Taiwanese electronics firm BenQ will bail out of its German mobile phone subsidiary, as it is unable to stem unsustainable losses at the unit.

The firm said Thursday that it has resolved to discontinue capital injection into BenQ Mobile and is considering filing for insolvency protection over the next few days.

BenQ acquired the beleaguered handset unit from Siemens in June 2005. The unit was in dire shape and the German manufacturer effectively paid BenQ Eur50m to take the ailing division off its hands.

But the dual brand BenQ Siemens devices are not selling as well as expected and the struggling mobile phone maker has already announced the closure of production plants in Mexico and Taiwan. Other subsidiaries in Brazil and other locations are reviewing their financial position, the company said in a statement.

K.Y. Lee, BenQ’s chairman said Thursday: “Despite the progress achieved in reducing cost and expenses, widening losses have made this very painful decision unavoidable.”

The news does not bode well for thousands of employees at the company. When BenQ acquired the division from Siemens last year, it also inherited 6,000 employees, 3,000 of which were based in Germany.

Dan Bieler, analyst at Ovum notes that the German employees had existing employment contracts protecting them until the end of 2006. “The timing of BenQ’s announcement thus matches more or less the time horizon for which its BenQ Mobile employees enjoyed job protection,” Bieler said.

With production moving to lower cost countries, BenQ now must prove that it has the right strategy in place to turn the handset business around. Bieler adds that since the departure from Siemens, the handset business has lost further market share from an already low level.

“We remain unconvinced that the high-end segment is the right way to go for BenQ. Too many players compete in that space with well-established brands, multitasking devices, must-have brand image and large marketing budgets. We believe that BenQ would be better focusing on the low-end segment,” he said.