UPDATE 3-Taiwan Memory picks Elpida as partner; shares jump

* Elpida shares soar 15 percent, Taiwan DRAM shares up 7 pct

* TMC to secure technology from Elpida; also work with Micron

* TMC says may inject capital in Elpida and Micron (Adds details, quotes)

By Baker Li

HSINCHU, Taiwan, April 1 (Reuters) - Taiwan Memory Co (TMC), set up by the island's government to rescue the country's memory chip sector from their worst-ever downturn, chose Japan's Elpida (6665.T) to develop new chips, sparking a rally in shares of Elpida and Taiwan DRAM makers.

Under the partnership, TMC will secure technology, including key intellectual property rights, from Elpida to jointly develop new DRAM chips for computers and mobile devices, John Hsuan, who oversees TMC, told a news conference on Wednesday.

TMC will then outsource manufacturing to local DRAM makers before it sells the chips under Elpida's or its own brand name.

Taiwan's new memory chip firm was set up to help local firms compete with the industry's biggest players in South Korea, Samsung Electronics (005930.KS) and Hynix (000660.KS).

"Generally, as miniaturisation progresses, development costs balloon. If Elpida can share it with TMC, that would be good," said Mitsubishi UFJ Securities analyst Yukihiko Shimada.

"Even if there will be no financial assistance, it is basically positive for Elpida."

Taiwan's dynamic random access memory makers (DRAM), which mostly power personal computers, have all been losing money for most of the past year in a global downturn due to oversupply, while demand for chips slump in the face of the global economic crisis.

Since its formation in early March, Taiwan Memory has been negotiating with both Elpida and U.S.-based Micron Technology MU.N to secure their technology. [ID:nTP168041]

The reshaped landscape might help Taiwanese suppliers -- which make nearly a quarter of all the world's DRAM memory chips -- to get a stronger grip on output, especially after companies recklessly built up output in the last many years.

Wednesday's announcement boosted shares of Taiwan's top DRAM players, including Powerchip (5346.TWO), Nanya Technology (2408.TW) and ProMOS (5387.TWO), which rose by their daily 7 percent limit and helped the broader market rise 2.0 percent.

Elpida shares surged 15 percent in a broader market .N225 up 3 percent.

TMC also said Micron had expressed strong interest in working with it on similar cooperation. Officials in Micron's sales office in Taipei were not available for comments.

"We want to find good process technology and develop new products," said Hsuan.

Taiwan's government plans to inject T$30 billion ($885 million) into Taiwan Memory, in which it will own a stake of nearly 50 percent.

TECHNOLOGY IS KEY

TMC will now discuss more details with Elpida, while TMC will have two separate teams working with Elpida and Micron.

Hsuan said TMC may inject capital into Elpida and Micron or consider buying a stake in the two companies in exchange for their technology. He did not give a timetable and any specific figures but stressed TMC's main focus is on design and marketing.

Still, some analysts were sceptical about TMC's plan.

"Lots of details are still very unclear, and it's not even sure how TMC intends to operate and where their production capability will come from," said Bevan Yeh, a fund manager at Prudential Financial Securities Investment Trust.

"But any of Taiwan's DRAM companies who don't want to be part of it will probably run out of money by the second quarter of this year," he said.

Samsung shares edged up 0.4 percent, while Hynix shares fell 0.8 percent, against a 2.3 percent gain in the broader market.

"What matters is not the structuring of the TMC but how it will affect capacity in Taiwan. Until that becomes clear, any impact on Korean makers will be muted," said Park Young-joo, an analyst at Woori Investment & Securities.

"Companies have already reduced capacity a lot, and the question is when they will step up production again. Supply cuts appear to have some impact on chip distributors' sentiment and DRAM contract prices may recover from May." (US$1=T$34) (Additional reporting by Argin Chang and Kelvin Soh in TAIPEI, Sachi Izumi in TOKYO and Rhee So-eui in SEOUL; Editing by Anshuman Daga)