By Marcel Michelson

DETROIT (Reuters) - German carmaker Daimler AG's <DAIGn.DE> premium division Mercedes-Benz Cars achieved another 10 percent in cost efficiencies in 2007 after a 12 percent productivity gain in 2006, Mercedes Chief Operating Officer Rainer Schmueckle told Reuters.

He said in an interview on Monday that the division wanted to have another 10 percent to 15 percent in efficiencies, measured in production hours per vehicle, in the next three years on a cumulative basis.

Raw material buying costs were reduced 7.5 percent to 8 percent over the period 2006-2007 and he expected further gains from purchasing practices over the next three years while the cost cuts due to Mercedes' new plan for modular car design would start to kick in from 2010.

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The modular system means that each new car is designed using common modules -- air conditioning or engines -- instead of using many separate parts.

The aim was to define 100 modules -- 50 have been finalized and the other half will be put in place in the next 1-1/2 years.

Schmueckle said Mercedes would decide in 2008 about a possible East European plant for additional capacity for the smaller A- and B-Class vehicle. "In that sector you have to be competitive on costs," he said.

Schmueckle was in charge of the CORE program at Mercedes, put in place by Chief Executive Dieter Zetsche to improve results by 7 billion euros ($10.41 billion) per year, which was achieved in September.

"At the end of September we had a return on sales of more than 9 percent," he said, adding he was confident of reaching the target of a 10 percent margin by 2010.

But he noted there were challenges ahead in 2008 with an uncertain economy, record low dollar and continued high raw material prices.

The U.S. and European car markets were expected to be flat to down in 2008, but Schmueckle said Mercedes expected its sales to rise due to its specific model line-up.

He said his job was to reduce costs further to obtain a "cushion" to deal with any new cost spikes -- such as those tied to cutting CO2 emissions.

He said he was convinced that customers, and certainly premium car customers, were willing to pay part of the costs of CO2 emission reductions, but not all.

Mercedes has four avenues for reducing CO2 emissions that will lead to reducing fuel use to 5.5 liters per 100 km (43 miles per gallon) by 2012/2015 from 7 liters on average now.

He said all engines would have direct injection and better heat management, while the trend was to make engines smaller and add hybrid versions.

While direct injection costs hundreds of euros per car, a hybrid engine would cost an extra 2,500 to 4,000 euros ($3,717 to $5,947) per car depending on the volumes.

Schmueckle said EU plans to reduce CO2 emissions were expected but he said Mercedes was surprised by Brussels' proposed price penalty of 95 euros ($141.2) per gram of CO2.

This compared to a price of some 5 euros in other areas, which penalizes the car industry out of proportion and would need to be reviewed, he said.

($1=.6726 euro)

(Editing by Maureen Bavdek)