Europe Finally Rises to Toyota’s Hybrid Bet

Avoiding a diesel-for-diesel competition with market leaders including Volkswagen AG, for years, Toyota Motor Corp. focused on pushing its hybrid models in Europe. The Japanese carmaker’s strategy is finally paying off.

Toyota is on track for roughly a 40 percent jump in annual sales of gasoline-electric vehicles in Europe in the first full year since Volkswagen’s emissions scandal threw the German giant into disarray. According to Karl Schlicht, executive vice president of the carmaker’s European division, hybrids are set to account for more than half of Toyota’s deliveries for the region by the end of the decade.

Rather than a regulatory crisis, Toyota’s Europe dilemma was a product mismatch. At the beginning of the decade, the Prius model barely attracted buyers in Europe, where more than half of industrywide sales are diesels, atwhen demand for its Prius was surging in other markets like the U.S. Toyota’s strategic decision to avoid pitting its models directly against diesel vehicles and force its dealers toward hybrids is now yielding results after Volkswagen’s scandal undermined those powertrains,

“When you have a strategy driven by necessity and it’s doing the right thing for the customers and the world, it’s a very powerful force,” Schlicht said in an interview. “We kind of had to do it, and that made us focus.”

According to the European Automobile Manufacturers Association, in Europe Volkswagen has a 24.1 percent market share and Toyota is still a small player in Europe, where it had a 4.3 percent market share in the 11 months through November.

Diesel will almost disappear by 2025 and be replaced by hybrids and battery-electric vehicles, forecast UBS AG analysts in a report this month. In a bid to curb pollution by 2025, Athens, Madrid, Mexico City and Paris have pledged to phase out diesel vehicles.

“Diesel is on its way out for cars; we’ve seen the beginning of the end,” Alexander Nix, a Toyota dealer in Germany since 1980, said by phone. “Once we see further restrictions on emissions, it’s just going to be too expensive. We’ve already seen that now.”

“Our dealers at the beginning of this period were very much like, ‘You guys need more diesels,’” said Schlicht, the Toyota Europe sales chief. He braced for criticism before auto shows in Geneva, Paris or Frankfurt. “Put your helmet on; you’re going to get beat up because we don’t have enough diesels.”

Even though they were accounting for just a fraction of the company’s sales mix, Toyota started directing its distributors and dealers to focus entirely on hybrids. They had to take a spin in the hybrid before they could try the diesel If a customer wanted to go for a test drive in, say, a Yaris.

Its auto buyers started becoming hybrid converts when Toyota coupled this retail strategy with an all-hybrid marketing campaign.

“There is no strategy that the carmaker can make if the front line doesn’t buy in,” Tom Fux, the Cologne-based president of Toyota Germany, said by phone. “For us, hybrid is the key focus.”

As residual values for diesels begin to shrink, corporate fleet operators and leasing companies are starting to talk with Toyota about increasing hybrids as a portion of their business mix. Such companies play an outsize role in Europe’s auto market and they have begun to feel exposed.

The newly introduced C-HR, a latecomer to the fast-growing compact sport utility vehicle segment will be another significant factor. Schlicht said that about 75 percent of initial orders have been for the hybrid version and the company will build the model at a plant in Turkey. The model won’t offer a diesel engine option.

“We’re not anti-diesel, but the mindset has shifted,” Schlicht said of Toyota Europe’s dealers and distributors. “It’s moved on, and now they’re really into selling hybrids.”

(Adapted from Bloomberg)

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