TOKYO – Europe is becoming a happier hunting ground for Japanese auto makers.

“It's been a difficult year overall for the automotive industry, reflecting the state of the European economy, but the Japanese have been doing quite well," says A.N.R. Millington, director general of the Tokyo office of the European Automobile Manufacturers Assn.

In the year’s first nine months, overall vehicle sales in Europe were off 1.5%. Most major auto makers suffered declines, such as the 3.4% dip for DaimlerChrysler AG, 3% decrease for Volkswagen AG and 2% drop for BMW AG.

The reverse is true for Japanese auto makers, admittedly with smaller volumes. Nissan Motor Co. Ltd. posted a sales gain of 7.7%; Honda Motor Co. Ltd. 7.4%; Toyota Motor Corp. 6.1% and Mazda Motor Corp.

33.5%. Mitsubishi Motors Corp. was the exception with a decline of 3.4%.

European buyers are being wooed by Japanese auto makers these days as never before.

Toyota Yaris is built in France.

"In the past, their European models were mostly leftovers from the Japanese and U.S. markets,” says Chris Richter, senior analyst with HSBC Securities (Japan). “Now they've begun addressing European styling tastes. The Toyota Yaris, Honda Jazz, Nissan Micra and Mazda Demio were all designed with Europe in mind."

Indeed, two-thirds of the Japanese vehicles sold in Europe now are made there at 12 plants in seven countries. Local production has increased more than eightfold since 1998, to 1,098,287 units in 2002.

"Higher capacity utilization of 90% or more in their European plants has enabled Japanese auto makers to avoid the 10% tariff on imports," says Koji Endo, head of Equity Research, Credit Suisse First Boston Securities

(Japan). This, plus a savings of $1,500 shipping costs for each imported car, has helped them make "a little bit of profit in Europe."

Adds Richter: "Margins in Europe of 3% to 5% are much lower than the

12% to 18% in the U.S., so Japanese auto makers are not making nearly as much profit there. But the U.S. market is such a cash cow for them that plenty of spare money is available to finance conquests elsewhere in the world."

Foreign exchange rates have helped as well. The yen has weakened against the euro, making Japanese vehicles more price-competitive. "European buyers are cost-conscious and Japanese models are less expensive," says Millington.

Another critical factor is the introduction of diesel engines, which power 40% of the cars sold in Europe. Until recently, Japanese auto makers were losing out by not making them available. Now they do.

So far, Toyota has made the greatest overall sales gains and is the most aggressive, with nine-month sales of 525,466 units, for a 4.8% market share. Nissan is second with sales of 298,954 vehicles and a 2.7% share, followed by Mazda (158,435) and Honda (155,558).

And although the Japanese are not yet a decisive force in Europe, their total market share has risen to 12.6% from year-ago’s 11.5% and 10.4% in 2001.

How much higher can they go? Nobody knows for sure, but says Endo: "Competition is more difficult for the Japanese in Europe than it is in the U.S. There are more domestic makers, and the quality and fuel economy of European cars is good. A market share of 30% is impossible. It would be hard to achieve 20%. However, 15% market share is quite likely by 2010."

Millington adds a cautionary comment on the changing nature of competition: "I don't detect greater nervousness among European auto makers about the Japanese threat,” he says. “They are not complacent, but the Japanese are still not in a position to rival them in design and flare."