France sinks Japanese, German bids to win $40 billion Australian submarine deal

French offer represented the capabilities best able to meet Australia's unique needs, said PM Malcolm Turnbull

France has beaten Japan and Germany to win a $40 billion deal to build a fleet of 12 new submarines for Australia, one of the world's most lucrative defence contracts, Australian Prime Minister Malcolm Turnbull announced on Tuesday.

The victory for state-owned naval contractor DCNS Group underscored France's strengths in developing a compelling military-industrial bid and is a blow for Japanese Prime Minister Shinzo Abe's push to develop defence export capabilities as part of a more muscular security agenda.

Reuters earlier reported that DCNS would be announced as the winner, citing sources with knowledge of the process.

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"The recommendation of our competitive evaluation process was unequivocal that the French offer represented the capabilities best able to meet Australia's unique needs," Turnbull told reporters in the South Australian state capital of Adelaide where the submarines will be built.

Australia is ramping up defence spending, seeking to protect its strategic and trade interests in the Asia-Pacific as the United States and its allies grapple with China's rising power.

Japan's government with its Mitsubishi Heavy Industries and Kawasaki Heavy Industries boat had been seen as early frontrunners for the contract, but their inexperience in global defence deals and an initial reluctance to say they would build in Australia saw them slip behind DCNS and Germany's ThyssenKrupp AG.

Political implications

Industry watchers had anticipated a decision to come later in the year, but Turnbull's gamble on a July 2 general election has sped up the process.

The contract 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, which traces its roots to 1624 and is 35% 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, a deal that would have cemented closer strategic and defence ties with two of Washington's key allies in the region but risked antagonizing China, Australia's top trading partner.

Under Australia's previous Prime Minister Tony Abbott, who wanted to pick the sub builder without a competition, Japan was seen as almost certain to secure the submarine contract, helped by a close personal relationship with Abe and with the tacit backing of the United States.

When Abbott was ousted by Turnbull in a party coup, however, criticisms of the Japanese bid, its inexperience and dearth of industrial ties grew.

Paul Burton, Defense Industry and Budgets Director at IHS Jane's said it was a surprise from a strategic standpoint that Japan didn't win.

"Japan is very keen to secure a significant piece of overseas business following the relaxation of its export legislation, and this Australian submarine deal was widely regarded as becoming a landmark trade," he said. "The tradecraft required to convince a sophisticated domestic buyer that Japan's was superior to that offered by France was lacking."

ThyssenKrupp was proposing to scale up its 2,000-tonne Type 214 class submarine, a technical challenge that sources had previously told Reuters weighed against the German bid.

Both losing bidders said they were disappointed by decision but remain committed to their Australian businesses.

"Thyssenkrupp will always be willing to further contribute to Australia's naval capabilities," said Hans Atzpodien, Chairman of Thyssenkrupp Marine Systems.

Japan's Minister of Defense Gen Nakatani described the decision as "deeply regrettable".

"We will ask Australia to explain why they didn't pick our design," he added.

America's Raytheon Co, which built the system for Australia's ageing Collins-class submarines, is vying for a separate combat system contract with Lockheed Martin Corp, which supplies combat systems to the U.S. Navy's submarine fleet. A decision on the weapons system is due later this year.

($1 = 1.2967 Australian dollars)