The memorandum of understanding between Saudi Arabian Military Industries (SAMI) and France's Naval Group is aimed at providing the oil-rich Gulf state's navy with “state-of-the-art systems”, a statement said.
“Through design, construction, and maintenance activities, the joint venture will contribute significantly to further enhancing the capabilities and readiness of our Royal Saudi Naval Forces,” SAMI boss Andreas Schwer said.
A spokeswoman for Naval Group — which is owned by the French state and French multinational giant Thales — refused to give any more details.
French lawmakers and rights groups have repeatedly called on France's government to suspend all arms deals to Riyadh because of the war in Yemen, where some 10,000 people have been killed since a Saudi-led coalition intervened in 2015.
Riyadh is battling on the side of the internationally recognised government against Iran-aligned Huthi rebels, in a conflict that has seen all sides accused of potential war crimes.
The US House of Representatives this week voted overwhelmingly to end American involvement in Saudi Arabia's war effort in neighbouring Yemen, dealing a rebuke to President Donald Trump and his alliance with the kingdom.
France, one of the world's biggest arms exporters, has sold equipment to Riyadh and fellow coalition member the UAE — notably Caesar artillery guns and ammunition, sniper rifles and armoured vehicles.
OPEC kingpin Saudi Arabia has been one of the world's top arms buyers for the past several years.
But in 2017, the kingdom's Public Investment Fund set up SAMI to manufacture arms locally with the fund expecting it to become one of the world's top 25 defence companies by 2030.
Naval Group — which was previously called DCNS — has been embroiled in a long-running graft scandal over the 2002 sale of two Scorpene submarines to Malaysia for $1.2 billion.
The submarine maker is alleged to have paid more than 114 million euros ($128 million) in kickbacks to a shell company linked to a close associate of ousted Malaysian leader Najib Razak.
A French investigation launched in 2010 has already led to four French executives involved in the deal being charged. They all deny wrongdoing.