Samsung to make system chips for Toshiba

Samsung to make system chips for Toshiba

Tokyo / Seoul: Toshiba Corp will outsource fabrication of system chips to South Korean rival Samsung Electronics Co , freeing up resources for its mainstay memory chip operations, the Nikkei business daily reported.

The move is a rare alliance between the two arch rivals in NAND-type flash memory but fits into Toshiba’s attempt to restructure its loss-making chipmaking operation and Samsung’s strategy of expanding into microprocessors.

Processor chips or system chips are used to power digital devices and have seen explosive demand growth this year, thanks to rising popularity of digital devices such as smartphones, tablets and Web-to-TV devices.

“Thanks to this tie-up Toshiba will gain a stronger position," said Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets.

“In a situation when bigger capacity is required, the burden of capital investment can be too big for one company, so the accord is a positive factor for Toshiba."

For new orders starting next fiscal year beginning in April, Toshiba will design cutting-edge system chips but will outsource production to Samsung, to avoid costly capital investment outlays, the Nikkei said.

Shares of Toshiba rose 1.4% to ¥444 after the report, outperforming the benchmark Nikkei average, which fell 0.7%. Samsung shares fell 0.2%, in line with the market.

Toshiba officials were not immediately available for comment and Samsung had no immediate comment on the report.

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Toshiba has continually improved the functionality of system chips and trimmed circuit widths in response to demand for smaller, more energy efficient equipment, Nikkei said.

With plant constructing costs ballooning to about ¥300 billion due to expensive production equipment, the partnership with Samsung enables Toshiba to save money by eliminating the need for capacity upgrades, the daily said.

Samsung, the most aggressive spender in memory chips with an 11 trillion won ($9.6 billion) investment budget for semiconductors alone this year, was chosen for production as it has advanced technologies and the ability to churn out large numbers of high-performance chips at low cost, Nikkei said.

Samsung’s system chips division has seen strong growth this year, driven by robust demand for mobile application processors and image sensors.

The division reported 4.8 trillion won revenue in the first nine months of 2010 versus 4.4 trillion won for all of 2009.

But the growing business still represents a small fraction of Samsung’s overall semiconductor business, as its mainstay memory chip operation, ranked the world’s largest, earned 20 trillion won revenue in the first nine months of 2010.

Toshiba, the world’s No.3 chipmaker behind Intel Corp and Samsung, is trying to restructure its chipmaking operations after the business logged an operating loss of ¥280 billion ($3.4 billion) in fiscal 2008 amid the global financial crisis.

As part of its chip business restructuring, Toshiba is also in talks with Sony to sell its microchip production line in Nagasaki prefecture for an estimated ¥50 billion, sources told Reuters on Wednesday.

Toshiba is the world’s No.2 supplier of NAND flash memory chips with a 35.7% market share, trailing Samsung, which controls 40% of the market, according to industry tracker DRAMeXchange.