Image source: Canadian Solar.

Canadian Solar (CSIQ -0.34%) now holds the dubious title of one of the largest solar manufacturers in the world. That doesn't mean it makes the most money or has the best product, but it has scale few can match.

But it has built that business on the back of commodity solar panels that don't differentiate the company from competitors. Can it overcome that challenge to win in solar long term? Here are two challenges to watch going forward.

Efficiency

After years of costs being the absolute most important factor in solar panel manufacturing, efficiency is now moving to center stage. SunPower, with its 22%-plus efficiency, is making money and expanding production, showing that there's demand for a high-efficiency product. SolarCity is constructing a panel manufacturing plant that it says will create some of the most efficient panels in the world, and manufacturers are selling more high-efficiency panels than ever before. 

On the flip side, companies who invested in scale and commodity products are struggling. Yingli Green Energy, LDK Solar, and Suntech Power are either bankrupt or struggling to survive. And each was formerly one of the largest solar manufacturers in the world, but they weren't able to differentiate on technology.

Canadian Solar has made products that are more efficient than in the past, but it's far from an industry leader. At least one of its modules has efficiency of up to 17.7%, but most of its products are below 17%, just like most commodity competitors.

If Canadian Solar can't differentiate itself on efficiency, it'll be competing on cost. And that's proven to be a losing strategy long term.

Complete system design

The other thing companies are doing to differentiate themselves is building fully integrated solutions from small residential systems to large utility projects. Basically, the more work you can move from the field into the factory, the better. And that's what  leaders like SunPower, SolarCity, and First Solar are doing. They're creating turnkey solutions that are cost-effective on a system basis, not just a panel level.

Canadian Solar has started to offer kits for residential solar and does its own engineering for large projects. However, it's fallen short in looking at the solar solution holistically, which could lower overall costs and allow the company to integrate next-generation solutions, like energy storage. 

This isn't to say Canadian Solar can't or won't build a more fully engineered solution for its end markets, but it's giving competitors a head start. And if it doesn't start moving quickly, companies who are thinking about the full offering for solar could pass it.

Canadian Solar is in a precarious position

There's no doubt Canadian Solar has the scale to compete in the global solar market, but it's not clear it has the technical advantages that will make it a long-term winner. I'd like to see the company invest heavily in a more efficient product rather than trying to compete on cost. Long term, being big and competing on cost hasn't been a winning strategy, and it's time to adapt to the future of the industry.