IBM says chip flaws decline, but still off target NEW YORK, May 12 (Reuters) - International Business Machines Corp. (NYSE:IBM - News) executives said on Wednesday that production of chips at its closely monitored new plant is improving, but has not yet reached its target. Armonk, New York-based IBM spent more than $3 billion to build the East Fishkill, New York, plant where it is using the latest technology to make chips for companies such as video gaming chip company Nvidia (NasdaqNM:NVDA - News) and Apple Computer Inc. (NasdaqNM:AAPL - News) But last quarter, yields, or the production of useable chips that have no flaws, fell, and the operations lost money. Wall Street keeps a close watch on the company's chip business because although its revenues are small in comparison to its other services, hardware and software sales, its operating results can swing profits one way or the other. IBM has vowed that the unit will be profitable by year end. Speaking during a briefing by telephone, John Kelly, who runs IBM's chip business, said that in the past few months the number of flaws found in the chips it makes have decreased. "Lately our defect densities have been improving quite rapidly," Kelly said. The facility started off last year with good improvements in its production of useable chips, but that then declined due to some design issues, he said. "We seem to have turned the corner on those (design issues). We believe we understand them and we are now making rapid progress on them. But we still are not quite to our target -- to our objective -- but we are getting very close," Kelly said. He was echoing remarks from IBM's former chief financial officer, John Joyce, who said during the company's mid-April earnings conference call that lower yields in its new plant contributed to the division's $154 million loss. IBM has been struggling to bring its chip division to profits even as its competitors such as Intel Corp. (NasdaqNM:INTC - News) have recovered from the worst downturn on record for semiconductors. It recently combined its computer servers and storage with microchips and that group is co-headed by Kelly and William Zeitler. Apple complained last quarter that IBM's inability to deliver enough chips had caused problems for its Xserve G5 computer. Kelly said during the call that IBM expects to be able to better meet customer demand this quarter. "We do expect to do a better job of meeting our customer demand here in the second quarter and we expect that we will do better and better as each quarter goes on," he said.