Australia has selected US defence company Lockheed Martin Corp as its preferred bidder to supply the combat system for its new $38 billion fleet of submarines, the country's defence industry minister said on Friday.

Lockheed Martin beat out competition from US rival Raytheon Co, which built the system for Australia's existing Collins-class submarines.

Australia chose French naval contractor DCNS Group in April to build 12 new submarines in a deal worth A$50 billion ($38 billion) - one of the world's most lucrative defence contacts.

France beat out offers from Germany's ThyssenKrupp Marine and Japan's Mitsubishi Heavy Industries and Kawasaki Heavy Industries.

Japan's bid had been seen as an early frontrunner, helped by a view that the US wanted to cement security ties between regional allies Japan and Australia to counter China's growing assertiveness in the South China Sea and beyond.

The decision to select Lockheed Martin will see Australia share the same weapons system provider as the US Navy, offering greater interoperability between the two allies.

"By partnering with an Australian-based company with strong links to the United States, we will ensure that we get the best Australian and US technology, while ensuring that our sensitive technology is protected," Minister for Defence Industry Christopher Pyne said in a statement.

The value of the contract was not disclosed.

Pyne also announced Australia had signed the first contract with DCNS to commence the design work for the new submarines.

DCNS, which is 35 per cent-owned by defence electronics giant Thales SA, was criticised last month after more than 22,000 pages outlining details relating to submarines it is building for India were published in an Australian newspaper.

The leak sparked concerns about DCNS's ability to protect sensitive data and drawing a warning from Australian defence officials.

The new fleet of submarines is a key element of Australia's increased defence spending, which will rise to A$195 billion, or 2 per cent of GDP, by 2021-2022.

In addition to the submarines, Australia is buying new equipment including frigates, armoured personnel carriers, strike fighter jets and drones.

But Canberra's defence plans have riled Beijing, with the Foreign Ministry expressing "dissatisfaction" with Australia's "negative" remarks on the South China Sea and its military development. – Reuters