(Reuters) - Japan's Renesas Electronics will outsource its top-end chips to Taiwan Semiconductor Manufacturing Co to survive cut-throat global competition after falling behind in investment and as it grapples with a costly restructuring.

Renesas, the world's fifth-largest chipmaker, and the rest of Japan's semiconductor industry face their biggest shake-out in a decade as more nimble rivals such as Samsung Electronics force them to tap the technical prowess of contract manufacturers such as TSMC, the world leader.

"By outsourcing to TSMC, it's sending its customers a message that it will continue to push forward its technology," said Fred Yu, an analyst at IBTS Investment Consultation.

Renesas' shares fell more than 11 percent on Monday to a record low after news over the weekend that it planned to sell loss-making operations and cut at least 12,000 jobs - more than a quarter of its workforce - as part of a sweeping restructuring.

The company's escalating troubles follow the February bankruptcy filing of Elpida Memory Inc, Japan's last producer of dynamic random access memory (DRAM) chips used in personal computers. Elpida is in talks with U.S. firm Micron Technology about a buyout plan.

Renesas' restructuring plan, presented to its banks, would be funded by raising more than 100 billion yen ($1.26 billion) in fresh capital, a source familiar with the situation said at the weekend.

The Japanese firm, struggling with high costs and mounting losses, said it expects to produce about 30 percent of its chips overseas by 2016/17, double the 15 percent in the year ended in March.

Renesas said on Monday it would outsource all its output of microcontroller chips with circuitry widths of only 40 nanometers or less, taking advantage of TSMC's more advanced production technology. Renesas is the world's largest producer of microcontroller chips for automobiles.

The Nikkei business daily reported at the weekend that Renesas' restructuring, which it aims to finalize by July, would also include selling TSMC a chip plant in northern Japan.

"If the business model is correct I don't think our company would rule out any possibility," said Cheng-Ming Lin, director of specialty technology at TSMC, when asked about TSMC carrying out production in Japan. "Japan has a lot of great engineering resources. I think this is a place that we can seriously consider but this is really my personal view."

Before finalizing the plan, Renesas must get approval from its main shareholders, electronics conglomerates Hitachi Ltd, Mitsubishi Electric Corp and NEC Corp, whose chip divisions were spun off and merged to form the company over the past decade. Combined, they hold more than 90 percent of Renesas shares.

Mitsubishi Electric, whose earnings along with Hitachi have been bolstered by strong results in the infrastructure business and by limited exposure to consumer electronics, said last week that Renesas' shareholders were prepared to offer support.

"If it can go through with the restructuring and raise funds, it will not be a repeat of Elpida," said Hideyuki Ishiguro, assistant manager of investment strategy at Okasan Securities.

"JAPAN INC" ENTERPRISE

But NEC, whose chip division was merged into Renesas just two years ago, has been hit with steep losses in recent years as its mobile handset and IT hardware businesses struggle.

Shares of NEC, which along with its employee pension trust owns 35 percent of Renesas, tumbled 9.2 percent on Monday and were the biggest drag on Tokyo's benchmark Nikkei average, while Hitachi and Mitsubishi Electric were both little changed, in line with the Nikkei.

Renesas ended down 10.6 percent at 244 yen after falling to an all-time low of 238 yen. It was the busiest day's trading for the stock in almost 9 years. The stock has dropped nearly 60 percent over the past two months as worries mounted about its business, compared with a 15 percent fall in the Nikkei.

"I think it's very likely Hitachi and the major shareholders will give support, so I do think the reaction today is a little excessive," said Okasan Securities' Ishiguro.

Renesas' loss-making system LSI unit, which makes system-on-chip products combining processing and other functions used in a range of digital electronics, has been a major drag on the company as Japanese consumer electronics makers cut production of televisions and other goods.

Sales in the system LSI division fell 35.5 percent in the year to end-March, the worst performance among its major divisions. Media reports have said Japan's government is pushing a plan to combine troubled system LSI businesses from Renesas, Panasonic Corp and Fujitsu Ltd into a government-backed company that would focus on chip design, while selling off factories and outsourcing manufacturing to contract chip makers.

Analysts note that Japanese system-on-chip makers have suffered from their willingness to over-customize chips to suit the needs of customers in Japan's consumer electronics sector, undermining efficiency and sacrificing profit margins.

While analysts have long urged Japanese chipmakers to take advantage of the so-called fabless model that focuses on chip design operations while outsourcing chip fabrication, Renesas' experience as a receptacle for other companies' unwanted chip operations bodes ill for such "Japan Inc" enterprises.

Analysts and industry executives have said a major factor behind Renesas' problems was a reluctance by executives from its various parent companies to relinquish control, hobbling an ability to make bold restructuring decisions such as closing down plants or discontinuing product lines.

"The major problem that Renesas faces is its own management, which is comprised of executives from its major shareholding companies," said a Japanese chip sector executive, who asked not to be identified because of the sensitivity of the issue.

"The problem with these firms that are the product of mergers of 'big name' companies is that they are not prepared to take on restructuring that is required and to do whatever necessary to survive."

($1 = 79.6000 yen)