SHANGHAI (Reuters) - The automotive industry’s seemingly inexorable drive towards electric cars - and especially Chinese polices pushing new energy vehicles - has forced Toyota Motor Corp, the world’s No.2 automaker by sales, into what one executive calls an “agonising” strategy U-turn.

Until recently, Toyota was one of the industry’s majorhold-outs against full electrification, and planned to more or less skip all-electric battery cars and turn instead to hydrogen as a mainstream alternative to gasoline-fuelled cars.

In 2013, Toyota Chairman Takeshi Uchiyamada, father of thegasoline-electric hybrid Prius, told Reuters the hydrogen carwas a “practical alternative” to the traditional combustionengine, and if there was any use for the electric vehicle (EV),it was “only as a neighbourhood errands car”.

Fast-forward to late last year, and Toyota said it had begundeveloping a long-range all-electric battery car, which industryexperts say should hit the market around 2020. The Japanese firmhas put its president, Akio Toyoda, in charge of a new unitcalled the EV Business Planning Department.

One Toyota executive, who did not want to be named ashe is not authorised to speak to the media, said the strategyabout-turn was “agonising” and “heart-wrenching”.

Toyota had for some time predicted conventional hybrids andplug-in hybrids would be a medium-term bridge to hydrogen-powered cars of the future.

In late 2014, Toyota launched the Mirai, a hydrogenfuel-cell car, selling in Japan for 7.24 million yen ($66,636)before subsidies and rebates. The model retails in the UnitedStates at $57,700 before subsidies. The game-changer for Toyota is China - the world’s biggestmarket and one where tough policies to push cleaner energy carshave challenged global automakers. Latest draft proposals from Chinese policymakers, releasedin September, require 8 percent of automakers’ sales to bebattery electric or plug-in hybrid vehicles by next year, risingto 10 percent in 2019 and 12 percent in 2020. After some industry pushback, the scale and pace of thoseplans may shift, but Toyota and other automakers don’t see muchchanging fundamentally in China’s drive to electrification byaround 2020. “Those mandates are tough to the point it could wreck ourfundamental business case,” said another Toyota executive.

Toyota is particularly exercised by China’s proposed policymove to categorize conventional hybrids, like the Prius, asgasoline-fuelled cars. That would mean conventional hybridswould not generate what China calls new-energy vehicle (NEV)credits, which automakers could use to meet strict fuel economyrules. Under the proposals, each hybrid an automaker would sell inChina would set them back by one NEV credit point. “The Prius and other hybrid cars are central to our greencar strategy,” said one of the Toyota executives. “But in China’s view, the Prius is no more than a gasolinecar. We have no choice but to get over our EV allergy and comeup with an electric car.” Hiroji Onishi, the head of Toyota’s China business, said on Tuesday ahead of this week’s Shanghai auto show that the Japanese firm would start selling plug-in electric hybrid cars in China next year, and aimed to sell an all-electric battery car in China, but gave no timeframe.

At a briefing on Wednesday, Onishi said this wouldn’t mean Toyota will de-emphasize sales of conventional gas-electric hybrid cars in China.

Because automakers in China are expected to have to meet stringent fuel-economy requirements in addition to new energy vehicle quotas in coming years, Toyota will try to sell more conventional hybrids in an effort to meet fuel economy requirements, he said.

Toyota sold close to 300,000 vehicles in China inJanuary-March, up 1.7 percent on the same period a year ago.

($1 = 108.6500 yen)