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UPDATE 1-Elpida, others to build $5 bln chip plant in China

(Adds details, background)

TOKYO, Aug 6 (Reuters) - Japan's Elpida Memory Inc 6665.T, the world's No.3 maker of PC memory, and a Chinese investment group plan to spend about $5 billion on a chip factory in southeastern China, in a move that could exacerbate memory chip price falls.

Elpida, which analysts expect will report a quarterly loss on Thursday, said it, the Suzhou city government and another unspecified company would set up a joint venture in which Elpida would be the main investor with a 39 percent stake.

The plant will supply chips for PCs used in China, will have an initial output capacity of 40,000 wafers a month when it goes on line in January-March 2010, and will raise capacity to 80,000 wafers at an unspecified time, it said.

“Elpida will probably lift its share (of the Chinese market) if the project proceeds as planned,” JP Morgan Securities analyst Yoshiharu Izumi said.

“But it’s not clear that the company will be able to generate the targeted returns on investment, given ongoing falls in DRAM prices.”

A supply glut in dynamic random access memory chips is dragging down earnings at No.1 memory maker Samsung Electronics Co Ltd 005930.KS and No.2 Hynix Semiconductor Inc 000660.KS, while prompting Taiwanese chipmakers Powerchip 5346.TWO and Nanya Technology 2408.TW to post their fifth straight quarter of losses.

Many analysts say a strong recovery is unlikely in the second half of 2008 due to the global economic problems.

Elpida, which also makes DRAM in Taiwan with partner Powerchip, will help build the new factory in a science park in Suzhou, where Chinese chip maker HeJian Technology Co also has a plant.

Elpida works with Taiwan's UMC 2303.TWUMC.N in a contract chip-making business for Japanese firms, and UMC helped set up HeJian.

Elpida spokespeople declined to comment on who the third party was and on whether it was in talks with HeJian or UMC about either of them investing in the factory venture.

“We are operating under the assumption that a third party will invest,” Elpida spokeswoman Kumi Higuchi said, adding that how much such an investor would put in has not been decided.

Shares of Elpida closed up 2.9 percent at 3,150 yen prior to the announcement, while Tokyo’s electrical machinery subindex rose 4.1 percent. (Reporting by Mayumi Negishi and Yumiko Nishitani; Editing by Hugh Lawson)

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