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June 13, 2010, 8:02 p.m. EDT

Fujitsu, Toshiba in Mobile Merger Talks

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By Hiroyuki Kachi

Such a merger would create the second largest player in Japan's large but nearly saturated domestic market, where makers are struggling to regain competitiveness and improve profitability by streamlining and consolidating. The industry also hopes to pool resources to compete with foreign rivals in promising overseas markets like China.

Like most Japanese players, Fujitsu and Toshiba will need to look abroad for future growth, even as they come under attack in the crowded home market from ambitious newcomers like Apple /zigman2/quotes/202934861/composite AAPL -0.23% Inc.'s iPhone, Research in Motion Ltd.'s Blackberry, and Taiwan handphone maker HTC Corp.

Toshiba says its mobile phone handset business posted sales of about 90 billion yen (about $986 million) in the year ended in March in 2010 but posted an unspecified operating loss. Fujitsu didn't provide details of its handset business.

Japan Real Time
  • 1+1=3? Not in Japan's 'Galapagos' Phone Market

According to data from the Tokyo-based private research agency, MM Research Institute Ltd., a merger of the mobile phone operations of third-ranked Fujitsu and eighth-ranked Toshiba would give the combined entity a market share of about 19%.

This would put it in second place after Sharp /zigman2/quotes/203224600/delayed JP:6753 -0.56% Corp., which had a 26% share of the Japanese market, based on shipments, during the business year ended in March. It would be well ahead of Panasonic Corp.'s mobile phone unit, Panasonic Mobile Communications Co., which had about a 15% share.

However, a merger still wouldn't give them the scale to compete with their bigger global rivals, with an estimated market share of less than 1%.

Fujitsu manufactures handsets for NTT DoCoMo Inc., while Toshiba mainly supplies cell phones to KDDI /zigman2/quotes/204923990/delayed JP:9433 -0.85% Corp. Combining engineering and know-how and using common software could lower costs and enhance competitiveness.

The talks take place against the backdrop of a shrinking domestic handset market and past failures by Japanese brands to gain a major overseas presence.

Apple has shown with the strong performance of its iPhone that smartphones and other popular foreign models can do well in the once hard-to-crack Japanese market.

Softbank /zigman2/quotes/207303954/delayed JP:9984 -2.51% Corp.'s unit will start offering Apple's new iPhone model, the iPhone 4, later this month. It has been selling iPhones since 2008 and kicked off sales of the iPad on May 28.

Handset sales have fallen in Japan since 2008, when carriers reduced subsidies for new models. Sales of new handsets fell 4% to 34.44 million units in the fiscal year ended March 2010, according to MM Research. Compared with three years earlier, the total market is down about 30%.

This has led to a flurry of consolidation in an overcrowded market.

In 2008 Kyocera Corp. bought Sanyo Electric Corp.'s mobile phone operations. Earlier this month, NEC /zigman2/quotes/205173342/delayed JP:6701 +0.33% Corp., Hitachi Ltd. and Casio Computer /zigman2/quotes/202492162/delayed JP:6952 +2.07% Co. joined forces to create a single mobile phone company.

Despite the mergers, Japanese companies are still dwarfed by foreign rivals such as Nokia /zigman2/quotes/207421390/composite NOK -0.38% Corp. and Samsung Electronics Co. According to Neil Mawston , an analyst at StrategyAnalytics, Fujitsu is the 16th largest handset vendor globally and Toshiba is the 22nd largest.

Fujitsu, a leading supplier of 3G Symbian smartphones in Japan, ships all its products domestically, while Toshiba is more diversified, shipping to parts of Western Europe.

Write to Hiroyuki Kachi at hiroyuki.kachi@wsj.com

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