TOKYO, Jan 30 -- Toshiba Corp is in talks to merge part of its chip operations with NEC Corp's semiconductor unit, a source said, as a sharp global slowdown forces Japanese chip makers to cut jobs and try to band together.
Chip makers worldwide are grappling with deep losses that deplete their cash base and hurt their ability to invest in future growth, but analysts and some executives said they doubted a merger among Japanese players would help.
Toshiba is in talks on how to combine its system chip business with NEC Electronics Corp, a semiconductor firm majority owned by NEC Corp, a person with knowledge of the talks said on condition of anonymity on Friday.
"It's a losers' union," said Fumiyuki Nakanishi, a manager at SMBC Friend Securities. "Despite some cost cut impact, it's doubtful if they can beat their international rivals even as a team. The domestic chip industry appears on the brink of death."
NEC plans to cut 20,000 jobs groupwide -- the biggest cuts announced by an Asian company so far in the global crisis -- while Toshiba is trimming $3.3 billion in fixed costs by delaying NAND flash chip capex plans.
If Toshiba's system and discrete chip operations and NEC Electronics merge, the combined business would have annual revenue of 1.5 trillion yen ($16.7 billion), based on their 2007/08 sales.
That would be bigger than the chip unit of Samsung Electronics Co at current exchange rates. Memory chips account for most of Samsung's semiconductor sales.
Toshiba shares dived 17 percent on news of chip merger talks, its annual loss forecast on Thursday and a rating cut by Goldman Sachs, which said it may have to consider equity financing.
System chips control multiple functions in electronics or cars and look like a maze of circuits on a sliver of silicon, while simpler discrete chips are used in bigger integrated microchips.
Semiconductor makers worldwide are forging alliances, seeking government help, or cutting jobs to survive a sharp downturn.
NEC and rival Fujitsu Ltd tumbled to sharp quarterly losses and slashed their annual earnings outlooks on Friday, while Toshiba, the world's No.2 NAND flash maker, warned earlier that it is headed for its biggest annual loss ever.
"The first priority is improving our own operations," said Fujitsu executive Kazuhiko Kato, who did not say if his company was also in talks with NEC on a merger of their chip operations, as was reported earlier in the Nikkei businesss daily.
"Nothing starts until we can stand on our own two feet. But over the longer term, we will give strong consideration to any offers of partnerships."
LOSSES, LOSSES EVERYWHERE
Twenty years ago, Japan's chip makers together commanded 80 percent of the global market.
But Japan's insular chip industry -- sometimes referred to as the Galapagos of tech -- fell behind in investment to South Korean and U.S. rivals, missing opportunities to corner overseas markets by catering heavily to domestic clients.
NEC, which also makes telecoms equipment and mobile phones, said it now sees a group operating loss of 30 billion yen for the year to March 31 instead of a profit of 120 billion yen.
That widely missed a consensus estimate for a profit of 62 billion yen by 13 analysts polled by Reuters Estimates. It tumbled to a quarterly loss of 24.8 billion yen.
"NEC is running out of bullets. They don't have any money," said Tomomi Yamashita, a fund manager at Shinkin Asset Management. "It's getting close to the point where they may have trouble surviving as a single organisation."
Fujitsu, which competes with IBM and Hewlett-Packard, cut its annual operating profit forecast by two-thirds to 50 billion yen, missing a projection of a 102 billion yen profit in a poll of 13 brokerages by Reuters Estimates. It logged a quarterly operating loss of 25.2 billion yen, against a 46.7 billion yen profit a year earlier.
Tatsuya Mizuno, a director at Fitch Ratings, said any merged entity would benefit from lower development costs and capital spending, but it would not necessarily mean a boost to competitiveness against global rivals.
Chipmakers Elpida Memory, born out of the PC chip operations of NEC and Hitachi Ltd, and Renesas Technology Corp, a venture of Hitachi and Mitsubishi Electric Corp, face mounting losses this year.
Shares of Toshiba closed down 17.4 percent, while NEC fell 6.5 percent and Fujitsu fell 6.8 percent. Tokyo's electrical machinery index fell 5.6 percent. ($1=1369.0 Won, $1=89.59 Yen) (Additional reporting by Mayumi Negishi, Aiko Hayashi, Elaine Lies and Taiga Uranaka; Editing by Michael Watson and Edwina Gibbs)
By: Noriyuki Hirata and Sachi Izumi
Copyright 2009 Reuters.