Ishikawajima-Harima Heavy Industries Co. and Kawasaki Heavy Industries Ltd. have called off their plan to integrate shipbuilding operations, the two companies announced Wednesday.

"We have agreed to discontinue the negotiations," the two companies said in a joint statement, attributing the decision to "difficulties in reaching terms to realize a targeted posture of merger at the current juncture."

The two did not elaborate, but said they will maintain a three-way operational alliance announced last September of IHI, Kawasaki Heavy and Mitsui Engineering & Shipbuilding Co.

After reaching a basic accord on the integration in April, IHI and Kawasaki Heavy had been negotiating to finalize an agreement in December to establish an equally owned joint venture on Oct. 1, 2002 to merge their shipbuilding operations.

The integration would have created Japan's second-largest shipbuilder, after Mitsubishi Heavy Industries Ltd., with the two companies aiming to increase their cost efficiency and compete better with South Korean shipbuilders, whose prices are 10 percent to 15 percent lower.

The new venture would likely have cut costs by 7 billion yen to 8 billion yen through joint procurement of materials and other rationalization moves, according to the two firms.

The IHI-Kawasaki alliance was expected to be expanded to include Sumitomo Heavy Industries Ltd., as IHI has already agreed with Sumitomo Heavy to integrate production of naval ships.

Among other major shipbuilders, Hitachi Zosen Corp. and NKK Corp. have agreed to merge their shipbuilding operations in October 2002.

IHI's shipbuilding division did 124.6 billion yen in sales in the business year to March 31, 2000, ranking second in Japan. Kawasaki had sales of 88 billion yen, ranking third.

Their combined sales of 212.6 billion yen still fell short of the 268.9 billion yen Mitsubishi Heavy booked last year, but had Mitsui Engineering and Sumitomo Heavy also joined the venture, the entity would have become Japan's largest.