Japanese electronics manufacturers NEC, Hitachi and Casio are to merge their mobile phone divisions to improve profitability.
The firms said they are pooling their resources for developing new mobile handsets to boost business growth.
The joint venture is "expected to result in the creation of innovative synergies and the development of appealing new products, in addition to future growth that is anticipated from a range of new areas," the companies said in a statement.
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The new company, to be known as NEC Casio Mobile Communications, is expected to have the second or third largest share of the mobile handset market in Japan after Sharp, challenging Panasonic for second place.
The move comes after heavy financial losses.
In Japan, sales in an already saturated market dropped dramatically after mobile operators cut handset subsidies earlier this year. There is also increased competition from foreign manufacturers such as Apple.
Internationally, Japanese handset makers have struggled due to the recession and the failure by Japan to adopt international mobile phone standards such as GSM.
The merger is expected to be completed by April 2010.
Analysts said increasing competition and economic pressure could prompt further consolidation among rivals.