Asian carmakers aim to churn out higher profits in Europe by moving up-market now that they have established a solid foothold in the region, while their local rivals struggle with excess inventories and restructuring costs.

Automakers such as Toyota Motor Corp. and Honda Motor Co. have slowly but steadily built up their shares of a shrinking western European market but have struggled to approach the profit levels they enjoy in North America.

Making money in Europe, a difficult task due to the prevalence of cheaper compact cars and an overcrowded market, has become even tougher as excess inventory at Volkswagen AG and others fuels a ferocious discounting war and as production costs rise with higher commodity prices.

To fight such headwinds, Honda, Japan's third-ranked automaker, said it aimed to re-position itself as a premium brand and shed its image as a maker of run-of-the-mill but reliable cars.

We want to move upscale, Honda Motor Europe President Shigeru Takagi told Reuters at the Paris motor show this week, adding the new Civic series and the CR-V crossover, unveiled at the show on Thursday, would help steer it toward that goal.

This will be the path for us going forward.

Nissan Motor Co. has a similar strategy in mind with offerings such as the Qashqai, a small four-by-four offroader, to take the place of conventional sedans and wagons such as its Primera and Almera models.

We tried for 15 years in these segments, which are very crowded and competitive, said Colin Dodge, senior vice president of manufacturing and purchasing at Nissan.

It's much better to stay away from 'me-too' cars, he said, adding that its strategy was better for profitability even though the vehicles' dynamic designs might mean smaller volumes.

Our profit target for next year is bigger than for this year, Dodge told Reuters.

FENDING OFF CHINESE

Hyundai Motor Co., South Korea's top automaker, has the same idea as it also looks for a means to pre-emptively fend off competition from the eventual entry of Chinese automakers into the lower end of the market.

There will be a Chinese threat in the future; you can't deny that, said K.H. Ahn, senior vice president of Hyundai's international operations. That's why we're trying to move up fast.

A new C-segment car unveiled in Paris code-named FD and designed specifically for Europe follows this strategy, he said.

Toyota, for its part, is counting on an increase in sales of its Lexus luxury brand to improve its profit structure in Europe.

Automakers acknowledge that the road to fatter margins won't be smooth.

An increase in the share of diesel vehicles in their line-up will pressure margins, while the need to meet forthcoming carbon dioxide emission regulations of 140 grams per km for new cars means bigger spending on research and development.

Profitability-wise, (adding diesel sales) is not so favorable for us, said Tadashi Arashima, Toyota's European chief. We need to work on this more, but to achieve this CO2 140 gram target diesel is one way to reduce the overall CO2, so we have to do this.

IMPROVING MARGINS

Analysts said that with their competitive products and expanding sales, Japanese automakers are relatively well placed to improve their margins in Europe.

But they see reaching even 5 percent, a long-term target Honda has set for itself and less than half of what top Japanese brands make in the United States, as probably over-ambitious.

Margins will probably rise gradually (from the current 2 percent level) but probably not as far as 5 percent, said Credit Suisse Securities Japan auto analyst Koji Endo.

But Asian automakers say bigger sales will help them fill their production capacity in a move that would raise productivity and lower per-unit manufacturing costs.

Honda's Takagi said it would lift its output capacity in Europe by more than 80,000 units a year to 300,000 units during 2007 through its plants in Britain and Turkey.

Hyundai, meanwhile, will begin construction this year on a 300,000-units-a-year Czech plant that would help shield it from currency-related losses, which last year slashed more than two percentage points from its operating margin to around 4 percent.

Automakers across the board are also counting on the burgeoning markets in Central and Eastern Europe to prop up profits.

Demand (in these markets) is superb for models like the Pajero SUV and our one-tonne pickup truck, Mitsubishi Motors Corp. President Osamu Masuko told Reuters, noting that the products' higher margins boded well for profits.

The European region is a major contributor to our profits, and we expect profitability to rise even more, he said.

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