Toshiba and NEC Electronics are joining hands to develop next generation semiconductor technology, in a move that highlights the pressure for further consolidation in the industry.

The groups said on Wednesday they had agreed to combine their resources to develop semiconductor process technologies in an attempt to reduce the cost of increasingly complex technology development.

The two will initially co-operate in developing 45-nanometre system LSI process technology.

Semiconductor manufacturers are producing semiconductor chips with circuitry widths of 90 nanometres but are working on developing narrower widths of 65 and 45 nanometres. The narrower widths allow for higher density chips and lower costs.

Toshiba and NEC Electronics, which is 70 per cent owned by NEC, said they were also discussing further collaboration in semiconductors, including product development and production.

The collaboration is the latest alliance between Japanese semiconductor manufacturers as fierce competition from South Korean groups has affected the competitiveness and profitability of Japanese electronics groups.

Fumiaki Sato, analyst at Deutsche Securities in Tokyo, said consolidation in the sector was far from complete. “This is just one step in the much-needed further consolidation of Japan’s semiconductor industry.”

In particular, the number of system LSI manufacturers needs to be reduced to about two players, Mr Sato says.

Japanese manufacturers, including Toshiba, Fujitsu, Renesas and Matsushita are currently the leaders in system LSI chips, which are used in small digital products such as mobile phones and digital cameras.

However, the high financial and human resource burden is putting a strain on many semiconductor manufacturers, particularly if they are dependent on products that face price pressure.

Last month, NEC Electronics reported a first-half loss and warned full-year losses would be higher than initially expected because of sharp price declines as well as falling demand for some of its main products.

Toshiba, which is focused on flash memory chips, has fared better as demand for flash chips has soared on the back of growing demand for portable audio players and digital cameras.

However, even Toshiba says the burden of research and development in advanced semiconductors is forcing it to take the initiative in trying to reduce costs.

Toshiba said on Wednesday that research and development on the Cell microprocessor, which it has been working on together with IBM and Sony for close to 5 years, has been a significant burden.

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