Chief Executive Kyoji Takenaka told a small group of reporters on Friday that Fuji Heavy would bring the engine to production at full throttle after agreeing last week to borrow Toyota Motor Corp.'s technology for hybrid cars.
"Because we're a small company, we had to choose between hybrid and diesel.
"Now that we have this arrangement with Toyota, diesel engine development and production are going to be our priority," Takenaka said, adding that the fuel-efficient engine, which powers half of Europe's cars, was also gathering momentum in major markets such as the United States and China.
"We're hoping to get it to market sometime around the end of 2007, or 2008," he said.
The engine would be compatible with its iconic symmetrical all-wheel-drive system, used on about two-thirds of its vehicles. Subaru will probably start offering the diesel option on the Legacy model, Takenaka suggested.
By 2010, about half of Subaru's European sales - projected at 100 000 units by then - should be fuelled by diesel, he said. Subaru sold 62,049 cars in Europe last year.
Beyond that, about one-third of Subaru's total all-wheel-drive models would switch to diesel, Takenaka said. He predicted the powertrain would eventually account for 10 to 20 percent of total car sales in Japan and the United States.
To reduce investment outlays, Subaru would build the engines on the same line as gasoline engines - a task that was possible thanks to the unique structure of the symmetrical AWD drivetrain, he said.
Fuji Heavy has yet to decide how specifically to proceed in developing gasoline-electric hybrid cars using Toyota's technology, but Takenaka said those vehicles would come to market only after the diesel products.
Last year, Toyota took an 8.7 percent stake in Fuji Heavy, replacing GM as its biggest shareholder.
Industry watchers are keen to see how far the new alliance will go, particularly whether Toyota will eventually boost its equity stake. Toyota took minority stakes in mini-vehicle maker Daihatsu and truck maker Hino Motors before turning them into majority-owned subsidiaries years later.
Takenaka said he did not envisage Fuji Heavy's becoming a full-blown member of the Toyota group, but rather being an independent partner much like motorcycle maker Yamaha, in which Toyota holds a 4.4% stake.
"We're a pretty stubborn bunch," said the former engineer.
"We never managed to blend in with Nissan Motor Co. or GM when we were allied with them. We'll preserve our independence," he said.
Takenaka said, however, that Fuji Heavy had a lot to learn from Toyota, mainly in reducing Subaru's high production costs and expediting the speed of vehicle development.