Image source: First Solar.

First Solar (NASDAQ:FSLR) has been an industry leader for more than a decade, but it has one of the most uncertain futures of any company in the business today. Its module efficiency is falling further behind competitors', and even hitting research and manufacturing targets might not be enough to keep the company relevant.

But a small acquisition made over a year ago could pay big dividends in the long term. Here's why.

How First Solar fell behind the competition
Just a few years ago, First Solar's cost advantage over the competition was so wide that the lower efficiency of thin-film product didn't really matter. In an August 2010 article, I noted that First Solar's cost per watt was $0.76, compared to $1.10 for Trina Solar (NYSE: TSL) and a whopping $1.71 for SunPower (NASDAQ:SPWR). The lower cost gave First Solar by far the highest margins in the industry.

Source: First Solar.

But today's solar industry is very different. First Solar's cost per watt in 2013 was $0.63 (a number it has since stopped reporting), which is higher than the $0.50 per watt threshold Yingli Green Energy, JinkoSolar, and Trina Solar havealready passed. If Chinese silicon-based solar panels cost less than First Solar's thin-film panels, they'll be the first choice of installers -- at 14% to 16% efficiency, they already generate more power than First Solar's 14.2%-efficient module. Higher efficiency means more panels can be packed into less land, lowering installation costs for labor and requiring fewer racking and electrical connections.  

First Solar has a road map to increase efficiency to 17.2%, or a stretch goal of 19.5%, by 2017, but even that might not be enough. Consider that this week Trina Solar announced the launch of new Honey cells that offer efficiency as high as 20.4%, which should lead to a module that is about 18% efficient. That's already higher than First Solar's 2017 lower goal and gives Trina Solar nearly three years to make further improvements.

Then there's SunPower, the world's leader in solar efficiency. The company's production X-Series panels are 21.5% efficient, and a production line that is now under construction promises to increase that figure to about 23% within the next year or two. Efficiency that high isn't even on First Solar's radar in thin film.  

With costs that are at best comparable to competitors', and lower efficiency, First Solar can't expect to survive. It has to make a big move to increase its product, and we may see that starting to happen.

Source: First Solar.

Will TetraSun transform First Solar?
In April 2013, First Solar made a surprising acquisition of a silicon solar module start-up called TetraSun. The company had yet to reach production, but had technology it hoped could produce cells up to 21% efficient at a low cost, bringing First Solar into the high-efficiency market. Last week, a 100-megawatt production line started making TetraSun-designed product, First Solar's first move into the silicon market.  

A number of different silicon-based technologies have failed over the years, so there's no guarantee First Solar will succeed, but if it can get its module cost to near $0.50 per watt and cell efficiency over 20%, it could change the company's future. The residential solar market would open up, utility-scale project costs would fall, and First Solar could be in for another phase of growth. 

The pressure is on
TetraSun seemed like a strange move when First Solar acquired the company, but now it's key to the company's future success. If high-efficiency silicon doesn't work out, the pressure would be back on CdTe thin-film technology, and I'm not sure First Solar can make the technology work over the long term.

Investors should hope the new silicon technology works as promised, or First Solar could be passed by as competitors improve their own efficiency. The stock's future likely depends on whether this technology is a success.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.