NEC Electronics Corp. and Renesas Technology Corp. are reportedly in final negotiations to merge their operations and form Japan's biggest semiconductor maker by sales. The Nikkei business newspaper reported today the companies aim to reach an agreement this month and are likely to complete the merger in 2010. It didn't cite any sources.

Both companies are facing heavy losses in the current economic downturn and have decided it would be difficult to survive on their own, the paper said. The merger would create the world's third largest chipmaker, behind US's Intel Corp. and Korea's Samsung Electronics. The companies both issued press releases that they had made no such announcement, and had not decided on a merger.

If Renesas and NEC Electronics were to merge it would be the first big deal in the Japanese semiconductor sector since the creation of Renesas in 2003. It would also increase the pressure on Japanese rivals Toshiba and Fujitsu to merge parts of their semiconductor operations.

A deal could also lead to the closure of older chip plants in Japan as Renesas and NEC Electronics have many duplicate products. They both make microcontrollers and system chips which are used as the brains of devices such as televisions.

Pressure for consolidation in the chip sector has been rising amid a slump in prices and demand. Renesas expects to have made a net loss of Y206 billion and NEC Electronics a net loss of Y65 billion in the year to March 2009.

The semiconductor business requires massive upfront investment for production equipment, and selling prices face constant downward pressure as technology advances. A merger would allow the two companies to phase out older, less productive lines and get better economies of scale.

Global chipmakers have been suffering from a supply glut and tepid demand stemming from the global economic slowdown that has driven down chip prices sharply. Many have already cut production to survive and have initiated restructuring moves such as job cuts. But with no recovery in sight, they see consolidation as the one way to ride out the semiconductor industry's worst downturn in a decade.

Japan's Elpida Memory Inc., a maker of PC memory chips, earlier this month inked a deal with the Taiwan government to supply key chip technology in exchange for a possible stake in a new chip company being established in Taiwan. (See: Government-backed Taiwan Memory Company ties up with Japan's Elpida Memory)

Other chip companies are also struggling. US memory maker Spansion Inc. and its subsidiaries filed for bankruptcy in March, and German manufacturer Qimonda AG declared bankruptcy in January. (See: Flash memory maker Spansion files for bankruptcy)

Shares in NEC Electronics closed limit up at Y930, up 12 per cent from previous day's close of Y830. NEC Corp. rose 1.4 per cent to Y300, outperforming the broader Nikkei index, which rose 0.1 per cent. NEC holds the majority of NEC Electronics shares, while Hitachi and Mitsubishi Electric jointly own Renesas.