UPDATE 3-Margin-squeezing discounts catch up with VW's Audi
* 2012 operating profit up 0.6 pct
* Operating margin narrows to 11 pct from 12.1 pct
* CEO says 2013 will be "at least as challenging"
* Audi plans vehicle assembly at Russian VW plant (Edits)
By Andreas Cremer
INGOLSTADT, Germany, Mar 12 (Reuters) - German luxury carmaker Audi, source of nearly half Volkswagen's profits, was forced by a weak European market to make margin-squeezing discounts that left earnings stagnant
Growing competition in Europe and China brought price pressures "that even Audi couldn't fully extricate itself from", finance chief Axel Strotbek said at the carmaker's annual press conference in Ingolstadt.
Chief Executive Rupert Stadler offered little hope for a marked recovery this year, saying that it "will be at least as challenging as last year" and that Europe will take three years to overcome its debt and unemployment problems.
Operating profit was almost flat last year, edging up 0.6 percent to 5.38 billion euros ($7 billion) despite a 10.6 percent sales lift to 48.8 billion euros, the company said on Tuesday.
Audi, which contributes about 40 percent of VW's group earnings, saw its profit margin drop to 11 percent from 12.1 percent in 2011, though still above its 8-10 percent target range.
The situation in Europe, destination of half of Audi's global sales, implies very many risks, said Hamburg-based M.M. Warburg analyst Marc-Rene Tonn. "A certain amount of restraint and caution is perfectly conceivable," he said.
Parent VW, sales of which have held up better than rivals such as Peugeot in Europe, last month scaled back its forecast for another record year in 2013. It said the goal now is to match 2012's 11.5 billion euro operating profit.
Audi said that it shouldered 1 billion euros in additional sales costs last year, indicating greater efforts by the luxury manufacturer to use discounts when launching models such as the new A3 compact and the A8 hybrid sedan.
Similarly, VW's introduction of the seventh-generation Golf compact, based on the same platform as the A3, led to heavy discounts on the old model as it was phased out.
"We saw a big run-out of the Golf 6 when they were pushing quite hard to clear about 100,000 units," a senior sales executive at another volume carmaker said. "Since the introduction of the Golf 7, the value destruction has calmed down a bit."
Audi stood by its goal to beat last year's record 1.46 million vehicle sales in 2013 and increase deliveries to more than 2 million by 2020, benefiting from a planned expansion of its SUV offerings and growing spending on foreign capacity, the CEO said.
The carmaker will build its first factory in Mexico to build the Q5 SUV and increase capacity at plants in China and Hungary, production chief Frank Dreves told reporters.
It is also planning to assemble vehicles at a VW plant in Kaluga, Russia, he said before reiterating the 2020 goal to snatch the luxury-sales crown from German rival BMW. ($1 = 0.7684 euros) (Additional reporting by Laurence Frost; Editing by Helen Massy-Beresford and David Goodman)