Toyota Strikes Back

Automotive recalls and the earthquake in Japan cost Toyota (NYSE:TM) its crown as the world’s largest automaker as the company fell to number three behind General Motors (NYSE:GM) and Volkswagen AG.

But now Toyota is putting its troubles behind it and is all set to make a play for higher volumes in VW’s own backyard in Europe. This year, the Japanese car maker is trying to shake off its reputation for staid and boring car design, readying the launch of Europe’s first hybrid subcompact version of the Yaris and the smart-looking GT86 sports coupe in an effort to turn back the meter on a falling sales graph in Europe, down 41 percent since 2007.

Toyota hopes the new cars, combined with an internal shakeup of its European management, will put Toyota in the black after almost five years in the red.

“The real issue for Toyota is winning back customers,” said Jonathon Poskitt, head of European sales forecasting at LMC Automotive in Oxford, England. “Toyota really needs to refocus on the requirements of what are sophisticated European customers that already have a great choice in new vehicles.”

The hybrid version of the Yaris is expected to return a fuel average of 76 miles per gallon. The far racier GT86 does zero-to-100 in 8.2 seconds in conjunction with its sporty low-slung grill and dual exhaust pipes.

Toyota will be assisted in its quest for higher European volumes by BMW, which will supply it with diesel engines that are highly popular in Europe due to lower taxation on diesel fuel. BMW agreed to supply Toyota with diesel engines in Europe as part of a cooperation pact on research into next-generation batteries.

Meanwhile, Volkswagen is preparing to take on Toyota in the U.S., where Toyota led the field by outselling VW 5-to-1. Volkswagen just opened a new $1 billion factory to make as many as 150,000 Passat sedans a year in Tennessee.