To draw an object on the screen, the engine has to issue a draw call to the graphics API (e.g. OpenGL or Direct3D). Draw calls are often expensive, with the graphics API doing significant work for every draw call, causing performance overhead on the CPU side. This is mostly caused by the state changes done between the draw calls (e.g. switching to a different material), which causes expensive validation and translation steps in the graphics driver.
Unity uses static batching to address this. The goal of the static batching is to regroup as many meshes in less buffers to get better performance, rendering giant meshes instead of a lot of small meshes which is inefficient. Unity will only loop on the same resources to render different ranges of these resources. Effectively it executes a series of fast draw calls for each staticcally batched mesh.
Built-in batching support in Unity has significant benefit over simply combining geometry in the modeling tool (or using the CombineChildren script from the Standard Assets package). In Unity 5.0, there is only one build of the index buffer on start and then a draw call is submitted for each sub mesh of that big mesh for each visible sub mesh.
Only objects sharing the same material can be batched together. Therefore, if you want to achieve good batching, you need to share as many materials among different objects as possible.
If you have two identical materials which differ only in textures, you can combine those textures into a single big texture - a process often called texture atlasing. Once textures are in the same atlas, you can use a single material instead.
If you need to access shared material properties from the scripts, then it is important to note that modifying Renderer.material will create a copy of the material. Instead, you should use Renderer.sharedMaterial to keep material shared.
Unity can automatically batch moving objects into the same draw call if they share the same material and fulfill other criteria. Dynamic batching is done automatically and does not require any additional effort on your side.
Static batching, on the other hand, allows the engine to reduce draw calls for geometry of any size (provided it does not move and shares the same material). Static batching is significantly more efficient than dynamic batching, but it uses more memory. You should choose static batching as it will require less CPU power.
In order to take advantage of static batching, you need explicitly specify that certain objects are static and will not move, rotate or scale in the game. To do so, you can mark objects as static using the Static checkbox in the Inspector:
Using static batching will require additional memory for storing the combined geometry. If several objects shared the same geometry before static batching, then a copy of geometry will be created for each object, either in the Editor or at runtime. This might not always be a good idea - sometimes you will have to sacrifice rendering performance by avoiding static batching for some objects to keep a smaller memory footprint. For example, marking trees as static in a dense forest level can have serious memory impact.
Internally, static batching works by transforming the static objects into world space and building a big vertex + index buffer for them. Then for visible objects in the same batch, a series of “cheap” draw calls are done, with almost no state changes in between. So technically it does not save “3D API draw calls”, but it saves on state changes done between them (which is the expensive part).
Semitransparent shaders most often require objects to be rendered in back-to-front order for transparency to work. Unity first orders objects in this order, and then tries to batch them - but because the order must be strictly satisfied, this often means less batching can be achieved than with opaque objects.
Some parts of Unity’s rendering do not have batching implemented yet; for example rendering shadow casters, camera’s depth textures or GUI will not do batching.