Fujitsu is to spin off its loss-making chip business next month, as increasing competition is forcing the Japanese group to create a leaner organisation.

Japan's integrated electronics companies such as Fujitsu, NEC and Hitachi, which make a wide range of goods from chips to nuclear reactors, are finding it increasingly difficult to compete with their nimbler rivals in other parts of Asia and in the US.

But rather than sell underperforming units to private equity groups or foreign rivals, Japanese companies have largely preferred to spin the off into subsidiaries controlled by the parent company. Such moves have raised questions from shareholders about their independence.

Fujitsu said it needed to improve efficiency and reduce development times to compete with its rivals, including Toshiba and Infineon.

The unit makes system large-scale integrated chips. System LSI chips incur huge investment costs because they are customised for applications. Unless the chips can be sold in large quantities, it is difficult for the manufacturer to recoup its costs.

Japanese semiconductor makers have struggled to compete profitably in the system LSI market, which is dominated by companies such as Intel and IBM.

The unit that makes Fujitsu's microchips, which are used in computer servers, camcorders and cameras, is expected either to break even or make a small profit this year, followinga loss of about Y20bn ayear ago.

For the year ending March 31, Fujitsu forecasts its chip business sales will rise by 12 per cent from a year earlier to Y530bn ($5bn).

Toshihiko Ono, 60, vice-president of Fujitsu, will become president of the new company, which will be 100 per cent owned by Fujitsu. The company will have about 13,500 employees.

Mr Ono said the unit hoped to increase sales to parent Fujitsu and planned to increase margins by focusing on Asia.

Fujitsu's shares closed at their highest level for nearly four years, up 8.2 per centto Y742, prior to the announcement.