Fujitsu, Toshiba Consider Merger

Fujitsu and Toshiba are reportedly in talks to merge their mobile phone operations this year, a move that would create Japan's second-largest handset producer, according to two officials at the companies.

The discussions are preliminary and may not lead to a deal, said the officials, who requested anonymity since the talks are private. Although the Japanese newspaper Nikkei reported the two Tokyo-based companies were in the final stages of negotiations, the officials have denied that.

The joint venture would let the companies share in the rising cost of developing phones and give them a combined 18.7% domestic market share behind Sharp, which has 26.1% share. Fujitsu is currently the third-largest Japanese handset maker and shipped over five million handsets in 2009.

But the driving force behind the reported talks is the crowded market of cell phone manufacturers in Japan, industry observers say. That's coupled with the fact that competitors, including Nokia Oyj and Samsung Electronics, win market share overseas and iPhone-maker Apple takes customers at home.

If Fujitsu and Toshiba combine their operations, that would leave six groups in the Japanese handset market, down from 10 three years ago. Earlier this month, NEC, Casio Computer, and Hitachi merged their cell phone operations to become NEC Casio Mobile.

With 97% market penetration in Japan, "The market is saturated and growth is now limited to the replacement handset market -- in other words they're not going to get new customers that haven't had cell phones in Japan," noted Mike Morgan, senior analyst, mobile devices, for ABI Research. "Consolidation has to happen as a mere form of survival."

Morgan said the news would not be surprising given the high penetration rates and the fact that Japan has shifted to a new subsidy model, so consolidation is the next likely phase.

"What makes me nervous is that we have a Japanese company merging with a Japanese company... It's all well and good but if you want to grow, you have to get off the island," Morgan said. And historically, he added, Japanese companies have not had good international success when they try to move their business outside the country. They would do well to follow Kyocera's example, which took its low-end handset business into the United States and Latin America with some success, Morgan said. "That's the best of the best in terms of going international and gaining foothold."

The Nikkei reported Friday that Fujitsu and Toshiba are likely to set up a venture this year to combine their handset operations, with Fujitsu expected to hold a majority stake. Both companies denied the report in statements to the Tokyo Stock Exchange.

Mobile phone shipments in Japan fell 12% last year after shrinking 30% in 2008, according the Japan Electronics and Information Technology Industries Association.

In an effort to cut costs and increase their competitive position, Fujitsu and Toshiba have held merger talks in the past, although they were unsuccessful, according to the two officials. The two companies don't provide financial details of the handset operations.

Fujitsu makes handsets for NTT DoCoMo, Japan's biggest mobile phone operator, while Toshiba primarily supplies cell phones to the country's number two telecom firm, KDDI.