Ive seen them upgrade their stuff regularly. Right now im in a match where the titan and some starbases got full upgrades even though the upgrades seem a bit random. Maybe its because of highest difficulty, dont know. 

They do upgrades and progression, its just very slow. Currently they dump everything into ship building so everything else staggers. But the devs said there will be more AI passes and I hope so, even in impossible difficulty settings, I give the AI allies up to groups of four x2 so far and its not been very hard.