A global price collapse in memory chips, massive oversupply problems and deepening crisis for Asia’s “mission critical” semiconductor industry may be poised to trigger a four-way merger between Japanese and Taiwanese giants.

But analysts said that the combined company – potentially the world’s second-largest chipmaker – might still be forced to apply for billions of dollars in financial bailouts from both the Japanese and Taiwanese governments just to stay afloat through the next six months.

Recent industry discussions about the possibility of creating a “$10 laptop” depend heavily on the fact that the essential semiconductors are currently in huge oversupply and command prices far below the cost of churning them out.

The prospect of a merger between Japan’s Elpida and three of Taiwan’s largest chipmakers was welcomed by investors, who have long viewed consolidation as the only realistic way for the industry to overcome what Damian Thong, an analyst at Macquarie Securities, described as “massive structural headwinds”.

Last month, German chipmaker Qimonda filed for bankruptcy despite urgent attempts to raise funds from the government.

Sources within the industry also believe that the next few months could see the outright collapse of several major names – a prospect that the surviving players would tacitly welcome because a string of bankruptcies would ultimately kill the oversupply problem and restore some pricing power.

The memory chip industry, which is worth around $30 billion a year, has taken a particularly severe beating from since last summer as worldwide sales of consumer electronics have been hammered in all major markets. But even before the financial crisis hit, said analysts at Nomura Securities, the chip industry was in severe trouble because of a 90 per cent plunge in market prices for DRAM chips and a giant overhang because too many chip plants were built worldwide during the good times.

Industry wide, the market price of 1 gigabyte of DRAM memory – among the most commoditised chips in the world – needs to be around $2 for its producers to break even. The chip currently commands just 85cents, and was even lower late last year.

Executives from Elpida Memory, Japan’s largest maker of DRAM chips for PCs, mobile phones and games consoles, met government officials in Taipei today to discuss a combined rescue package for the industry, including the prospect of major emergency consolidation.

The Taiwanese government has identified its semiconductor industry, which consumes a notoriously huge annual research and development budget, as sufficiently central to its national economy to deserve public fund injections of perhaps $2 billion. Government officials have vowed that it will not be allowed to fail, despite the pressures it faces.

In Japan, the government is about to revise the law to allow vast public fund infusions to non-financial firms. Elpida, with or without its merger with the Taiwanese, was expected to become the first company to tap the new facility.

Elpida said today that its president, Yukio Sakamoto, would this week hold consolidation talks with his counterpart at Powerchip Semiconductor – the largest of Taiwan’s memory chip producers. A merger between the two firms, possibly drawing in Powerchip’s local rivals Rexchip Electronics and ProMOS Technologies, would create a company large enough to challenge the semiconductor dominance of Korea’s Samsung Electronics.

Elpida, which has been loss-making for five straight quarters, is testament to the relentlessly boom-bust cycle that has defined the global semiconductor industry since it began. The company was formed in 1999 when the chip divisions of Hitachi and NEC were forced to combine to weather the fallout from the Asian financial crisis. Korea’s Hynix was created in the same year and for similar reasons as the industry struggled to cope with yet another of its periodical production gluts and price collapses.

Chip production, especially in Asia over recent years, has seen wild investment in new factories as producers licked their lips over what seemed to be the unlimited demand for iPods, laptops, digital cameras and mobile

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