Infineon hopes to be among the handful of suppliers to weather the electronics industry's prolonged slump by snatching up troubled competitors and increasing its heft in the market. Initially, that strategy led Infineon to enter talks with Toshiba, which has been widely reported to be looking for a way out of the loss-ridden DRAM sector.

However, a source close to the negotiations said the possibility of a merger between the two companies' DRAM businesses is fading given that the parties were unable to broker a preliminary agreement by the end of October as had been hoped.

Sources said it was unclear if the talks with Toshiba hit a snag or if Infineon is exerting pressure tactics by courting Taiwan's troubled DRAM suppliers. It's likely that Infineon became disenchanted after Toshiba refused to include its flash memory business in the proposed joint venture, said a source close to the German chipmaker.

Infineon and Toshiba declined to comment on the status of the talks.

However, in Taiwan, where the top six DRAM makers have lost a combined $1.23 billion so far this year, several vendors said they have been contacted by Infineon on the subject of a merger. The company already owns a 47% stake in ProMOS Technologies Inc., a DRAM joint venture with Hsinchu-based Mosel Vitelic Inc., but may be interested in taking complete control of the operation or in merging with Mosel Vitelic itself, according to sources.

"Many players in the industry have been thinking hard about how to boost their competitiveness. The answer is consolidation," said Thomas Chang, vice president of Mosel Vitelic, which lost $179.5 million in the third quarter, extending its losses to $434.8 million in the nine months through September.

"Infineon has talked to everyone in Taiwan about possible cooperation," including Nanya Technology, Powerchip Semiconductor, Vanguard International Semiconductor, and Winbond Electronics, said Hander Chang, an assistant vice president at Winbond, who declined to elaborate.

Each of Taiwan's DRAM producers licenses process technologies from overseas partners, making them vulnerable when the industry is in a downcycle. "In the global supply chain, all Taiwan can do is manufacturing," which is at the low end of the chain, Mosel Vitelic's Chang said.

A merger of Infineon with any of its rivals in Taiwan would do little to relieve the market's current supply glut or stimulate demand, but it would help Infineon raise its position in the industry, according to analysts.

"The only benefit of such a merger would be to expand Infineon's market share," said Albert Lin, director of the business operations division at ProMOS. "This is a war. Everybody is determined to kick each other out of the market and see who survives at the end of the game."

Infineon now owns about 8% of the world market in terms of DRAM unit shipments, trailing Samsung Electronics with 22%, Micron Technology with 20%, and Hynix Semiconductor with 17%, according to Nomura Securities Inc. in Taipei.

Teaming with Toshiba or any combination of Taiwan vendors could give Infineon a larger critical mass to compete against these few industry heavyweights. Infineon executives a year ago said the company could be an effective competitor with a 10% market share.

Analysts said the DRAM suppliers that join Infineon will have a better chance of survival, while those that are left out face continuing losses. "Some DRAM companies will end up just having to close their operations," said Sherry Garber, an analyst at Semico Research Corp., Phoenix. "There aren't enough buyers out there to take over everyone who's in trouble. With new 300mm-wafer DRAM fabs coming on line, we'll probably need only five or six suppliers total to meet global demand."

Already, Taiwan's DRAM makers are showing stress fractures. Hsinchu-based Winbond, for example, has said it will shift to specialty DRAM over the next three years and dramatically increase its non-DRAM manufacturing.

Winbond last week announced a flash memory development agreement with Sharp Corp. using the Japanese company's 0.18- and 0.13-micron Advanced Contactless Technology (ACT1), which Winbond claims can double flash-chip density. Production is slated to begin in the first quarter of 2004.

"The industry trend isn't in favor of Taiwan," said Rick Hsu, an analyst at Nomura. "Only the top three will be able to make money, and the rest will have a difficult time surviving."