Tokyo: Japan’s NEC Corp, Casio Computer Co and Hitachi Ltd said they planned to merge their struggling cellphone operations to cut development and manufacturing costs.

A union would create Japan’s second-largest cellphone maker with sales of 505 billion yen ($5.6 billion) and could trigger more consolidation in a sector worn down from infighting in a crowded and dwindling market.

NEC, Japan’s No.3 handset maker, said it will split off its mobile phone division and merge it with a cellphone joint venture operated by Hitachi and Casio. How much the merger will save NEC has not been calculated yet, an NEC spokeswoman said.

NEC would hold 70.7% in the new venture, which will receive a 5 billion yen capital injection by June 2010. Casio will hold 20% and Hitachi 9.3%, the three companies said in a statement.

Japan’s mobile phone market is shrinking but phone makers are still shouldering hefty development costs, which can cost as much as 10 billion yen ($111 million) per new handset in the world’s most technologically competitive mobile market.

NEC, Casio and Hitachi together controlled about 20% of Japan’s mobile phone unit sales in the year ended in March, according to research firm BCN Inc.

That would nudge out No.2 Panasonic Corp and come a close second to Sharp Corp, with 22%.

NEC supplies handsets to phone companies NTT DoCoMo Inc and Softbank Corp, while Casio Hitachi Mobile Communications supplies KDDI Corp, US firm Verizon and South Korea’s LG Telecom Co.

The three makers are to hold a briefing at 0800 GMT.

Prior to the announcement, shares in NEC closed down 2.9%, in line with Tokyo’s electrical machinery index. Casio fell 4.5% and Hitachi 4.4%.