Honda has started work on a new 200,000-unit factory to build the Fit (also known as Jazz in some markets) near Celaya in central Mexico. The company said it plans to start production in two years.

The Celaya facility is Honda’s second in Mexico and will ship cars to the US as well as Brazil, Latin America’s largest market. US Fits are currently built in Japan.

The move is to counter the strength of the yen and follows a similar decision by Mazda which has also started to build a factory in Salamanca, in the same region as the Honda factory.

Nissan is also pondering another Mexican factory.

Honda is investing about US$800m in the plant and will take on around 3,200 employees.

''We have high expectations for Mexico,'' Honda president Takanobu Ito told reporters at the groundbreaking ceremony.

Honda chose Mexico, he said, because of its ''promising domestic market and high labour quality'' as well as the fact that a number of auto parts manufacturers are operating there.

Honda has an option to add another plant at the Celaya site which would double annual capacity to 400,000 units.

''It's possible depending on developments in the North and Latin American markets,'' Ito said, adding that Honda would consider assembling compact or subcompact vehicles other than the Fit, if it goes ahead with the plan.

Separately, Volkswagen has predicted that its output in Mexico will rise 20% this year to 615,000 units thanks to strong demand in the US.