Jan. 5 (Bloomberg) -- Toyota Motor Corp. and Honda Motor Co., Japan's largest and third-biggest automakers, predict record sales in North America this fiscal year. They would do even better if they could make enough cars.

The companies say they need to raise production in a market where they earn as much as 70 percent of their operating profit. At the Detroit auto show starting Jan. 7, they will display models designed to eat away at General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler's market share, already at an all-time low.

Toyota and Honda will both open assembly plants in North America in 2008. Growth has come at a cost for Toyota, set to eclipse GM as the world's largest carmaker this year, as a record number of recalls in Japan last year besmirched its reputation for quality.

``Toyota will need to make sure that it solves its quality problems as it expands production,'' said Atsushi Osa, who helps oversee $1.4 billion at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Both companies need more capacity as the demand is out there.''

Japan-based carmakers raised their combined U.S. market share by 2.6 points to a record 34.8 percent last year. Toyota's U.S. sales gained 12.5 percent and Honda had a 3.2 percent increase, compared with an 8.7 percent drop for GM and a 7.9 percent decline for Ford.

Record Investment

The companies are using their North American plants to the fullest to meet the surge in sales, said Koji Endo, a Credit Suisse Group analyst in Tokyo. Toyota, Honda and Nissan Motor Co. will have to boost North American production by at least 30 percent to 5.4 million vehicles by 2010, according to Endo.

Domestic production has filled the gap. Japan's auto exports to the U.S. surged 36 percent to 2.06 million units in the first 11 months of 2006, with Toyota accounting for more than half.

The three automakers plan to invest a combined record 2.69 trillion yen ($22.6 billion) in the fiscal year ending in March, up 9 percent from a year ago, as they build plants and retool or expand existing factories around the world.

At the North American International Auto Show, Toyota will display the Lexus IS-F sport sedan, Nissan will show the Rogue small crossover sport-utility vehicle, Bevel small car concept and Infiniti G coupe, and Honda will show its Accord Coupe concept.

Toyota shares fell 2.4 percent to 7,900 yen at the close of trading in Tokyo. Nissan shares declined 0.8 percent to 1,443 yen and Honda shares dropped 3 percent to 4,600 yen.

Eighth Assembly Plant

Toyota may open an eighth auto assembly plant in North America after starting production at its second Canadian plant in 2008, President Katsuaki Watanabe said last month.

``Our strategy is to build where we sell,'' Watanabe said Dec. 22. ``If sales continue to rise, we will have to make more vehicles.''

The Wall Street Journal yesterday said Toyota may announce an additional plant as early as this month, citing people familiar who weren't identified. That facility would likely be in the U.S. Southeast, have capacity to make 200,000 vehicles a year and open by 2009, the story said.

Toyota officials in Japan and U.S. declined to confirm the report.

Toyota opened its sixth North American factory in Texas in November. The $1.28 billion factory builds Tundra full-size pickups that will compete with Ford's F-150 and GM's Silverado and Sierra models.

Recalls Rise

Higher production volume has also brought an increase in recalls as Toyota uses more common parts in different models. Toyota recalled more than 1.2 million vehicles in Japan in 2006, prompting the nation's government to order the carmaker to improve oversight of defects.

Watanabe plans to hire 8,000 engineers globally by 2010 as the company's resources are stretched.

Toyota's growth plans contrast to GM's decision to shut 12 factories in North America by 2008 in response to declining demand for trucks and SUVs, while Ford, which reported a third- quarter loss of $5.8 billion, is eliminating 38,000 jobs.

Honda, which introduces a redesigned version of the Accord this year, posted a 10th consecutive year of record sales in the U.S. in 2006.

The company also opens a sixth North American assembly plant in Indiana in 2008, which will make four-cylinder engine vehicles such as the Civic or Fit subcompact.

Honda is also adding an engine plant in Canada and shifting all production of Pilot SUVs to an Alabama factory to boost Civic production in Alliston, Ontario.

`Pleasant Problem'

``Our factories in North America are operating at full capacity,'' said Honda President Takeo Fukui in an interview on Dec. 26 in Tokyo. ``This is a pleasant problem to have.''

Consumers in the U.S. have been opting for smaller and more fuel-efficient vehicles including Toyota's Corolla, Nissan's Versa and Honda's Civic instead of trucks and big sport-utility vehicles, said Ashvin Chotai, a London-based automotive analyst for Global Insight Inc.

Nissan's Chief Executive Carlos Ghosn is seeking a partner in North America to help boost output without the expense of a new factory. Spurned by GM last year in an attempt to set up an alliance, Ghosn plans to review GM and Ford plants that are slated to close to see if they are suitable for Nissan's needs.

``North American customers love Japanese cars,'' said Norihito Kanai, a senior analyst at Meiji Dresdner Asset Management Co., which manages $2.5 billion in equities in Tokyo. ``Sooner or later, we will see another wave of capacity increases.''

To contact the reporters on this story: Kae Inoue in Tokyo at kinoue@bloomberg.net; Naoko Fujimura in Tokyo at

Last Updated: January 5, 2007 01:30 EST