Matsushita and NEC, Japan’s two largest mobile phone manufacturers, are poised to announce a joint venture to develop mobile phone software in a further step in the integration of the two groups’ businesses.

The venture is another sign of the problems faced by the companies in their loss-making mobile phone operations, which have suffered from a mature domestic market and rising development costs.

It will bring together hundreds of Matsushita and NEC’s software development units under one roof to develop Linux-based operating systems and application software.

However, the companies are expected to maintain their separate factories and individual brands. Both Matsushita and NEC said they had been discussing further co-operation but that nothing had been decided.

Matsushita and NEC have been co-operating in software development since 2001 in an effort to cut costs. Software development costs have risen sharply since Japan moved to third generation technology.

Both groups reported losses in their mobile phone operations as high development costs and fierce competition in a saturated market took their toll.

In the last fiscal year to March 2006, Matsushita lost Y8.4bn in its mobile phones business while NEC posted a Y25bn loss. NEC is forecasting a Y15bn loss for its mobile phone division this year and Matsushita is aiming for a Y6bn profit.

This year, Matsushita and NEC conceded they would need to increase their co-operation in order to survive. However, they ruled out an outright integration of the businesses.

“The joint development of software by Matsushita and NEC so far, has not had the desired effect [of cutting costs dramatically],” says Michito Kimura, senior analyst at IDC in Tokyo.

In particular, NEC’s position in the market has deteriorated even since top management publicly declared that a turnround of the division was a priority.

NEC has failed to introduce the right kind of products for the market nor has it won the leading position in the high-end market where it used to be dominant, according to Mr Kimura.

Both groups have also suffered in overseas markets, where they do not enjoy the same brand recognition that they have in Japan. Matsushita pulled out of the US and European markets and does not intend to return until about 2008 or 2009 when standards are expected to migrate from 3G to 3.5G.

NEC, meanwhile, failed to keep up with severe competition from Korean vendors in the European market, where its advantage in 3G technology did not help it due to lackluster market demand for the advanced features of 3G.

NEC also over-expanded in China, a market that it had pursued aggressively. This resulted in a piling of inventories and a weak brand image.

Although the joint venture will help reduce costs, particularly if both groups transfer the bulk of their mobile phone handset developers to the new company, this is not likely to save the businesses.

“No matter how much they cut costs, it won’t solve their problems unless the handsets sell,” Mr Kimura said.

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