Japanese chip maker Elpida said it will outsource production of advanced PC memory chips to Taiwan's ProMOS, a move aimed at locking in production capacity in Taiwan, cutting costs, and putting it on stronger competitive footing against its big South Korean rivals.

Elpida, battling U.S. chipmaker Micron Technology to be the world's No.3 DRAM maker, wants to gradually ramp up production as the embattled global DRAM market starts to show signs of recovery.

Its decision to license technology to financially strapped ProMOS could also be partly strategic, analysts said, as it seeks to tie up capacity in Taiwan to compete with Micron's rival Taiwan grouping which includes Nanya Technology. This is a partly defensive move to secure capacity away from the Micron camp, said Deutsche analyst Takeo Miyamoto.

If it works well, the additional output of Elpida-technology chips will also help keep overall production costs down.

Under their agreement released on Friday, Elpida will outsource production of advanced DDR3-type DRAM memory chips to Taiwan's No.3 DRAM maker ProMOS.

The tie-up will allow ProMOS, seeking to diversify into the contract chip business, to lift its plant usage rate at its 300-mm plant in Taichung, central Taiwan.

Elpida shares rallied on news of the tie-up, rising 3.4 percent in morning session in Japan, against a 2.4 percent rise for the electrical machinery sub-index .IELEC.T. In Taiwan, ProMOS shares were up 5.8 percent, easily outpacing a 1 percent gain for the broader TAIEX .

As part of its efforts to rescue the island's DRAM sector from its worst-ever downturn, Taiwan's government announced the formation of Taiwan Memory earlier this year, which would use technology from Elpida, jointly develop new chips and then outsource manufacturing to local DRAM makers.

Taiwan also wants to consolidate its struggling DRAM companies, though the effort has met with resistance so far from the top two player, Powerchip and Nanya.[ID:nTP335629]

Chipmakers are hurrying to adopt new technologies and grab market share in DDR3 as the sector emerges from a prolonged slump.

Elpida, which secured a $2-billion lifeline earlier this year including public money is rushing to narrow the technology and market share gap between it and bigger South Korean rivals Samsung Electronics and Hynix Semiconductor.

The (Elpida/ProMOS) tieup is positive in the short term but we are not sure if ProMOS can have more cash to buy more advanced equipment to make chips in the future, said Bevan Yeh, a fund manager at Prudential Financial Securities Investment Trust.

If demand is weak in the first quarter next year, somebody might be just out.

Elpida will provide 65-nanometre process technology to ProMOS for mass production in the second half of 2010. Outsourced production is likely to be about 30,000 to 40,000 wafers a month.

Elpida, which reported its first operating profit in eight quarters on Thursday, is cementing ties with its former Taiwan rivals, and has entered into a capital tie-up with Taiwan's state-backed Taiwan Innovation Memory Co (TIMC), formerly Taiwan Memory.

ProMOS has also said it would partner with TIMC, but has given no details.

(Editing by Valerie Lee)