Well this is a complex subject...how much time do we have?
I mulled over this and could not make either option work [21 PBS VS 375 U-Boats]...but I still got a damn sight better fleet than historical.
Thought experiment.
As mentioned the KM laid down 21-23 large warships in the prewar Hitler years ,but they also laid down over 200 smaller vessels many of which were costal vessels, however all where diesel/bunker oil. In WW-I such ships were always laid down as coal powered, since German coal supply was order of magnitude better/more secure than diesel or bunker oil. Roughly speaking 1/4 to 1/3 million tons diesel every year was consumed by coastal forces. It was a strategic mistake using diesel engines and fuel this way.
Step 1. for heavy ships.
Step 2. for FACs and torpedo boats.
Step 3. Engines for FACs.
Step 4. Engines for large warships.
The German diesel industry might have managed to build enough large diesels for 21-23 big warships, especially if they can switch over to the advanced diesels [late 30s] instead of high pressure/temp boiler-turbines. A 14,000 ton [max] PBC about the size of the AGS- with completed hull form & transom stern, could be built through the 1930s , with 10 completed before war and 3 more early 1940s.
Brief discussion.
The idea of unit machinery lends itself to certain interesting marine engineering solutions. My own thoughts on this subject here are heavily influenced by American turbo-electric machinery of the 1920s, but read me out. Consider a baseline 5000 kW diesel/electric generator set. that is about ideal for a submarine if one can build it. The same motor/generator set can be ganged up in a configuration to supply power to surface ship electric motor final drives. No backing engines. No specialized turbine sets for destroyers, cruisers, or battleships. Specialized electric motor final drives per shaft (4,700 kW, 9,400 kW, 18,800kW) but one gets the point? Downside is that all these power plants arrangements (1 motor/generator final drive, 2 motor/generator/final drive, 3 motor/generator/final drive,) can result in diesel powered cruisers and battleships as well as subs. All of these types will be noisy. The three classes should be long-ranged and most definitely (except for subs) fuel economical.
Top speed should be 30 knots standard & 28 knots deep. The armor should be 3000 tons and offer estimated 6-7" belts plus 3" deck [all multiple plates ]. The armament should include 2 triple 11"C28 gun turrets [although 6 of these 20 turrets would have to be removed from the Deutschland class to keep production going ] . In addition 24 torpedoes in 4 triple mounts would also be mounted along the side superstructure. In between those should be 4 twin 4" flak; although most would start off with twin 88 flak turrets and all swap out with 6 twin 4"flak , a couple of years into war.
If we are after cruiser/raiders then we are in disagreement. The sustained speed in a seaway is critical. Armament is also a disagreement. C-28 guns with a long-rod ACR base fuse shell designed is acceptable, but 4x2 is my preferred. (See above previous for why.). Torpedo battery, given the time period is also problematic. The torpedoes available to the KM are worse than the US Mark 11s!
Based on tech, no more than a pair of quad H-8s and that more for psychology than for effectiveness. Armor is either all or nothing. 20 cm belt will be swiss cheesed by contemporary US or UK 8 inch guns at effective battle ranges (4-15 km), so nothing. Put the tonnage into sustained speed. I agree with a 8 cm deck. Bombs and plunging shells have to be stopped so the raider has a chance to flee. A turtle deck (protected cruiser) scheme may be appropriate.
Along side the PBC program , about 11 larger heavier Panzerschiffe would be completed [6 before 1940 & 5 finished 1940 -1942] . These should be Scharnhorst size @ 27,000 tons max with 6000 tons armor offering 4" deck & 12" belts. The main batteries would initially be either 3 triple 11"C28 or 3 twin 12"SKL 50 [WW-I guns used as coastal batteries in WW-II]. The Panzerschiffe completed from 1940 on- should be armed with twin 13" gun turrets , and all previous Panzerschiffe should be up gunned to the same 3 twin 13" guns standard by 1942/43. Each of these warship should be also armed with 8 twin 4"flak from the start plus 2 dozen torpedoes.
That works out to 35,000 tonnes. Better opt for 38 cm/45 (14.96") SK L/45 (3x2/3 twin mounts). These are known quantities and Krupp knows how to build them in 1927. NO TORPEDOES! More Flak. See my comments above; especially about Wurzburg organs and 10.5 cm twins. Germany can build 4 or maybe 5 before 1940. No more than these. Not enough slips, not enough time, not enough resources.