Under the agreement, Thales' subsidiary Australian Munitions will manufacture the extended-range ammunition at its factory in Benalla, Victoria state.
ST Kinetics Chief Operating Officer and President, Defense Business Gan Boon Jin said agreement with Thales is a good opportunity to introduce a local manufacturing capability.
"This range also complements the broad and deep product portfolio offered by the Thales Group and our strategic partners," Australian Munitions' Executive General Manager Kevin Wall said. "We will be working with ST Kinetics also to integrate the 40mm ammunition with Thales Australia's in-service F88SA2 assault rifle, as well as the new EF88 currently in development."
The F88 Austeyr assault rifle is the standard individual weapon for the militaries of Australia and New Zealand. Thales manufactures the F88 in Australia under licence from Austrian maker Steyr Mannlicher.
The EF88 is specifically for Australia's LAND 125 program and is based on the F88 platform that has been in service in Australia since the late 1980s.
Australia's LAND 125 program is a major graduated procurement process to improve the fighting capability of ground troops.
LAND 125 ranges from the purchase of thermal rifle night-sights and personal radios to improved clothing and body armor.
Thales Australia reorganized its armaments manufacturing businesses and created Australian Munitions in September last year. The restructuring was part of a strategy to capture more of the munitions and general defense manufacturing market.
The division encompasses Thales' Victoria state Benalla factory, an explosives and propellants facility at the government's Mulwala site in New South Wales state and other logistics services in Australia.
A main driver for creating Australian Munitions was the government's Domestic Munitions Manufacturing Arrangements Project.
Under DMMA, the winning consortium will run the two non-guided missile armaments production centers of Mulwala, a government-owned establishment, and Benalla, built in 1996 and owned by Thales Australia.
Both centers have been run by Thales since the 1990s.
Thales Australia and its consortium partners General Dynamics-OTS, NAMMO and Winchester Australia were shortlisted in July for the DMMA Project.
Two other consortia -- Alliant Techsystems has teamed with NOIA Nominees, American Ordnance and Day & Zimmerman -- were shortlisted.
BAE Systems Australia is working with its subsidiary BAE UK and BAE US, as well as Expal Systems.
The Defense Materiel Organization said at the time a final decision on a manufacturer will be made in the third quarter of 2014, with the winning consortia taking over production in 2015.