Struggling solar manufacturers will likely be driven into mergers with rivals to survive a sector squeeze, a trend that could draw major Asian conglomerates deeper into the renewable energy sector.

Solar makers have seen their profit margins nearly erased this year as prices for renewable energy systems plummeted by about 40% and industry experts say many companies are too small to withstand the downturn on their own.

Market experts have named China's Suntech Power Holdings , Trina Solarand Yingli Green Energy Holding as good bets to survive the current slump, as well as U.S.-based First Solarand SunPower and Germany's SolarWorld .

But former sector leaders from Germany, such Conergy, Q-Cells, Solar-Fabrik  and Sunways may be threatened, analysts at Swiss bank Sarasin said recently.

Many U.S.- and German-based makers have been among the hardest hit and a handful of high-profile bankruptcies have tarnished the industry's image, including the collapse of Solyndra, whose demise after receiving more than $500 million in U.S. funds triggered a political backlash in Washington.

Still, many China-based companies, which produce the majority of the global supply of solar panels, are also suffering, as heavy debt threatens their survival.

China's state-run banks opened billions of dollars in credit lines to the industry there and helped drive a proliferation of companies that now number in the hundreds.

Most are small producers that appear to be selling modules - or the wafers and cells used to build modules - at a loss, creating a huge oversupply of products that pressures prices across the global supply chain.

That problem is now under the microscope in Beijing, where the government appears to be pushing smaller players to shut down or be taken over by big producers with global reach.

A draft proposal from China's Ministry of Industries and Information Technology (MIIT) asked Beijing to support the creation of one or two big solar makers with production capacity of 5 gigawatts (GW) and about 8 to 10 medium-sized ones with around 1 GW capacity.

Currently, no solar companies have 5 GW of capacity. Suntech is the largest in the world, with 2.4 GW of cell and module production capacity.

Suntech Chief Executive Zhengrong Shi told a conference call in November the top six module suppliers saw their market share jump to 55% in the second quarter from 26% a year earlier.

"We expect this trend to continue, as customers recognize the importance of partnering with companies that are positioned to be long-term players," he said.

Yingli CFO Bryan Li told analysts last month the top Chinese banks were tightening lending and had drawn up lists of the solar companies they were willing to work with now, in a move that would likely push some out of the industry.

"They want to see the industry consolidation ... to eliminate those tier-two and tier-three players and leave a big stake for the tier-one players," he told analysts.

Enter The Conglomerate

Private funding for small solar companies has all but dried up and cash-poor players are not likely to persuade banks to open up credit lines because of the tough industry conditions.

That will leave them to turn to their competitors to try to merge and cut their costs, or to find large companies to buy them.

"There will be some mergers to improve economies of scale and then some companies in the sector will fall into the arms of better-capitalized, big strategics who have had their eye on the sector," said Neil Auerbach, managing partner at private equity firm Hudson Clean Energy Partners.

Industry players pointed to South Korea's Hanwha Chemical Corp's purchase last year of nearly half of Chinese Solarfun Power Holdings as a model that is likely to be copied across the industry.

Hanwha bought the 49.99% stake in the company to create Hanwha SolarOne Co Ltd, giving the struggling Chinese company a partner with deep pockets to withstand the downturn.

"I couldn't remember the last time a Korean company bought a Chinese company, but I guess that was a good indication of a big company wanting to hurry up and get into solar," said Kevin Landis, portfolio manager of Firsthand Alternative Energy Fund.

Landis also pointed to SunPower's deal earlier this year in which French oil giant Total SA took a majority stake in the U.S. company, as well as Taiwan Semiconductor Manufacturing Co Ltd's investment in privately held U.S. solar company Stion.

Smaller U.S. start-ups are also turning to larger partners as venture capitalists' willingness to fund capital-intensive manufacturing has declined significantly since the financial crisis. One small U.S. company, HelioVolt, secured a $50 million investment from South Korean conglomerate SK Group earlier this year and its rival, Miasole, said on Monday it was seeking a partner to help fund its growth.

The need for a partner or parent company with deep pockets could become particularly pressing for companies that are seen as too financially weak to stand behind solar module warranties that can stretch out as long as two decades.

That is helping draw customers to companies such as Sharp's Solar Energy Solutions Group (SESG), a division of Japan's Sharp Electronics Corp and the U.S. solar arm of Sharp Corp.

"The reason they are coming back - and they are coming back very strongly - is the recognition that our warranty is absolutely inviolate," said Eric Hafter, the company's senior vice president. "It's been a huge advantage for us lately."

Brett Prior, of research firm GTM Research, said Sharp, as well Japan's Kyocera Corp, Sanyo Industries Ltd and Mitsubishi Corp and South Korea's LG Corp, Samsung and Hyundai Corp were all capable of scooping up smaller players to expand their solar market share.

Still, those big companies may shy away from outright purchases of smaller companies facing difficulties.

"They can just wait for a third-tier producer to go bankrupt and buy the equipment," he added.