Honda has confirmed plans to build a new plant in Mexico that will employ 3,200 people and assemble cars for North America.

The company said it would spend US$800m to build the plant which is expected to begin operations in 2014 and will have a capacity of 200,000 vehicles a year.

Tetsuo Iwamura, chief operating officer for Honda’s North America Region, said: “With growing demand for fuel-efficient vehicles, this plant will increase Honda’s ability to meet customer needs for subcompact vehicles from within North America.

“This new plant will further strengthen the foundation of Honda’s North American business by enabling us to more flexibly respond to changing market conditions from within the region.”

The new plant will take the number of Honda car factories in North America to eight and will increase the company’s regional production capacity from its current 1.63m vehicles to 1.83m in 2014.

The new plant will be built at the suburb of Celaya, Guanajuato, about 210 miles east of Honda’s two existing plants in El Salto, Jalisco, which build cars, motorcycles and auto parts.

Honda has also recently announced plans to expand production in the US and Canada by adding a second shift to plants in Indiana, Ohio, and Ontario.

The carmaker employs more than 33,000 people in North America and the new plant will boost its capital investments to nearly US$21bn.

Honda’s announcement is a further boost for industry in Mexico. In June Mazda said it will build a US$500m factory while General Motors, Audi and Nissan are also said to be on the lookout for new investments in the country.

Mexico increased vehicle production to a record 2.3m units in 2010, making it the world’s ninth biggest carmaker. Analysts said that following a period when car companies were moving production to China, some are looking at Mexico because of its favourable exchange rate, relatively low transportation costs and free-trade status.

Beyond cost advantages, proximity to the US market is another factor also luring major auto companies to Mexico.