Japanese chipmaker Kioxia Holdings Corp. and its U.S. peer Western Digital Corp. are in detailed talks about merging their operations, a move that could create a new memory chip company with a global share on par with its leading rivals, people familiar with the matter said Friday.

The two companies are considering setting up a joint venture to integrate their production and sales operations, and Kioxia may hold the larger stake in the new company, the sources said.

Their talks on business integration come as their earnings are under pressure due to a plunge in demand for NAND flash memory chips caused by slumping smartphone sales in the post-COVID period. They already jointly operate plants in Japan's Iwate and Mie prefectures.

The move would mark the latest reorganization in the industry after South Korea's SK Hynix Inc. laid out plans in 2020 to buy Intel Corp.'s NAND flash memory business by 2025.

Toshiba Corp. holds a stake of about 40 percent in Kioxia and is in the midst of restructuring efforts with a buyout plan from a consortium led by Tokyo-based fund Japan Industrial Partners Inc. The merger involving loss-making Kioxia could help Toshiba carry out smoother reforms.

Kioxia fell into the red in the last fiscal year ended March, posting a net loss of 138.1 billion yen ($994 million), as chip demand for smartphones and PCs dropped.

In 2022, Kioxia and Western Digital ranked third and fourth in the global NAND flash memory chip market, with sales of $11 billion and $8 billion, respectively.

Their combined sales last year compared with $20 billion at the top maker Samsung Electronics Co., according to data from British research firm Omdia.

Toshiba sold a majority stake in its chip unit, which was later renamed as Kioxia, to a consortium led by U.S. private equity fund Bain Capital in 2018 to raise cash as part of its restructuring.

The chip company initially planned to go public but the plan has been postponed due to unfavorable market conditions.

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