The $39 billion global solar energy market is growing fast, but cut-throat competition means producers must shave costs - providing a windfall for small firms more used to making PCs, mobiles and popular electronics gadgets, said a report.

The electronics manufacturing services (EMS) industry, which puts together consumer products for the world's biggest PC makers like Dell and cellphone companies like Nokia, has signed up to the solar bandwagon.

Solar panel maker SunPower Corp is partnering contract manufacturer Flextronics International in making panels in Silicon Valley, and Q-Cells will boost its panel production by 200 megawatts by outsourcing work to Flextronics.

Oil major BP's solar unit has farmed out production of its modules to contract manufacturer Jabil Circuit to cut costs.

'A new EMS boom is starting up, this time in the solar panel business,' Greg Sheppard, chief research officer at iSuppli, wrote in a recent note.

Analysts say the trend is creating opportunities for top contract manufacturers such as Taiwan chip maker Hon Hai Precision Industry, Canada-based Celestica and US firm Sanmina-SCI Corp.

iSuppli expects global solar installations to double to 13.6 gigawatts (GW) this year given increasing state support for solar power use.

Solar contract manufacturing could triple this year to 1,100 MW, iSuppli forecasts, enough capacity to power over half a million households in the US. By 2014, contract manufacturing of solar panels will nearly quadruple to 4.1 GW.

'Solar panel makers now are running their factories at 90 percent of capacity, straining their capability to meet demand,' said Sheppard. 'Outsourcing of manufacturing provides access to that essential capacity.'

Clean tech outsourcing

Solar firms also outsource production of their panels to bring their products closer to the market, eliminating logistics costs associated with shipping, breakage and inventory.

As the clean tech industry develops, contract manufacturing will spread to other green-related technologies including smart metering, efficient lighting and wind power, said analysts.

'We believe the clean tech market could be a meaningful opportunity for the EMS industry over time,' said Ticonderoga Securities analyst Brian White.

He estimates Flextronics' deal with Q-Cells alone could generate yearly sales of at least $100 million. Flextronics shares have doubled in the last 12 months.

Flextronics said in March it will use 1 million sq ft of its facility in Malaysia to make solar panels and component parts for smart meters, while Celestica announced last week a big expansion of its green technology manufacturing in late 2010.

'We think the biggest near-term opportunity for us would be working with the Ontario government to provide alternative energy solutions, primarily in the area of solar,' CEO Craig Muhlhauser told Reuters.

Cree, maker of light emitting diode fixtures, and solar products makers Carmanah and Oerlikon are examples of green companies that are turning to contract manufacturers to produce some of their products.

But, while contract manufacturers are generally bullish about the green industry, analysts warn this part of their business is not without risk.

As green technology relies on state subsidies to drive demand, the business is vulnerable to policy change and a fragile global economy.

For now at least, contract manufacturers are encouraged to go green.

'Longer-term, we believe this market could open up a new growth driver,' said Ticonderoga's White. – Reuters