UPDATE 3-Japan's Elpida to outsource chips to Taiwan's ProMOS

* Defensive move against Micron (MU.N) - analyst

* To outsource DDR3 chips to meet demand for faster PCs

* ProMOS aims to lift 300-mm plant usage rate, diversify

* Elpida up 1.8 pct vs sector's 1.5 pct, ProMOS up 3.9 pct

(Rewrites throughout, adds details, closing share prices)

By Mayumi Negishi and Baker Li

TOKYO/TAIPEI, Nov 6 (Reuters) - Japanese chip maker Elpida (6665.T) said it will outsource production of PC memory chips to Taiwan's ProMOS (5387.TWO), as it jockeys for political and technological clout in Taiwan against U.S. rival Micron (MU.N).

Elpida, locked in a race with Micron to be the world's No.3 DRAM maker, wants ProMOS on its side as it fights Micron's rival Taiwan alliance, which includes Nanya (2408.TW) and Inotera (3474.TW).

Elpida, which said on Friday it would provide chip-making technology to ProMOS, Taiwan's No.3 DRAM maker, wants to ramp up production as cheaply as possible as the embattled DRAM market shows signs of recovery.

"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."

Elpida will outsource production of advanced DDR3-type DRAM memory chips to ProMOS, helping it lift its sluggish plant usage rate and diversify into the contract chip business.

Elpida shares closed up 1.8 percent, ahead of the electrical machinery sub-index's .IELEC.T 1.5 percent gain, while ProMOS shares were up 3.9 percent, outpacing a 0.6 percent gain for the broader TAIEX .

"The (Elpida/ProMOS) tieup is positive in the short term but we are not sure if ProMOS has the 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."

(For related analysis click [ID:nTP145879])

Elpida will provide 65-nanometre process technology to ProMOS for the mass production of DDR3 chips, used in power-efficient PCs, in the second half of 2010.

CEMENTING TIES

Elpida, which reported its first operating profit in eight quarters on Thursday, is cementing ties with Taiwan chip makers.

It has agreed to provide technology to the state-backed Taiwan Innovation Memory Co, formed earlier this year to rescue the island's DRAM industry and which will outsource manufacturing to local DRAM makers. [ID:nTP335629]

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

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 (005930.KS) and Hynix Semiconductor (000660.KS). (Editing by Valerie Lee)