Matsushita Electric Industrial Co and Hitachi Ltd are discussing multi-billion dollar deals on flat panels that could reshape an industry hit by fierce competition, a source familiar with the matter said.

The two possible deals would allow Matsushita, the world's biggest maker of plasma TVs, to do an about-face and move aggressively into liquid crystal displays (LCDs) while enabling Hitachi to scale down a loss-making business.

Panasonic-brand maker Matsushita is looking to take control of a LCD venture it has with Hitachi and Toshiba Corp, the source said. It will also invest $2.7 billion in a new LCD factory as part of that deal, the Nikkei business daily said.

That would help it address a weak spot in the flat TV market.

Matsushita has invested most aggressively on plasma in the belief that it was the most cost competitive technology for big TVs above 40 inches, but plasma's dominance in that segment of the market has started to give way to bigger and cheaper LCD TVs.

This is a move that Matsushita had to make, said Tetsuro Miyachi, fund manager at Franklin Templeton Investments Japan.

It needed to decide whether it would become a niche player in 50-inch-plus TVs or pursue the mass market, and if it was going to do that it had to get bigger in LCDs, he said.

The Nikkei said Matsushita and Canon Inc are also considering investing more than 100 billion yen each for minority stakes in Hitachi Displays Ltd, which makes small and mid-sized LCDs and is also developing organic light-emitting diode panels.

OLED is a promising next-generation display technology and is seen as an eventual replacement for LCDs.

Matsushita, Hitachi and Canon all issued statements saying nothing had been decided.

Flat panel display makers are pouring billions into new plants to meet growing demand from consumers trading in their boxy tube sets for sexier flat screens.

Japan's Sharp Corp is spending over $3 billion to build the world's biggest LCD plant while Sony Corp and partner Samsung Electronics Co are ramping up production at their plant in South Korea.

TIMING QUESTIONED

Global LCD TV sales will likely grow 85 percent to $91 billion by 2010, while rival plasma TV demand is expected to shrink 15 percent to $15.8 billion over the same period, according to research firm DisplaySearch.

But some analysts questioned the logic behind Matsushita making such a big bet on LCD production at this stage.

The Nikkei said Matsushita's new LCD factory would likely make LCD panels from so-called eighth-generation motherglass, which is bigger and more efficient than the sixth-generation glass currently used at their IPS Alpha Technology joint venture.

But any new factory was unlikely to come into operation until around 2010. By that time Sony and Samsung will have been working with 8th-generation glass for several years and Sharp's new factory will be cutting panels from 10th-generation glass.

Shinko Securities analyst Hideki Watanabe said global demand for LCD TVs could peak around 2009 as Japan, Europe and the United States complete their switch to digital broadcasting, which has been driving sales for flat TVs.

The timing is just too late, Watanabe said.

For Canon, the investment in Hitachi Displays would give it access to OLED panels which it hopes to use in its digital cameras and ink jet printers as part of its strategy to bring production of key parts in-house to lower costs.

The deal would also mark the latest reorganization for Hitachi, a sprawling conglomerate which is under pressure to hive off unprofitable businesses to sharpen its focus. It is currently considering selling a stake in its loss-making hard drive unit.

Franklin Templeton's Miyachi said the reported deal was probably not drastic enough.

They are moving in the right direction but still it only goes half-way. It would be much better for Hitachi to pull out of the business completely, he said.

Matsushita's shares closed down 0.9 percent at 2,225 yen, Hitachi fell 1.2 percent to 775 yen, and Canon lost 0.6 percent to 5,400 yen. The benchmark Nikkei average .N225 dropped 1.2 percent.

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