China's Lenovo Group is in talks with Japan's NEC Corp for a joint venture in personal computers, two sources with direct knowledge of the matter said, in a deal that would help them take on larger global rivals.

The Nikkei business daily said Lenovo planned to take a controlling interest in NEC's PC unit. But a buy-out might be a delicate move as Japan eyes China's growing clout, and sources told Reuters it was not clear what form the partnership might eventually take.

Lenovo, ranked fourth in the global PC market behind Hewlett-Packard, Dell Inc and Taiwan's Acer Inc, is looking to tap NEC's technology for development and expand its share of the Japanese market, the Nikkei said.

NEC, which is the top maker in Japan's mature PC market but does not rank in the top 10 globally, would likely see the tie-up as a chance to take advantage of the fast-growing Chinese market.

The Japanese company, with a market value of $7.6 billion, clocked sales of about 250 billion yen ($3 billion) from the PC business last year, accounting for roughly 7 percent of its revenue, the Nikkei said.

Demand for PCs is weakening with the advent of smartphones and tablets, said Tomomi Yamashita, fund manager at Shinkin Asset Management. As they seek a survival strategy, it is positive that they are looking to a growth area like Asia, rather than choosing a domestic partner.

A spokesman for NEC declined comment. Lenovo declined to confirm the report, but said that the company was always looking at ways to expand its market share and talking to potential partners.

Shares of NEC ended 2.1 percent higher, outperforming a 1.6 percent fall in the benchmark Nikkei average. Lenovo's Hong Kong-listed shares were up 0.5 percent in a Hang Seng index down 0.4 percent.

NEC, which controlled about 18 percent of the Japanese PC market in 2009 - expects the PC business to post a profit in the year to March 31. Lenovo sells around one in four PCs in its home market.

NEC-branded PCs are expected to remain on the market once the deal is concluded, the Nikkei reported.

If the deal goes ahead, it would add to a growing trend of Chinese companies investing in Japan Inc, despite a strong yen. In 2010, according to Thomson Reuters data, acquisitions by Chinese firms in Japan totaled 11.8 billion yen, 6 percent more than in 2009 and 52 times more than in 2008.

Fukoku Capital management's CEO Yuuki Sakurai said one reason the Chinese are interested in buying Japanese companies is so they won't be accused of stealing their technologies.

Because they have a great amount of money in their pockets they are trying to see which companies are good for buying and I think this is going to be a wide-ranging wave throughout Japanese industry.

TELECOMS INFRASTRUCTURE BUSINESS

A partnership in PCs between the two companies would be another step by NEC in its efforts to focus on building telephone networks, say analysts.

It looks to me as if NEC is trying to lower its risks by detaching its personal computer business, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

We've already seen NEC pull out from the semiconductor operations in the past. After today's (reported) move, we can see that the company will put more focus on the telecommunications infrastructure business.

Goldman Sachs analyst Ikuo Matsuhashi said that although the joint venture would have little impact on NEC's PC business earnings, it would be a sign of change in NEC's business strategy.

If NEC were to cede leadership to another company even in the PC business, something that would have been difficult to imagine in the past, that would mark a shift aimed at changing the company's earnings structure, he said in a note.

Matsuhashi reiterated a buy rating on NEC.

(Additional reporting by Reiji Murai, Kentaro Hamada, Mariko Katsumura, Isabel Reynolds, Tim Kelly and Chikafumi Hodo in Tokyo, Swetha Gopinath in Bangalore; Chyen Yee Lee in Hong Kong; and Melanie Lee in Shanghai; Editing by Nathan Layne and Anshuman Daga)

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