Europe has set an ambitious target to obtain 20% of its energy from renewable sources by 2020. Trouble is, even if only one-quarter of it comes from the sun, that much power will require enough solar panels to generate 200 gigawatts of electricity. That's a tall order—some 25 times the current annual production of solar panels around the world. Clearly, manufacturing volumes have to jump, or Europe's green energy target will be out of reach.

Help is on the way from an unlikely source: Silicon Valley's Applied Materials (AMAT), the world leader in chipmaking equipment. For 40 years, Applied Materials has been producing high-precision manufacturing gear for semiconductors and flat-panel displays; now it's racing to sell specialized machines that churn out solar panels more cheaply and in higher volumes than ever before.

The immediate goal is to drive down the cost-per-watt of solar electricity by at least 25%—and eventually bring it to parity with conventional sources such as coal and natural gas. "Applied has a history of using technology and smart engineering to lower cost and grow markets," says Chief Executive Mike Splinter. "We see a real opportunity to change the cost equation for solar power through adoption of our existing technology and new innovation."

Covering the Bases With Both Technologies

To flesh out its product line, the company has gone on a shopping expedition in Europe, tapping into the Continent's deep expertise in alternative energy. In July, 2006, it bought a U.S.-based company called Applied Films—which has major operations in Alzenau, Germany—for $464 million. Last August, it acquired Switzerland's HCT Shaping Systems for $483 million. And on Jan. 31, it sealed a deal to take over Italy's Baccini for $330 million. All the acquired companies brought advanced panel-making technology to Applied's portfolio.

Now, the company is tying together these and other products to offer customers one-stop shopping for cutting-edge solar panel manufacturing. To hedge its bets, the company offers tools to make both prevailing kinds of panels—the so-called "thin-film" type built on a glass foundation, and the "crystalline silicon" type akin to a mesh of semiconductor wafers connected with tiny wires.

Clients such as India's Moser Baer and Spain's T-Solar already are using Applied's thin-film equipment, and the company says it has 20 more customers lined up. Using technology Applied developed for flat-panel displays, customers now can make sheets of glass as big as a king-sized bed on which to build solar panels—four times larger than previously possible. That helps drive down cost and boost volumes.

Prices Must Go Down

Applied's recent European acquisitions also have strengthened their position in the other type of panel manufacturing. By letting customers produce thinner, more uniform silicon wafers, the technologies should save money and produce crystalline silicon panels more cheaply. Still, to compete with today's electricity, the price of solar power needs to drop by about 50%, says Vishal Shah, a vice-president for equity research in the solar energy sector at Lehman Brothers (LEH) in New York.

That challenge isn't stopping Applied Materials. The company says its move into solar was a natural fit because its experience with semiconductors and flat panels means it knows all about techniques such as depositing and manipulating thin films on various substrates efficiently.