Toshiba, Infineon double dip into chips

By CNN's Kristie Lu Stout

TOKYO, Japan (CNN) -- Toshiba has struck a preliminary deal with Germany's Infineon Technologies for a joint venture in the chip market.

The pact grants the German semiconductor giant access to Toshiba's memory chip operations, and includes a joint foray into the lucrative flash memory business.

A formal alliance between Infineon and Toshiba would create one of the top three largest memory chipmakers in the world.

Inking an alliance

Talks have been underway for weeks, but Infineon CEO Ulrich Schumacher told reporters on Wednesday that an agreement had been reached.

Infineon is expected to take up to 80 percent of the joint venture with Toshiba to make DRAM (dynamic random access memory) memory chips.

In return, Toshiba will give Infineon a 20 percent stake in its flash memory chip business.

In contrast to DRAM chips, flash memory chips are a less volatile semiconductor type used by mobile phones and digital cameras.

Prices in DRAM chips, the least profitable semiconductor category, have fallen 90 percent over the last year.

Gartner estimates that the memory chip market will shrink this year by 67 percent.

To formally ink the alliance, both companies are seeking approval from their respective supervisory boards.

Infineon is confident that approval and a deal will be clinched by the end of the year. Toshiba however is not so certain, and has expressed doubt that the talks can be wrapped up by then.

Consolidation

With the tie-up, Toshiba stands to gain access to the European mobile phone market. The Japanese electronics giant would also be better able to leave the DRAM market.

"From Toshiba's standpoint, they want to exit the business," said Merrill Lynch's Asia head of semiconductor research, Dan Heyler.

"From Infineon's standpoint, they are trying to seek partnership to gain market share in DRAM."

Analysts say Infineon is not interested in a complete exit from the volatile DRAM sector since it did account for over 80 percent of its operating profit last year.

Asia's chipmakers have warned of hefty losses and job cuts as they face a severe downturn and fierce global competition.

The need to cut chip making capacity and drive down costs in the DRAM sector has led to major consolidation in the sector.

The world's number-two and number-three memory chipmakers, the U.S.-based Micron Technology and South Korea's Hynix Semiconductor, are also in talks to strike an alliance.