French naval contractor DCNS has beaten Japanese and German rivals to win a A$50 billion ($40 billion) deal to design and build Australia's next generation of submarines in the country's biggest ever defence procurement programme.
Prime Minister Malcolm Turnbull had announced that his government was seeking to replace Australia's ageing diesel and electric-powered Collins Class submarines, which are due to leave service from around 2026.
Turnbull said the 12 new subs "will be the most sophisticated naval vessels being built in the world."
A Japanese government-backed consortium led by Mitsubishi Heavy Industries and German group ThyssenKrupp Marine Systems were also in the running, but French company DCNS won the bid.
"The recommendation of our competitive evaluation process ... was unequivocal that the French offer represented the capabilities best able to meet Australia's unique needs," Australian Prime Minister Malcolm Turnbull told reporters.
"This is a momentous national endeavour. This is securing together with our commitment to surface vessel construction, this is securing the future of Australia's navy, over decades to come," he added.
French President Francois Hollande hailed the decision as historic.
"It marks a decisive advance in the strategic partnership between the two countries who will cooperate over 50 years," his office said in a statement.
Industry watchers were expecting the decision to come later in the year, but the process has gained speed due to upcoming general elections that will be held on July 2.
The deal will have an impact on thousands of jobs in the shipbuilding industry in South Australia, where retaining votes in key electorates will be critical for the government's chances of re-election.
"The submarine project .. will see Australian workers building Australian submarines with Australian steel," said Turnbull.
DCNS, 35 percent owned by defence electronics giant Thales SA, proposed a diesel-electric version of its 5,000-tonne Barracuda nuclear-powered submarine.
DCNS enlisted heads of industry and top government figures to convince Australia of the merits of its offering and the benefits to the broader relationship.
Japan had offered to build Australia a variant of its 4,000 tonne Soryu submarine.
Japanese were the early favourite to win the bid and last November its defence minister said handing Tokyo the contract would help bolster regional security, with some senior US officials backing a Japanese build.
Earlier this month, The Australian newspaper cited US officials backing Japan not just for the quality of the submarine involved but also for the development of deeper strategic, maritime cooperation between Canberra, Washington and Tokyo at a time of China's rise.
For Australia, cooperating with Japan risked angering its biggest trading partner China. There were also reportedly concerns that Tokyo lacked experience in exporting such complex military hardware.
Asked if the decision to go with France would upset key ally the United States, Turnbull said the choice of contractor was "a sovereign decision for Australia."
Japan's Minister of Defense Gen Nakatani described the decision as "deeply regrettable."
German group ThyssenKrupp Marine Systems was proposing to scale up its 2,000-tonne Type 214 class submarine, which is a technical challenge.
"Thyssenkrupp will always be willing to further contribute to Australia's naval capabilities," said Hans Atzpodien, Chairman of Thyssenkrupp Marine Systems.
"We will ask Australia to explain why they didn't pick our design," he added.
Australia is increasing its spending on defence, to protect its strategic and trade interests in the Asia-Pacific as the United States and its allies grapple with China's rising power.