First Solar (NASDAQ:FSLR) is narrowing its focus to two main businesses: solar panel manufacturing and project development. It's exiting the engineering, procurement, and construction (EPC) business, which served third party developers with the tools needed to get a solar farm off the ground. This comes a little over a year after the company sold its asset ownership yieldco, 8point3 Energy Partners, so First Solar is reducing vertical integration.

The strategic change may not seem significant on the surface, but it aims to make First Solar more efficient in its two remaining operating businesses. Third-party companies that specialize in engineering, tracker design, and construction are already doing EPC work for developers, so the business is specializing -- and so is First Solar. 

First Solar panels at a desert installation.

Image source: First Solar.

First Solar's focused core

First Solar's core focus is solar panel production, and this is a reinforcement of the product. The Series 6 solar panel is in the midst of a $1 billion expansion in the U.S. alone. Once a global upgrade of manufacturing capacity is completed, the company will have 5.4 gigawatts (GW) of Series 6 capacity, enough to power almost 900,000 homes with new solar panels annually. 

With a better focus, First Solar aims to improve gross margins in the solar panel business from the 5% last quarter. Margins have been volatile over the past few years, but long-term investors should expect high-teens to low-twenties in gross margin from this segment.

Developing solar projects has also been a boon to First Solar, and that's the other business that will remain. The company normally finances construction and then sells the projects on completion, which generated a gross margin of 18% last quarter. Project values can be volatile depending on factors like interest rates and the financial health of potential buyers, but First Solar has made big profits on projects over the course of its history, and it provides a captive source of demand. 

Is horizontal integration next?

This is another step toward ending nearly a decade of vertical integration in the solar industry as companies continue to specialize. The question is whether or not companies like First Solar will horizontally integrate into solar panels that can serve markets outside of their traditional utility-scale customers. First Solar tried to enter the residential and commercial markets with the acquisition of TetraSun's technology in 2013. The company's product was shut down in 2016, and the company never made any headway in small-scale solar. 

One logical move would be to buy SunPower (NASDAQ:SPWR), the high-efficiency solar manufacturer. The company is a leader in residential and commercial solar, and has differentiated technology, just like First Solar. SunPower is also looking for capital to expand its manufacturing capacity, and First Solar could provide that capital, with nearly $2 billion in net cash expected to be on the balance sheet at the end of 2019. 

First Solar's renewed focus

It'll take time to see if First Solar's focus results in better returns for investors, but shedding EPC isn't going to be a big loss for the company. It can now lean on specialized companies that are more efficient at EPC functions. That's the right way to focus efforts in a highly competitive solar manufacturing space.