Japanese Carmakers to Launch Fuel-Efficient Models to Expand in Europe

Japanese carmakers are targeting small car segments to expand their sales in Europe and are preparing to launch at least eight fuel-efficient vehicles by 2010 as they attempt to gain market shares in the region. According to a Nihon Keizai Shimbun (Nikkei) report, Toyota, Honda, Nissan, Mitsubishi and Mazda are all busy working on developing their diesel offering, bringing hybrid powertrains to smaller cars or simply developing their small car ranges to take advantage of changing buying patterns in Western Europe. 

Continuously high fuel prices, greater eco-consciousness and focus on affordability from consumers have resulted in demand for new cars shifting in favour of smaller, more fuel efficient A and B-segment cars in western Europe. In the first six months of 2006, sales of B-segment cars, Europe's most popular vehicle category, were up 7.8% year-on-year (y/y) to just over 2 million units. At the same time, sales of A-segment cars surged 31.5% to about 530,000 units. Most of the gains were underpinned by extensive new model activity from leading manufacturers, notably with the arrival of the third generation Renault Clio, Fiat Punto, Peugeot 207 and Toyota Yaris II in the B-segment, and the deployment of the Volkswagen (VW) Fox, Peugeot 107, Toyota Aygo, Citren C1 and Fiat Panda in the usually narrow A-segment. 

As part of its plans to develop its Lexus brand in Europe, Toyota aims to emphasise its hybrid capabilities to lure buyers of premium cars in Europe away from the traditional German brands. Toyota has added a hybrid variant to its midsize GS sedan in April 2006 and plans a similar development with the high-end LS. Toyota is also beefing up its diesel offering. Last year, the Japanese carmaker launched production of  the 2.2-litre diesel engine to equip its Avensis models sold in Europe and will probably launch a sports-utility vehicle (SUV) in 2007. 

Honda is following the same direction, focusing on proposing a more homogeneous hybrid range in Europe to entice more European customers. Honda's hybrid vehicles are primarily sold in the United States and Japan. For this reason the carmaker intends to launch a new small hybrid to the global market in 2009, which could appeal equally to European and American drivers. Moreover, Honda has developed its diesel line and now proposes four diesel versions of its Civic model. For its part, Nissan, whose European sales are declining dangerously these days, is planning to bring two new small cars with small engines as the carmaker believes in the potential of small cars for urban usage. Mitsubishi will go ahead with the European launch of a model based on its i-concept this year. The original small car uses a three-cylinder, 660cc turbocharged engine (63hp) that delivers fuel consumption of 5.43 l/km and achieves ultra-low CO2 emission (126g/km). Mitsubishi is also considering proposing diesel variants of its Lancer and Outlander models. Mazda is by far the least aggressive, but still decided to start offering diesel versions of its Mazda6 model in Europe.

Outlook and Implications

Toyota's decision to supply small cars to Subaru to support the latter's expansion in Europe sums up the development direction selected by Japanese brands toward the European market. According to  the Yomiuri newspaper, the Associated Press revealed that Toyota could start supplying its Yaris and Aygo models to Subaru on an original equipment manufacturer basis from 2008. The vehicles will therefore be entirely assembled by Toyota but sold under the Subaru brand. So far, Subaru has failed to make an impact in Europe as it lacks a robust small car offering and diesel expertise. Toyota, which became the single largest shareholder in Fuji Heavy Industries—Subaru's parent company—after acquiring a 8.7% stake from General Motors, is tightening its collaboration with Subaru. Earlier this year, Toyota and Fuji said they aimed to start producing the Toyota Camry at Fuji's plant in the United States from 2007. 

Whether Japanese carmakers believe that fuel prices have remained at high levels for long enough to have permanently changed the structure of the European new car market, or if they believe that fuel prices will continue to soar looking forward, remains to be seen. Japanese carmakers nonetheless seem to believe that demand for fuel-efficient vehicles is bound to increase in Europe and are keen to take advantage of this development. Japanese brands' ability to propose attractive fuel efficient sedans has already proved highly successful in the United States where consumers are moving away from large domestic cars in favour of smaller Japanese vehicles. Yet, a similar development is unlikely to unfold in Europe where the world's most renowned manufacturers of small cars reside. However, by putting some emphasis on small cars and by bringing more fuel-efficient vehicles to Europe, Japanese carmakers are also showing their intention to contribute to the ACEA Commitment on CO2 emission reduction. From 2008, new cars sold in the European Union (EU) must have average carbon dioxide emissions 25% lower than 1995 levels, with the regulation applying to Japanese vehicles beginning in 2009.