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By Ucilia Wang

SunPower (SPWRA) is hiring Jabil Circuit (NYSE:JBL) to take SunPower's solar cells and assemble them into panels, a deal that reflects the increasingly tight relationship between solar technology developers and contract manufacturers.

SunPower is outsourcing panel production to Jabil in order to reduce costs and better serve the North American market, the company said Monday.

The deal is a smart move by the San Jose, Calif.-based company, which has seen the United States becoming its biggest market. The U.S. market accounted for 61 percent of its revenue for the first quarter of this year, up from 21 percent in the same period a year ago, according to its quarterly report filed with the U.S. Securities and Exchange Commission.

The agreement also shows the increasing attempts by consumer electronics manufacturers to get a piece of the solar market. Singapore-based Flextronics (NSDQ: FLEX), another heavy weight in the contract manufacturing space, has a deal to make solar inverters for Petaluma, Calif.-based Enphase Energy. The inverters convert the direct current from solar panels into alternating current for feeding the grid. Flextronics also is jumping into the solar panel making business.

SunPower has historically produced its own cells and most of its own panels in the Philippines. It has contracted solar panel assembly with a Chinese manufacturer, Jiawei SolarChina, but SunPower typically obtained panels from Jiawei through short-term purchase orders instead of long-term supply agreements, SunPower said in its 2008 annual report.

The agreement with Jabil would extend through multiple years, SunPower said.

Outsourcing is becoming more common in the solar industry. It minimizes the risks associated with building and owning factories, and large contract manufacturers could take care of shipping and even offer repair services.

Evergreen Solar (ESLR) is hiring Jiawei to make solar cells and panels using Evergreen's wafers, for example (see Evergreen Outsources Cell and Panel Production to Jiawei Solar). BP Solar (NYSE:BP) also decided to do the same and was still negotiating with contract manufacturers when it announced the plan in March (see BP Solar is Laying Off 620, Outsourcing Panel Manufacturing).

SunPower makes premium crystalline solar cells with higher sunlight-to-electricity conversion rates (22 percent) than any other crystalline silicon players in the industry.

It also charges a premium for its products, a move that critics said could make it difficult for the company to compete with lower-cost competitors such as Suntech Power (NYSE:STP) and First Solar (NASDAQ:FSLR), particularly during the economic downturn (see Pricing Pressure Beating Down on SunPower).

Jabil, a veteran electronics designer and manufacturer based in St. Petersburg, Fla., plans to produce the SunPower panels in Mexico starting in the second half of this year.

Making a foray into the solar business is a good move for Jabil, which has had to close offices and factories in Europe, Asia and the Americas over the past year, according to the company's recent quarterly filing with the SEC.

The restructuring plan was approved by Jabil's board of directors during the second fiscal quarter, which ended in February this year, also included cutting its worldwide workforce by about 3,000. Jabil currently has more than 85,000 employees, the company said Monday.

Jabil's largest customers include Cisco Systems (NASDAQ:CSCO), EchoStar (NASDAQ:SATS), Hewlett-Packard (NYSE:HPQ), Nokia (NYSE:NOK) and IBM.

SunPower said it also is considering building its own factories in the United States. The plan is to look for suitable sites with Jabil.

The U.S. market is expected to grow significantly in the long run, prompting many solar cell and panel makers to set up factories here in recent years. SolarWorld from Germany and Sanyo from Japan have opened factories in Oregon.

Schott Solar recently started producing solar panels and steel tubes for building solar-thermal power plants, which use sun's heat to generate power (see Schott Opens New Factory, Considers Biz Beyond Manufacturing).

Last month, Suntech Power, which makes its products in China, said it's looking for a factory site in the United States.

Source: Contract Manufacturers' Foray Into Solar Market