KAWASAKI (WSJ) -- NEC Electronics Corp. will likely outsource more production of semiconductors used in consumer electronics to outside foundries to insure against a sudden plunge in demand following losses last year tied to a rapid drop in orders.

In an interview Tuesday, NEC Electronics President Junshi Yamaguchi said that any new outsourcing would likely start after the company’s proposed merger with Renesas Technology Corp. While the two chipmakers have reached a basic agreement to merge by April, they are still working out the details of a plan that could lead to the creation of Japan’s largest chip maker.
As a way to avoid the huge capital investment required for new chip plants, semiconductor companies are increasingly designing products and then turning to foundries like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. for production.
NEC Electronics has already agreed to use Japanese chipmaker Elpida Memory Inc. as a possible foundry for semiconductors used in LCD televisions, but it now plans to outsource production of chips for other consumer electronics affected by volatile demand.
However, the firm still intends to produce some of types of chips in-house and use the foundries to buffer against spikes or plunges in orders from customers. Yamaguchi said his company will continue to make automotive chips at its own production facilities, noting Japanese chip makers have been more reluctant to turn to outside foundries as a way to save costs.
NEC Electronics, which is 70% owned by electronics conglomerate NEC Corp., is coming off its fourth straight year in the red, posting a net loss of ¥82.6 billion ($888 million) in the fiscal year ended March 31. “The worst is over,” said Yamaguchi, who is pushing the company through a ¥90 billion cost-cutting program.
He added there are signs of improving demand from lows hit in the January-March quarter when the company’s factory utilization was about 40%. That figure grew to more than 50% in the April-June quarter before reaching about 65% in July.
Yamaguchi said he expects factory utilization to approach 70% in September, although it may take two to three years for its plants to run at full capacity.
Part of the company’s recovery is being fueled by strong demand for chips used in electronics such as flat-screen televisions and DVD players in Japan and China as the overall industry adjusted its inventory levels.
Demand for chips used in autos also looks solid. He expects microcontrollers -- which serve as the “brains” of electronics products by controlling engine units and other auto components -- to cash in on the growing market for hybrid vehicles powered by electric motors and gasoline engines.