Toshiba Corp will overhaul its chip operations, outsourcing output of some system chips to Samsung Electronics and selling a production line to Sony Corp, as it reduces its non-memory chip exposure.

Toshiba, the world's No.3 chipmaker behind Intel Corp and South Korea's Samsung, is restructuring its chipmaking operations after the business logged an operating loss of 280 billion yen ($3.4 billion) in fiscal 2008 amid the global financial crisis.

For new orders for the next financial year beginning in April, Toshiba will design cutting-edge system chips but will outsource production to Samsung, and maybe other foundries, to avoid costly capital investment outlays.

The rare deal between rivals Toshiba and Samsung, which is expanding into microprocessors, frees up resources for other projects, which analysts see as positive.

Thanks to this tie-up Toshiba will gain a stronger position, Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets, said after the Nikkei business daily reported the move earlier on Friday.

In a situation when bigger capacity is required, the burden of capital investment can be too big for one company, so the accord is a positive factor for Toshiba.

System chips, used in digital devices, have seen explosive demand growth this year, due to rising popularity of smartphones, tablet PCs and Web-to-TV devices.

Toshiba said it would sell to Sony its system chip production line in Nagasaki prefecture, a deal which an industry source has estimated at 50 billion yen. The line produces chips for Sony PlayStations and is housed in a factory owned by Sony.

The electronics conglomerate whose businesses also include nuclear plants, also plans to build a new domestic factory to make LCD panels with total investment likely to be over 100 billion yen ($1.2 billion), a prefectural government official said on Friday.

Toshiba, the third most actively traded stock on Tokyo's main board on Friday, rose 0.7 percent to 441 yen outperforming a 0.7 percent decline in the benchmark Nikkei average.

The Nikkei business daily said Samsung, the most aggressive spender in memory chips with an 11 trillion won ($9.6 billion) investment budget for semiconductors alone this year, was chosen as it has advanced technologies and the ability to churn out large numbers of high-performance chips at low cost.

Samsung's system chips division has seen strong growth this year, driven by robust demand for mobile application processors and image sensors.

The division reported 4.8 trillion won revenue in the first nine months of 2010 versus 4.4 trillion won for all of 2009.

But the growing business still represents a small fraction of Samsung's overall semiconductor business, as its mainstay memory chip operation, ranked the world's largest, earned 20 trillion won revenue in the first nine months of 2010.

Revenue from foundry chipmakers, who produce chips on behalf of fabless companies such as Texas Instruments, Qualcomm and Nvidia, is set to rise by 42 percent this year to $28.9 billion this year and reach $33.7 billion next year, according to research firm iSuppli.

Taiwan's TSMC and UMC are the world's the two biggest foundry makers. Samsung is already in foundry chip production deals with other companies such as U.S.-based Xilinx.

($1=82.96 Yen)

($1=1151.9 Won)

(Additional reporting by Antoni Slodkowski and James Topham in TOKYO and Divya Sharma in BANGALORE; Editing by Edwina Gibbs)

Chip Samsung Sony Deals