Toyota Motor Corp (NYSE:TM) is hoping to capitalize on the European auto market’s revival. After suffering a six year long slump, the European car market is expected to grow by 2-3% this year.  Car sales in the five most important markets-Germany, U.K., France, Spain and Italy-are either growing or expected to grow in the near future. Toyota, which used to sell over a million cars and SUVs a year in Europe in 2008, wants to become profitable in Europe again. To achieve this target, the Japanese auto maker has targeted three specific areas- mini cars, hybrid cars and a partnership with BMW, the world’s biggest luxury car maker. In our analysis below, we outline Toyota’s thinking behind targeting each of these areas.
Mincars form Europe’s third largest auto segment, behind subcompacts and small SUVs. Sales in the segment are forecast to rise by nearly 20% in the next three years.  The highly competitive segment-13 of the top 20 minicars have been added or refreshed in the last four years- is witnessing a huge product offensive with a fleet of new or refreshed models from Renault, Peugeot Citroen, Suzuki and Toyota set to hit the market. Research firm IHS automotive predicts the size of the minicar segment to grow from 2013′s level of 1.1 million to 1.3 million by 2016 on the back of this huge segment refresh.  In the past, Toyota has acknowledged that the partnership with Peugeot is profitable, therefore we expect the growth in sales of the Aygo to boost the company’s margins and thus the bottom line as well.
There is a big opportunity in the hybrid segment in Europe for Toyota, a global leader in hybrid sales. As a result of the sovereign debt crisis and stagnating income levels, people are slowly becoming budget conscious and paying more attention to the low emissions and fuel efficient hybrids. Consequently, Toyota is planning 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 a fair share of those. 
In 2013, sales in Europe’s hybrid market grew by 40% to 214,237 units — and close to 90% of the growth was contributed by Toyota’s Yaris and Auris models.  According to research firm JATO Dynamics, in 2013, sales of the U.K.-built Auris hybrids were up 131% to 53,426 units, and the France-built Yaris were up 103% to 48,758 units. Toyota’s strategy here is simply but effective — it’s using traditional European designs to appeal to popular tastes, but steadily bringing down the prices by adapting advanced technology. In 2013, hybrid sales grew an impressive 43% to 156,863 units. The hybrids also contributed heavily to the 56% operating margin growth the company recorded in Europe in the first three quarters of fiscal 2014.((Toyota, PSA benefit from rising European demand for hybrids, Automotive News, March 2014))
A significant advantage for Toyota in this market is that there is almost no competition, especially as Honda Motor Corporation has decided to essentially exit the segment. Even though Honda entered the European hybrid market a year before Toyota, sales have been slow. According to JATO Dynamics, Honda sold just 1,242 units of Insight and 695 of 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 sole car on the market. 
Alliance With BMW
Nearly 55% of all new cars sold in Europe every year run on diesel. That number can rise to 70% in the next few years, especially in countries like France and Spain. Consequently, Toyota is looking to improve its diesel offerings in Europe. To this end, Toyota has signed a deal with BMW for the supply of diesel engines. Future versions of the Verso, Toyota’s compact minivan, will come with BMW-supplied 1.6-liter diesel engines. Currently, the Verso only comes with 2.0 and 2.2 liter diesel engines. The Japanese auto maker expects the new engines to be able to boost the sales of the Verso to 44,000 units this year, implying a growth of 12%. 
The ambit of the Toyota-BMW deal is not merely limited to the development of a diesel engine for the Verso- it extends to an agreement to develop next-generation, eco-friendly technologies together. The two companies plan to collaborate on developing a fuel cell system, lithium air batteries, light-weight vehicle body technologies, and also a sports car. The deal should be beneficial for both companies but it is likely to have a significantly positive impact on Toyota’s European operations.Notes:
- ANALYSIS: Europe’s under water car market growing again, Just Auto, February 2014 [↩]
- Minicar mania: Renault, PSA, Toyota debut key new entries at Geneva show, AutoMotive News, March 2014 [↩]
- Minicar mania: Renault, PSA, Toyota debut key new entries at Geneva show, AutoMotive News, March 2014
Toyota has manufactured cars in Europe for the last decade in an alliance with French auto maket PSA Peugeot. Earlier this year, a refreshed version of Toyota’s Aygo minicar, which is manufactured at the joint venture’s plant in Koln, Czech Republic, debuted at the Geneva auto show. The car will hit the market later this year. Karl Schlicht, executive vice president for sales, marketing and product for Toyota’s European business, said he expects the new model to grow the sales sales of Aygo to 80,000 units by 2015, from 65,000 last year. ((Toyota reconfirms commitment to PSA minicar alliance, Automotive News, March 2014 [↩]
- Toyota Europe CEO plans profit growth as hybrid-car sales expand, Automotive News, March 2014 [↩]
- Record hybrid sales push Toyota Motor Europe market share and volume gains, Automotive World, January 2014 [↩]
- Honda to end Europe sales of Insight, CR-Z hybrids, Automotive News, February 2014 [↩]
- Toyota hopes BMW diesel will lift Verso sales in Europe, Automotive News, February 2014 [↩]