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PARIS, Oct 28 (Reuters) - PSA Peugeot Citroen , Europe's second-biggest carmaker, said on Monday it would spend 700 million euros on a plant in central Europe, underlining its optimism for growth despite flagging demand for cars.
Peugeot has posted the strongest internal growth of any carmaker in the past four years, thanks to a refreshed and popular model line-up. Several of its plants are close to their capacity limit, working in three shifts and at weekends.
The Paris-based company said in a statement that the new factory would have the capacity to build 300,000 cars a year, making it one of the company's biggest plants from 2006.
Despite Peugeot's strong performance this year and ambitious long-term targets, the move looks bold given overcapacity of 20 to 30 percent in the sector and falling car demand in Europe.
"On the positive side this is an extremely confident message," said an analyst at a French bank who asked not to be named. "But the bottom line is it might be slightly over ambitious."
At 1356 GMT, Peugeot shares were trading up 3.9 percent at 44.04 euros, outpacing a 2.8-percent gain by the wider DJ Stoxx European autos index .
Peugeot said it had begun looking for the best site in central European countries, which offer decisive advantages, and that it would choose the plant's location early next year.
The group noted it had seen strong growth in sales in central Europe, where its market share has increased to 12 percent from five percent in the last five years.
Peugeot, which already has nine assembly plants in Europe, aims to sell four million vehicles in 2006, up from a goal of 3.25 million in 2002 and 2.1 million in 1997.
"Maybe these latest plans show that (Peugeot) will have the industrial infrastructure to meet its long-term goal," said Nicholas Hirth, an autos analyst at Morgan Stanley in London.
AMBITIOUS
Hirth described the 2006 sales target as demanding given current weak market conditions and forecasts that competition is set to tighten.
Both Volkswagen AG , Peugeot's bigger European rival, and its French peer Renault SA are launching key new products in coming years.
Peugeot, helped by new products such as the Peugeot 307 and Citroen C3, has stolen market share in Europe from VW, which is suffering from an ageing model range.
Still, overall auto demand in western Europe has fallen almost four percent so far this year. Hirth noted that the decision to opt for a low-cost country indicated that 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," said Hirth, noting that the 700 million euro sum ($682.3 million) indicated a low investment per unit.
Wages in the auto industry in the Czech Republic are about six times lower than in France, say industry experts.
Peugeot already plans to build a 1.5 billion euro new plant in the Czech Republic in a joint venture with Japanese carmaker Toyota Motor Corp .
The French carmaker said its capacity utilisation rate has increased steadily to 114 percent in 2001 from 69 percent in 1997, according to the widely accepted Harbour index.
It said it invests three billion euros a year in developing and upgrading its plants and launching new products.