PSA Peugeot Citroen is planning to build a new 700 million euro major assembly plant in central Europe, underlining its confidence about future growth, Reuters reported.

According to Reuters, Peugeot, which is one of this year's strongest players in the European vehicle sector, said in a statement that the new factory would have capacity of 300,000 cars a year, making it one of the group's biggest plants from 2006.

Reuters said, however, that, despite Peugeot's strong performance this year and ambitious long-term targets, the move looks bold given overcapacity of 20-30% in the sector and deteriorating demand for cars.

Reuters said that PSA, which currently lacks capacity, would choose the location of the plant at the beginning of 2003 and that it had begun prospecting for the best site in Central European countries, which offer decisive advantages.

“I think they have got to the point of no return with their existing capacity," Morgan Stanley auto analyst Nicholas Hirth told Reuters in London.

“Maybe these latest plans show that [Peugeot] will have the industrial infrastructure to meet its long-term goal," Hirth said, according to Reuters.

Reuters said Peugeot, which already has nine assembly plants in Europe, aims to sell four million vehicles in 2006, up from 3.25 million in 2002 and 2.1 milion in 1997, and the group currently invests three billion euros a year in developing and upgrading its plants and launching new products.

According to Reuters, Peugeot said its capacity utilisation rate has increased steadily to 114% in 2001 from 69% in 1997 according to the widely accepted Harbour index.

Peugeot, Reuters said, added that it has experienced strong growth in sales in central Europe, where its market share has increased to 12% from 5% in the last five years.

Morgan Stanley’s Hirth told Reuters the 2006 sales target as demanding given current weak market conditions and increasing competition in the next few years as both Volkswagen [new Golf line] and Renault [which has just launched the Megane II with redesigned derivatives such as the Scenic minivan soon to follow] are launching key new products in the next couple of years.

Reuters said Hirth noted, however, that the decision to opt for a low-cost country indicated Peugeot was conscious of its cost position.

“With overcapacity in the sector, it is difficult to paint capacity expansion as a positive, but they do appear to be doing it on a cost-conscious basis,” Hirth told Reuters, noting that the 700 million euro sum ($US682.3 million) indicated a low investment per unit.

PSA Peugeot Citroen is also building a new plant in the Czech Republic with Japanese carmaker Toyota. That plant will bring capacity for 100,000 small cars for each of Peugeot and Citroen on stream by 2005.

Reuters said overall car demand in western Europe has fallen almost four percent so far this year but Peugeot, helped by a range of new products [such as the 206 and 307 station wagon derivatives] has stolen market share in Europe from the area's biggest car maker, VW, which is suffering from an ageing model range.

VW does have a new Golf line in the wings but will bring out the minivan version first next year, with remaining variants – such as the hatchback and a Bora saloon replacement – not due until 2004 and 2005.

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