Japan pledged to shore up Elpida Memory Inc <6665.T> with public money, bringing the total aid expected to come to the loss-making chip maker to $1.7 billion as it struggles to compete with its larger South Korean rivals.

With an injection of 30 billion yen ($313 million) from the state-backed Development Bank of Japan, Elpida will become the first Japanese firm to get aid under a scheme that makes public funds available to businesses hit by the global financial crisis.

Besides 100 billion yen in loans from its banks, the aid package includes a possible 20 billion yen capital injection from Taiwan Memory Company, which was set up by Taiwan to save its own chip sector and had chosen Elpida as a technology partner.

Elpida is Japan's last hope in PC memory chips in an industry dominated by Samsung Electronics <005930.KS> and Hynix Semiconductor Inc <000660.KS>.

Elpida lost the No 3. slot to U.S. chipmaker Micron Technologies in January-March.

Years of price slides and weak consumer demand have hammered the sector, dragging DRAM makers into the red and forcing Germany's Qimonda to file for insolvency this year. Elpida reported a record operating loss of 147 billion yen in the year ended March 31.

This ensures that Elpida will survive, but can it win? said Yoshihiro Shimada, chief analyst at research firm SPI Analysis. That depends on how quickly it can catch up to its competition in shrinking its chips.

Elpida, which posted its sixth straight quarterly loss in January-March, has fallen behind Samsung in using smaller circuitry on its DRAM chips, which are mainly used to power PCs.

Smaller circuitry on semiconductors allows makers to pack more power onto smaller chips and lower per-chip costs, but it also yields more chips per wafer and exacerbates oversupply.

Elpida said it would use the funds to shrink chips and expand output of advanced DRAM chips at its Hiroshima plant in southwest Japan to cut costs by 20 percent.

If Elpida upgrades its production technology, that would be bad news for Korean makers which have benefited from price competitiveness with cutting-edge production lines, said Song Myung-sup, an analyst at HI Investment & Securities in Seoul.

Elpida will cement ties with Taiwanese makers, Elpida Chief Executive Yukio Sakamoto said, adding that TMC is considering taking a 10 percent stake in Elpida, while Elpida is also considering a stake in TMC.

The last battle in the DRAM sector is starting, forcing further consolidation, he said at a news conference.

Elpida's shares ended up 1.4 percent, having risen more than 60 percent over the past three months, helped by media reports on the government aid and its tie-up with TMC. The benchmark Nikkei average <.N225> has added about 20 percent over the same period.

Elpida's shares tumbled nearly 90 percent in 2008.

MONEY WITH STRINGS ATTACHED

Elpida, which will issue 30 billion yen in preferred securities to the Development Bank in August, will report to both its public and private creditors.

The Development Bank, which will also extend 10 billion yen in loans, has the option of converting its preferred shares to common shares after three years.

Elpida is already indebted to suppliers such as Shin-Etsu Chemical Co <4063.T>, Advantest Corp <6857.T>, Taiwan's Powertech Technology Inc <6239.TW> and U.S. DRAM module supplier Kingston Technology, which invested 46 billion yen in the company in April.

Japan, which has earmarked a fund of 2 trillion yen to cover potential losses at the Development Bank, is likely to field an application from struggling electronics maker Pioneer Corp <6773.T>, sources said.

Japan Airlines Corp <9205.T> is also seeking 100 billion yen in loans from the Development Bank of Japan and private banks.

But helping Elpida could trigger protests by overseas rivals. Elpida had earlier petitioned Tokyo to slap a tariff on computer memory chips made by South Korea's Hynix after it received government aid in 2001 and 2002.

Nor will aid solve the underlying issue of weak demand, analysts said, although it would help it meet debt and corporate bond repayments of 127 billion yen in the year to March.

The spot price of DRAMs is around $1.10 per gigabit of double data rate 2 memory, far below the $1.50 to $2 range Elpida has said it needs to make a profit.

($1 = 96.06 Yen)

(Additional reporting by Taiga Uranaka and So-eui Rhee; Editing by Edwina Gibbs and Anshuman Daga)

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