With Japan becoming a threat in the Pacific and England occupied by Germany, the Australian Ministry of Munitions started to consider building their own tanks in early June 1940.
This was to be a major undertaking by the Australians as they had never even built their own automobiles.
A. Chamberlain, was an engineer that was sent to the United States to study tank production. He was joined by Colonel W. D. Watson, who was an advisor from England. They both studied the M3 Medium.
In November the Australian General Staff developed the requirements for a tank. It was to have a 2-pdr (40 mm) gun and two 7.7 mm (0.303") machine guns. The tank was also required to go 30 mph and have at least 50 mm of armor. It was to use as many of the same components as the American M3 Light Tank. The engine was to be three Cadillac automobile engines joined together. Cast armor was also a requirement.
It had rubber-block suspension with horizontal volute bogies similar to the French Hotchkiss.
The centered hull machine gun had a large armored sleeve.
In the front the driver sat on the right side with the hull gunner on the left. Between them sat the gearbox and the Vickers .303 machine gun that was water cooled.
The middle compartment contained the turret, which contained the commander on the left, the loader / radio operator on the right, and the gunner in front of the commander.
The rear compartment contained the frame which held the three Cadillac 75 engines. The fuel and radiator was also located in the rear compartment.
As firms producing rolled armored plates were committed, it was decided to try to make the hull from a solid cast. Other experiments involved trying to make strong enough armor from metals available in Australia.
Early hopes to use the Guiberson diesel engine were dashed and the Cadillac automobile engine was selected. Three engines were combined.
Australia had hoped to make a copy of the M3 Medium's gearbox, but industry in Australia just didn't have the tooling to make them properly. Chamberlain returned in May 1941 from the United States proposing the design of what would become the AC 2. The AC 2 would use imported transmissions that were used in heavy trucks. However, with events in the Pacific rapidly changing, the AC 2 program was cancelled in September 1941 by the Minister for the Army.
With design changes it became possible for the manufacture of the gearbox, for the AC 1, in Australia.
The radio was a Wireless Set No. 19 Mk 2.