Toshiba Corp <6502.T> is in talks with Singapore's Chartered Semiconductor and Globalfoundries Inc about outsourcing production of some of its next-generation system chips to help cut costs, two company sources said.

Toshiba, which sources have said plans to bid for French nuclear group Areva's power transmission and distribution unit, is looking to save costs at its loss-making chip division as it seeks stabler revenues from the power business.

The world's No.2 maker of NAND flash memory chips plans to make 28-nanometre chips at its plant in Oita, southern Japan, but is considering contracting out production of chips exceeding its capacity, said company spokeswoman Hiroko Mochida.

But Yuichi Ishida, analyst at Mizuho Investors Securities, said he expected Toshiba to outsource all of its 28-nanometre chip production.

It makes no sense to go to the trouble of investing in expensive equipment to make these cutting-edge chips if you're going to outsource as well. Why spend money you don't have to? he said.

The sources said Toshiba is in talks with Chartered and Globalfoundries -- the two foundries in an IBM-led consortium to develop next-generation system chips, used in a wide range of electronics from game consoles to digital cameras.

The two contract chipmakers may soon come under the same roof after Abu Dhabi's state fund Advance Technology Investment Co's (ATIC), which owns 55.6 percent of Globalfoundries, offered to buy Chartered Semiconductor for $1.8 billion. Globalfoundries is a joint venture with Advanced Micro Devices .

Toshiba's Mochida declined to comment on whether or not Toshiba had commenced talks and on which companies may win an outsourcing contract.

IBM's 28-nanometre process technology alliance also includes Infineon Technologies , NEC Electronics <6723.T>, Samsung Electronics <005930.KS> and STMicroelectronics .

Toshiba bought Sony Corp's <6758.T> system chip line for about 90 billion yen ($968 million) last year.

Shares of Toshiba were up 3.2 percent at 481 yen, outperforming a 1 percent rise in the benchmark Nikkei average <.N225>, in what some market analysts said was likely short-covering after the stock fell on Friday on news of its bid for the Areva unit. ($1=92.99 Yen)

(Reporting by Mayumi Negishi; Editing by Edwina Gibbs)

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