(Bloomberg) -- Toyota Motor Corp. and Honda Motor Co. are rushing to exploit their advantage in hybrid systems to make inroads in Europe. Daimler AG and PSA/Peugeot-Citroen plan to stop them before they have the chance.
Toyota began selling the U.K.-built Auris compact hybrid in Europe in July and will add the Lexus CT 200h, a hybrid hatchback designed for Europe, in 2011. Honda will roll out a Jazz hatchback hybrid in Europe next year, adding to three gasoline-electric models it already sells in the region.
Asian carmakers aim to use their edge in hybrid vehicles to gain traction in Europe, where their market share is sinking, as stricter emissions standards make the technology more attractive. European carmakers, more reliant on diesel engines, are intensifying research to catch Toyota, whose 1997 gasoline-electric Prius was the world's first hybrid.
“There was a sea change with regard to European carmakers' attitude toward hybrids two or three years ago,” said Stefan Bratzel, director of the Center of Automotive at the University of Applied Sciences in Bergisch-Gladbach, Germany. “It's a long-distance race, but the technological advantage of the Japanese can be made up.”
Hybrids are becoming an attractive alternative to diesel because new European standards taking force in 2014 require carmakers to cut nitrogen-oxide emissions for diesel engines by 56 percent to 80 milligrams (0.003 ounce) per kilometer (0.62 mile). Few diesel cars now comply. Rules for gas engines and hybrids won't change with the tighter rules known as Euro 6.
Toyota and Honda are betting the legislation can help them succeed in Europe, a market where they have struggled to make gains. The combined eight-month share of Asian automakers in the region was 16.6 percent, while Volkswagen AG, the region's largest carmaker, had a share of 21.3 percent.
“One of the big things in Euro 6 is the relative harsh penalty on diesel,” said Colin Couchman, a London-based analyst at IHS Automotive. “That could get the Asians a foot in the door of the European market.”
Toyota, which has been selling cars in the region since 1963, saw its eight-month European market share slip 0.6 percentage point to 4.4 percent, after it recalled about 1.3 million cars in Europe in January to fix sticky pedals linked to unintended acceleration. Honda's share dropped to 1.3 percent from 1.7 percent, according to data from the European Automobile Manufacturers' Association, or ACEA.
“Europe is probably one of the most difficult markets to get into and be successful if you are non-European,” said Koji Endo, a Tokyo-based analyst at Advanced Research Japan. “Hybrids will help the Japanese carmakers make up some ground in a market where they continue to suffer.”
Incentives from governments may also help boost hybrid sales. France offers 2,000 euros ($2,741) toward the purchase of a hybrid, while the U.K. exempts gas-electric models from central London's 8 pounds ($12.68) a day “congestion charge.”
Toyota, based in Toyota City, Japan, sells the Auris hybrid for 22,950 euros in Europe, compared with 20,500 euros for the diesel engine version and 19,500 euros for the gasoline model.
Implementation of Euro 6 regulations from September 2014 may help raise the share of hybrid and electric vehicles in Europe to 13 percent by 2020 from about 0.1 percent today, IHS estimates. Along with the Auris and Lexus CT 200h, Toyota will begin building a small hybrid in France from 2012. Honda's Jazz will come on top of Insight, Civic and CR-Z gas-electric models.
Diesel, which emits less carbon dioxide and offers better mileage than regular gasoline cars, accounts for about half of car sales in Europe, where gasoline prices are almost doubled by taxes, according to the Brussels-based ACEA. In Germany, Europe's biggest market, customers pay 0.66 euro of tax per liter (0.25 gallon) of gasoline.
“Whether hybrids will become dominant remains to be seen, but hybrids will gain on diesel as the advantages are many,” Koei Saga, who manages Toyota's hybrid technologies program, said at the Paris Motor Show last week.
European carmakers are also stepping up their hybrid efforts. Daimler has been developing its own hybrid technology after a partnership with Bayerische Motoren Werke AG and General Motors Co. ended. The Mercedes-Benz maker sells hybrid versions of the ML sport-utility vehicle and S-Class sedan and plans to introduce a diesel-hybrid E-Class next year. Last week Peugeot showed the world's first diesel-electric car in Paris.
The Asians will need more than hybrids to dent the European market. Asian carmakers lag behind locally based rivals in styling and handling in a region with strong national brand loyalty, said Ashvin Chotai, a London-based analyst at Intelligence Automotive Asia Ltd., adding that Asian carmakers haven't paid Europe much attention as they chased U.S. profits.
Europe is a “a market we can't run away from,” said Yoichi Hojo, Honda's chief financial officer. “It's painful, but we have to be there.”