intermediate) I have been surprised how reckless the German U-boats have been - so far (August 1940, with France still unconquered) three have been sunk. Admittedly I been have using my destroyers and light cruisers in a very aggressive manner and they have taken some heavy knocks including one LC gone but the U-boats don't seem to exercise much discretion in self preservation. In the turn just finished one on 7 stayed put in the presence of five opposing vessels (most with some damage or under strength) which had destroyed a U-boat within a couple of hexes on the previous turn. If that had been a human player I would think he had forgotten to move the threatened U-boat.

I have played that scenario three times now (actually being on #4) and what I found is that they sometimes seemingly behave really shrewd and strong (depriving me of a lot of convoy MPP until I finally get them down to size), and sometimes they lose out like a total newbie right from the start. Don't know why that is, maybe chance, maybe scripts. Sometimes they also seem to have lots of subs, and then not so many.

That is one spot I find the AI lacking. It's too easy to clear up the U-boat by 1940 with access to the British and French navies. I am guilty of not playing the Allies as of yet in SC3, but I will take your word that Axis U-boats are too aggressive before France is out of the war.

I've found that at the end of my turn, I can make a 'net' around the u-boats with 3 destroyers where the u-boat can't see them and there is no path that won't run into one of my destroyers. On the AI turn, it always hits one of them and has to stop allowing me another round of attacks. Not sure if that's a game design issue or an AI issue that makes it fairly easy to wipe them out.

And if you get lucky with early level 1 anti-sub breakthrough before the subs have hit level 1 its a real cakewalk for the Allies.

Seems like the AI should recognize the tech difference and hide in the ports till they catch up. I know I do when the situation is reversed.

It depends and varies from game to game. In my most recent game the AI Germany kept their fleet and u-boats near home waters, except for that one that starts in the Atlantic. After France fell they sent out 3 u-boats that I spotted.

It varies highly for me as the Axis player. Some games my subs linger on and keep doing damage some i seem to magically run into every friggin' allied ship in the sea and get my fleet beat to hades early.