Daimler's passenger car division Mercedes-Benz Cars expects operating profit to reach the upper end of its forecast this year and aims to boost profitability to 10 percent of sales by the second half of 2012.

Daimler said on Friday Mercedes should earn more this quarter than in the first quarter and might even exceed the 7 percent operating margin in the three months to March thanks, in part, to considerable sales growth in May and June.

Higher research and development expenses to reduce its fleet's carbon emissions and costs to develop new models mean second-half earnings will likely fall short of the first half.

Nevertheless, I can say that EBIT at Mercedes-Benz Cars will be at the upper end of our forecasted 2.5-3.0 billion euros, Daimler chief executive Dieter Zetsche said in a statement following an investor presentation in Beijing.

The division posted earnings before interest and tax (EBIT) of 806 million euros ($987 million) in the first quarter.

The German carmaker anticipates it can reach its profitability targets in the next 24 months thanks to efficiency gains, a recovery in markets and a strong model pipeline.

Assuming there is no further global economic slump, we expect that Mercedes-Benz Cars can meet its return on sales target of 10 percent in the second half of 2012 and sustainably reach it starting in the 2013 business year, Zetsche said.

Bernstein analyst Max Warburton said the goal, first set five years ago, previously seemed unrealistic since Mercedes never got beyond the 2007 peak of 9.1 percent and R&D headwinds from stricter CO2 legislation were only getting worse.

Zetsche renewed Mercedes' 10 percent margin target, which a year ago would have seemed wildly ambitious but, with 7 percent-plus margins likely in H1 2010, (it) no longer looks so crazy, he wrote on Friday, adding Mercedes would likely exceed 3 billion euros in EBIT this year.

LOW VOLUME GROWTH, DATED IMAGE

Daimler's passenger car division, which includes its two struggling brands Smart and Maybach, has enjoyed the biggest rebound in margins and now leads rivals Audi and BMW, the latter of which aims to post an operating return at its car business of 8-10 percent in 2012.

Mercedes has also been the quickest to undertake significant strategic measures, deciding to shift some of C-Class production to the United States, angering its German unions.

It also entered into a strategic partnership that would see its next generation Smart built on a joint platform with Renault and even lead to further developed Renault engines being used in small Mercedes models like the A-Class compact.

A rich sales mix buoyed by resurgent demand for its S-Class flagship may have helped profitability recently, but Mercedes volume growth has lagged its rivals and it is currently the farthest behind when it comes to attractive small car offerings.

While Audi can boast of its Italian design DNA and BMW is popular for its superior handling and performance, Mercedes has struggled to rejuvenate its conservative, dated image that appeals mainly to older buyers.

According to Millward Brown Optimor's 2010 list of global brands, the gap between the value of the Mercedes-Benz marque versus BMW HAS widened -- a trend Zetsche wants to reverse with flashy new models like the SLS AMG supercar, a modern interpretation of its legendary 300SL Gullwing from the 1950s.

(Editing by David Cowell)

Daimler AG