Japan's NEC Corp will take over the cellphone operations at Casio Computer Co and Hitachi Ltd as the struggling sector bands together to cut costs and survive a fast-shrinking market.

The move will create Japan's second-largest cellphone maker with sales of 390 billion yen ($4.3 billion) and could trigger more consolidation in a sector worn down from infighting in a crowded market.

NEC, Japan's No.3 handset maker, said on Monday it would split off its mobile phone division and merge it with a cellphone joint venture operated by Hitachi and Casio.

NEC will hold 70.7 percent in the new venture, while Casio will hold 20 percent and Hitachi 9.3 percent, allowing Casio and Hitachi to keep the loss-making cellphone businesses off of their consolidated books.

With the market shrinking as it is now, we knew that there was not enough space here for 8 companies to survive, NEC Senior Vice President Akihito Otake said at a news conference.

How quickly cost savings will kick in from lower procurement and development costs is not yet clear, he said. The bulk of production will be at NEC's production facility, and the venture aims to merge production, although no timetable has been set.

Japan's mobile phone market is expected to shrink 20 percent to 30 percent in 2009, executives said. But phone makers are still shouldering hefty development costs, which can cost as much as 10 billion yen per new handset in the world's most technologically competitive mobile market.

NICHE SPECIFIC

Most Japanese makers ship small volumes exclusively to domestic operators, in contrast to the world's largest handset maker Nokia Corp, which mass produces models that it supplies to vendors worldwide.

Japanese brands, which were the first to put cameras and wireless Internet browsing on mobile phones, together hold less than 10 percent of the world's mobile phone market and that percentage is fast declining.

The combined entity needs to go after growth overseas, but it will continue to first focus on niche areas.

Can the company really make a profit going after small lots? asked Goldman Sachs analyst Ikuo Matsuhashi at the news conference. Otake's response was, We will have to.

NEC, which makes handsets for Softbank Corp and NTT DoCoMo, withdrew from China and Europe in 2007 after its technology-packed and pricey phones lost out to cheaper models.

NEC, Casio and Hitachi together controlled about 20 percent of Japan's mobile phone unit sales in the year ended in March, according to research firm BCN Inc.

That would nudge out No.2 Panasonic Corp and come a close second to Sharp Corp, with 22 percent.

Casio Hitachi Mobile Communications supplies KDDI Corp, U.S. firm Verizon and South Korea's LG Telecom Co.

Prior to the announcement, shares in NEC closed down 2.9 percent, in line with Tokyo's electrical machinery index .IELEC.T. Casio fell 4.5 percent and Hitachi 4.4 percent.

($1=90.40 Yen)

(Reporting by Mayumi Negishi; Editing by Joseph Radford and Chris Gallagher)

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