Japan's Fujitsu Ltd and Toshiba Corp unveiled plans on Thursday to merge their mobile phone businesses in October to create Japan's second-biggest cellphone maker in a rapidly shrinking market.

The merger will help the two electronics makers share development costs, but the combined entity is unlikely to pose an immediate threat to global leaders such as Nokia Corp and Samsung Electronics.

Analysts expect more industry consolidation in Japan, where too many cellphone makers are vying in a declining market. After the planned merger, there will be six groups making mobile phones in Japan, down from 10 just three years ago.

Fujitsu will hold a majority stake in the joint venture -- 70-80 percent according to the Nikkei business daily -- which one analyst said could put pressure on its earnings in the short term but benefit it in the longer run.

For Fujitsu's mobile phone business ... taking in a business with about a 10 billion yen loss, even though the loss should shrink this year, would be negative from the earnings point of view, Mizuho Investors Securities analyst Yuichi Ishida said.

But this would be a plus for both Fujitsu and the whole industry, because Fujitsu is lacking smartphones and the industry needs consolidation, he added.

Deutsche Securities earlier said it expected Toshiba and Fujitsu's cellphone sales to total more than 300 billion yen in the year to March 2011. The merged company will rank second in Japan behind Sharp Corp.

A separate venture combining the mobile phone operations of NEC Corp, Hitachi Ltd and Casio Computer also started operating this month.

Thursday's announcement came as no surprise after two sources said last week the two electronics makers were in talks to merge their cellphone businesses.


Fujitsu has been keeping its mobile business in the black by focusing on its strengths such as water-resistant handsets, mobile phones with fingerprint readers and phones for older people.

But it does not offer cellphones in the growing smartphone segment and is eyeing Toshiba's know-how.

Smartphones such as Apple's iPhone and Research In Motion's BlackBerry combine capabilities of personal computer and mobile phones and are gaining popularity worldwide.

Toshiba has been selling smartphones based on Microsoft's Windows in Japan, Europe and some parts of Asia.

Despite their dominance in the domestic market, Japanese makers only have a combined share of about 3 percent worldwide, outmatched by bigger and more efficient rivals.

Most local makers ship small volumes exclusively to domestic operators, in contrast with the world's largest handset producer, Nokia, which mass-produces models and supplies them to vendors worldwide.

Cellphone sales in Japan have shrunk almost 40 percent in the last two years, driving mobile phone makers to target overseas markets and share development costs estimated to be as much as 10 billion yen ($110 million) per new handset.

Fujitsu manufactures handsets for Japan's biggest mobile phone operator NTT DoCoMo Inc, while Toshiba mainly supplies cell phones to KDDI Corp, Japan's No.2 telecoms firm.

Fujitsu shares gained 1 percent to 593 yen after the announcement, while Toshiba gained 0.8 percent to 487 yen. The Nikkei average fell 0.7 percent.

(Additional reporting by Arnika Thakur in Bangalore; editing by Balazs Koranyi)