Japan buys luxury European cars, not mass models

CHIBA, Japan, Oct 25 (Reuters) A strong euro and a falling demand are making life in Japan hard for European carmakers, but luxury brands such as BMW and Porsche say sales in the world's third largest market remain solid.

Last year, all imported cars, including cars made abroad by Japanese firms, made up just 6 percent of the Japanese auto market.

By comparison, Japanese carmakers have a 13.3 percent market share in Europe.

A 17 percent rise in the euro versus the yen in the past two years may be hurting margins, but BMW and Porsche say the strong euro is not affecting their sales.

''The market is weak so probably there is less demand for the Europeans also,'' said Christopher Richter, auto analyst at CLSA Asia-Pacific Markets. ''But they remain popular, and they earn good money,'' he added.

Anthony Millington, the director general of the Tokyo office of the European Automobile Manufacturers Association (ACEA) said Japanese automakers were benefiting from a weak yen, which makes European imports more expensive.

A growing gap in incomes among the Japanese is helping high-end luxury cars. ''But it's pretty much destroyed the market for medium-sized cars,'' he said.

Millington said import brands have passed on some of the cost of the strong euro, but not all. ''If we did, we'd completely be priced out of the market.'' ''Volumes are down too, but the real damage has been on the profitability,'' he said. ''Profits earned from Japan in the past have been tasty icing on top of the cake -- but not the cake.'' HEADS TURNING Both BMW's marketing head Stefan Krause and Porsche sales and marketing head Klaus Berning shrugged off suggestions at the Tokyo Motorshow that the euro was making their life difficult and Volkswagen chief executive Martin Winterkorn said enthusiastically that he saw heads turning when he drove in Tokyo with a Tiguan sports utility vehicle.

''This has not been of any influence on us,'' Berning told Reuters about the euro rise.

''We have a natural hedge because we buy a lot of transmission in Japan, and that which is not hedged naturally, is hedged financially,'' he added. ''We are in the safe zone.'' In the January-September period, sales of foreign cars in Japan fell 7.3 percent to 172,086 vehicles, roughly in line with the overall market's 7.6 percent drop.

Among gainers were Audi, plus 8.3 percent, BMW Mini up 0.6 percent, Porsche up 16.7 percent and Alfa Romeo which rose 5.4 percent.

Decliners were Mercedes, down 9.4 percent, Peugeot down 18.5 percent, Renault fell 17.3 percent and VW slipped 7.3 percent while BMW declined 4.0 percent.

BMW's Krause, however, said these registrations figures were not a good indication of the market and he said the retail sales of BMW in Japan were only slightly down and the group was on track to end 2007 with higher sales than in 2006.

But Mercedes-Benz Cars executive vice president Klaus Maier acknowledged the headwinds: ''Japan is a declining market and that also hits us,'' he said, adding he expected annual Mercedes sales to stagnate at the current levels of 45,000-50,000 cars a year.

REUTERS SR BD1238