Toyota's New Strategy to Strike the Right Chord in Europe

After suffering a six-year long slump, the European car market is expected to grow (about 2%-3%) in 2014. Japanese automaker Toyota (NYSE: TM  ) doesn't intend to miss out on this revival. It wants to go back to selling a million cars and sports utility vehicles in the continent by mid-decade, like it was in 2008. This time, the company wants to make money out of it -- something it couldn't do in 2008. To fulfill its dreams, Toyota has devised three solid strategies -- mini cars, hybrids, and an alliance with the world's largest luxury car maker, BMW (NASDAQOTH: BAMXF  ) . Let's zero in.


Toyota's Ancenis Factory in France. Source: Toyota.

Sell more minicars
Minicars form Europe's third largest auto segment, and according to forecasts, sales could grow more than 20% over the next three years. The segment is witnessing a huge product offensive with a fleet of new/refreshed models from Renault, Peugeot Citroen, Suzuki, and Toyota. Researcher IHS Automotive predicts that the size of the segment could grow to 1.3 million in 2016 from 1.1 million past year, with a revival in Italy, Europe's biggest minicar market, playing a vital role. 

Toyota has a decade-long alliance with French automaker PSA Peugeot for manufacturing minicars in Europe. The joint venture plant in Kolin in the Czech Republic rolls out popular models such as Toyota Aygo, Peugeot 108, and Citroen C1.

A refreshed version of Toyota's Aygo minicar recently debuted at the Geneva auto show and will be in market later this year. Karl Schlicht, Toyota Europe executive vice president for sales, marketing and product, said he expects the new model to boost sales to touch 80,000 units by 2015, from 65,000 last year. Toyota has acknowledged that the alliance with PSA Peugeot is profitable -- so higher Agyo sales will add to both the top and bottom lines.


Toyota Aygo minicar. Source: Toyota.

Rule the hybrid market
A global leader in hybrid sales, Toyota sees a big opportunity in Europe as people are slowly warming up to the low emissions and fuel efficiency offered by hybrids. It plans to introduce 15 new hybrid models globally over the next two years, and Europe, the third largest market for hybrids after Japan and the U.S., will get its fair share.

Europe's hybrid market saw 40% sales growth in 2013 to 214,237 units -- and 85% of this came from Toyota's Yaris and Auris models. Data compiled by researcher JATO Dynamics shows that in 2013, sales of British-built Auris hybrids were up 131% to 53,426 units, and the French-built Yaris were up 103% to 48,758 units. Toyota's strategy is simple and effective -- it's using traditional European designs to appeal to popular tastes, and steadily bringing down the prices by adapting advanced technology.  

Didier Leroy, head of the Toyota Europe division, said, "We've never sold as many hybrids as we're selling today." In 2013, sales grew an eye-popping 43% to 156,863 units. The hybrids also contributed heavily to the 56% operating margin growth the company saw in Europe in the first three quarters of fiscal 2014 (which ends in March).

It suits Toyota that not many automakers are building hybrids for Europe, and archrival Honda (NYSE: HMC  ) has decided to almost wash its hands off this market. Though Honda entered the Europe hybrid scene a year before Toyota, it's struggled with sales. According to JATO Dynamics, Honda sold just 1,242 Insights and 695 CR-Z last year, down 62% and 66%, respectively, from 2012. It has decided to stop selling both models, leaving the Jazz hybrid as its lone offering.

Alliance with BMW
Toyota wants to strengthen its diesel offerings in Europe as they enjoy greater popularity over gasoline variants. Diesel cars make up more than 55% of all new cars sold in the continent every year, and that number can even rise to 70% in countries like France and Spain. Diesel and gasoline cost roughly the same, but it's cheaper to run and maintain the former. Europe's minivan segment predominantly runs on small diesel engines, especially the 1.6-liter variant.

Toyota has a pactwith BMW for supply of diesel engines, and future versions of Toyota's Verso compact minivan sold in Europe will be fitted with 1.6-liter diesel engines from BMW. Fabio Capano, Toyota Europe's product communications director, said, "The new 1.6 D-4D will be by far the most popular engine in our Verso lineup; we plan to sell more than 25,000 a year." So far, the Verso compacts came with only Toyota's 2.0- and 2.2-liter diesels. With the new BMW engines, Toyota expects Verso sales to grow 12% to 44,000 units in Europe this year.

The main aim of the Toyota-BMW pact is to develop next-generation, eco-friendly technologies. The duo would collaborate on developing a fuel cell system, lithium air batteries, light-weight vehicle body technologies, and also a sports car. The alliance, although a win-win package for both, will amplify Toyota's European presence.

Last thoughts
In a 2012 interview to Bloomberg, Leroy had said, "It's unacceptable for Toyota to be at this volume level in Europe." True to his words, the company has formulated strategies to boost its presence in the continent. Growing demand for its hybrid cars, opportunities in the minicar segment, and association with BMW promises a better future for Toyota in Europe. And the best part is, Toyota is in a position to comfortably grow and yet remain profitable in the reviving European economy.

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