Australia's future submarine fleet will be built by French defence firm DCNS, Prime Minister Malcolm Turnbull announced Tuesday, in a decision closely watched internationally as other major Asian powers bolster their own armed forces.

France's state-controlled company beat off German and Japanese competition to be named as the government's preferred bidder for the project worth nearly 40 billion US dollars.

The 12 "regionally superior submarines" would be "designed in partnership with DCNS" and "built here in Osbourne, South Australia," Turnbull said in a nationally televised address.

DCNS, almost two-thirds owned by the French government, offered to build a Shortfin Barracuda, a diesel-electric version of its current nuclear-powered vessel, re-designed for Australia.

"The French offer represented the capabilities best able to meet Australia's unique needs," Turnbull said.

Criteria included "superior sensor performance and stealth characteristics, as well as range and endurance similar to the [current] Collins Class submarine," as well as the involvement of Australian industry, the Defence Ministry said.

DCNS chief executive Herve Guillou said the success so far was "thanks to the strong teamwork" with the French authorities and the company's partners.

“France and Australia have been allies for more than 100 years and we look forward to further strengthening this time-honoured relationship," he said.

French Prime Minister Manual Valls described Canberra's decision as a "magnificent success for DCNS and our industry," and the office of President Francois Hollande said he was "proud of the technological excellence that its companies had demonstrated," AFP reported.

The project, worth 50 billion Australian dollars (39 billion US dollars), is said to be the largest naval public spending project in Australian history, and will double the size of the current outdated submarine fleet. The new submarines are intended to eventually replace the old fleet.

The unsuccessful rivals were Germany’s ThyssenKrupp Marine Systems and a Japanese consortium including Mitsubishi Heavy Industries.

"We are naturally disappointed, but we stand ready to provide support for Australia’s Future Submarines project," John White, chairman of the ThyssenKrupp Marine Systems Australia, told dpa.

Japanese Defence Minister Gen Nakatani said Tokyo had offered its "utmost cooperation" to the consortium. "We are going to request an explanation as to why it was not chosen," Jiji Press agency quoted him as saying.

The Japanese consortium was proposing to build a longer version of the current Soryu Class submarine while German group ThyssenKrupp proposed an 89-metre submarine known as the Type 216, among the fastest and designed to carry 18 torpedoes or anti-ship missiles.

According to experts, the pump-jet propulsion of the DCNS Barracuda is much quieter than a conventional propeller, making the submarine harder to detect.

The first submarine is expected to be launched around 2030.

"These submarines will be the most sophisticated naval vessels in the world," Turnbull said, adding the combat system for the submarine would be sourced from the United States.

"This is a great day for our navy, a great day for Australia's 21st-century economy, a great day for the jobs of the future," Turnbull said of the project that is said will generate 2,800 jobs.

"The submarine project alone will see Australian workers building Australian submarines with Australian steel," he said.

DCNS is now the preferred bidder, a standard term in defence procurement meaning negotiations on the details of the contract can now proceed with a single party.

Upgrading the submarine fleet "reflects the fact that we are a maritime-based trading nation," Defence Minister Marise Payne said.

The submarine contract has broader international dimensions, as the military balance of power shifts in Asia.

There were reports that the United States had favoured the Japan bid, while China had warned Australia that a submarine deal with Japan could threaten its trade relations with Canberra.

China has modernised its armed forces rapidly over the past decade and taken a more aggressive stance in areas such as the South China Sea, a major trade route for global - and especially Australian - trade.

Legislation passed in Japan meanwhile has enabled its military to fight in conflicts abroad for the first time since World War II.

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