Apr. 16--TOKYO -- Japanese chipmakers Renesas Technology Corp. and NEC Electronics Corp. are in talks to integrate their operations by April 2010 in a bid to weather plummeting demand amid the global economic recession, sources close to the matter said Thursday.

If realized, the move would create not only Japan's largest semiconductor maker, surpassing Toshiba Corp., but also the world's No. 3 chipmaker, trailing U.S. giant Intel Corp. and South Korea's Samsung Electronics Co.

The deal is likely to trigger more realignment in the industry among other semiconductor makers like Toshiba and Fujitsu Ltd., with businesses pummeled by stagnant demand and erosion of chip prices, observers said.

Meanwhile, the government welcomed a possible realignment in the industry.

Although declining to comment on individual cases, Vice Minister of Economy, Trade and Industry Harufumi Mochizuki told reporters that chipmakers have faced a turning point and "need to seek to reform their operations in various manners." Renesas, currently Japan's No. 2 semiconductor maker, and third-ranked NEC Electronics, a wholly owned subsidiary of NEC Corp., aim to streamline their operations and cut costs through the merger.

The two firms will iron out details on the investment ratio and the structure of the new management through further negotiations, the sources said.

Based on the latest earnings projections, the merger will create a firm with combined sales exceeding 1.23 trillion yen in the largest realignment in the domestic chipmaking industry since 2003, when Renesas was founded through a joint venture between Hitachi Ltd. and Mitsubishi Electric Corp.

It will also control about a 5.1 percent share in the global semiconductor market, which is still far behind industry leader Intel's 13.3 percent but follows closely behind Samsung's 6.8 percent, according to data compiled by information technology research firm Gartner Inc.

Speculation was rife that NEC was studying a merger of its semiconductor unit with Toshiba in what may have developed into a three-way integration including Fujitsu, but it apparently switched over to Renesas after talks faltered.

Renesas and NEC Electronics are key suppliers of large-scale system integrated circuits and microcomputers that are often used in digital home appliances and automobiles.

Both companies have been studying effective cost-cutting measures in the face of large-scale losses projected for the business year that ended in March.

For the whole of fiscal 2008, Renesas anticipates a group net loss of about 200 billion yen, while NEC Electronics projects a group net loss of 65 billion yen.

Hitachi and Mitsubishi Electric, which own 55 percent and 45 percent of Renesas respectively, injected 54 billion yen in fresh capital last month to restore its financial health. Renesas also carried out wage cuts and solicited employees to apply for early retirement to stem losses.

Meanwhile, NEC Electronics, of which about 65 percent is controlled by NEC, has also closed some of its production lines and announced measures to cut 80 billion yen in fixed costs in the next two years.

Big-name chipmakers around the world have been swept under by the unprecedented sales decline in digital home appliances and cars, most recently by the collapse of Spansion Inc. of the United States and Qimonda AG of Germany.

On the domestic front, Elpida Memory, the world's third-largest maker of dynamic random access memory chips for personal computers, will partner with Taiwanese chipmakers to survive the industry recession.

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