Toshiba Corp and Fujitsu Ltd are discussing an alliance that would create a semiconductor business with Japanese yen 1 trillion (US$7.6 billion) in annual sales, the Nihon Keizai newspaper said, without citing sources.
The tie-up, expected to be completed in May, would focus on chips used in home appliances and autos and strengthen Toshiba's position as the world's No. 2 chipmaker behind Intel Corp, the paper said.
"We're already cooperating with Toshiba in various areas such as memory chips," said Yuri Momomoto, a Fujitsu spokeswoman.
A further alliance "has not been decided," she said.
A potential tie-up would underscore attempts by Japanese chipmakers to cope with higher development costs and more competition from Taiwanese and South Korean rivals. On Tuesday, Mitsubishi Electric Corp and Hitachi Ltd said they may merge some operations to create the world's fourth-biggest chipmaker.
"The consolidation we are seeing is born out of necessity," said Keon Han, an electronics industry analyst at Bear Stearns Asia Ltd in Hong Kong.
"It's lack of profit and capital that's inhibiting their research and development. They have been in a very bearish market for the last decade and they don't really have enough money to continue their core programs."
Toshiba expects a record loss of Japanese yen 260 billion in the 12 months ending March 31. Its chip business expects to report sales of Japanese yen 680 billion in the period, while Fujitsu, the world's third-largest computer maker, projects sales of Japanese yen 396 billion, the paper said.
Toshiba President Tadashi Okamura declined to confirm the report. "We're always considering what to do with our semiconductor operations," he said.
* A lack of profit and capital at Japanese chip firms is inhibiting research and development, forcing companies to cooperate.
* Mitsubishi Electric and Hitachi have said they may merge some operations.
* The alliance would split Japan's chip industry into three camps, with Toshiba and Fujitsu competing against Hitachi and Mitsubishi Electric. NEC Corp would stand alone.
In the 1990's Japanese companies tried to lower costs by selling technology in commodity markets, such as the memory-chip industry, to Taiwanese companies, which acted as their production units.
This proved insufficient when the semiconductor industry hit one of its worst slump ever last year. Personal computer sales shrank for the first time, causing sales of some chipmakers to contract by as much as two thirds.
The alliance will split Japan's semiconductor industry into three camps, with the Toshiba-Fujitsu alliance competing against a company to be formed out of the system-chip businesses of Hitachi and Mitsubishi Electric. NEC Corp will stand alone, the paper said.
"Overall it's healthy for the chip industry," said Bear Stearn's Han. "You always want fewer players because that gives better control over the supply side of capacity."
Hitachi and Mitsubishi Electric, which plan to form a joint venture within a year, may combine system-chip businesses, creating a company with Japanese yen 550 billion in estimated sales in the fiscal year ending March 31.
Japan's chipmakers are expecting losses of billions of dollars in the year ending March 31 because of plummeting prices of commodity-type chips, such as dynamic random-access memory chips, the main memory in personal computers.
System chips are typically used in DVD players and digital cameras. They are designed for specific customers, meaning supply rarely exceeds demand.
The chips include memory and processor functions on a single piece of silicon, taking up less space than several chips for each functions, allowing consumer-electronics makers to shrink the size of their products.