By Gilles Guillaume

PARIS (Reuters) - Renault CEO Luca de Meo's bet on a low-cost gearbox technology is allowing the French carmaker to gain ground in Europe's fast-growing hybrid car market, giving it some breathing space as rivals get squeezed by the electric mobility challenge.

Demand for expensive electric vehicles is not taking off in Europe despite a European Union ban on combustion engine cars due to come into force in 2035, putting massive strain on Europe's automotive industry.

But Renault, which is smaller than auto peers and was hit by record losses in 2020, is showing surprising strength in hybrid cars that use both a thermal engine and an electric one.

In the first eight months of the year, sales of Renault hybrid models including the Clio and Captur were up 55% from the previous year, according to Renault preliminary figures, above a 21.1% increase for the whole of the European Union, data from European industry body ACEA show.

The sales increase, which reached 60% in the first half of the year, made the Renault brand Europe's second-biggest in this segment, behind Japan's Toyota.

"Renault seems to be doing very, very well," analysts at Stifel said after the carmaker announced on Oct. 8 it was sticking to its business targets, one of the few traditional carmakers not to revise downwards its estimates amid tough market conditions.

"We think the company is simply more versatile and agile than its peers," they added in a research note.

Retaining strength in hybrid cars, cheaper than electric vehicles but less polluting than traditional ones, could help de Meo to lower the group's overall emissions and grow sales in the near term.

Demand for hybrids is expected to continue to grow until the end of this decade, before electric vehicles take over, according to consultancies Dataforce and S&P Global.

With a market cap of 11.6 billion euros ($12.68 billion), Renault is worth just a quarter of European leader Volkswagen, which makes it more nimble but potentially more vulnerable than peers against intensifying competition from Chinese e-cars.

The company, 15%-owned by the French state, is also seeking a new direction after having largely abandoned its two-decades long alliance with Nissan and Mitsubishi, and after ditching a planned IPO of EV arm Ampere.

LOW-COST GEARBOX

The secret behind Renault's recent success in hybrid is a focus on a technology that the French group has mastered.

A pioneer in gearboxes a century ago, Renault engineers turned to a simplified 'dog clutch' - used to connect and disconnect gears without the need for a battery of syncronisers - to create a low-cost hybrid transmission system, named E-Tech.