Peugeot to build new central European plant

PARIS, Oct 28, 2002; Reuters reported that Europe's second biggest carmaker PSA Peugeot Citroen said on Monday it planned to spend 700 million euros on a major new assembly plant in central Europe, underlining its confidence about future growth.

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

Despite Peugeot's strong performance this year and ambitious long-term targets, the move looks bold given overcapacity of 20-30 percent in the sector and deteriorating demand for cars.

The company, currently lacking capacity, said it 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," said Nicholas Hirth, an auto analyst at Morgan Stanley in London.

"Maybe these latest plans show that (Peugeot) will have the industrial infrastructure to meet its long-term goal," Hirth 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.

Peugeot 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.

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

At 1032 GMT, PSA shares were up 2.64 percent at 43.52 euros, broadly in line with the DJ European Auto Stoxx Index.

AMBTIOUS

Hirth described the 2006 sales target as demanding given current weak market conditions and increasing competition in the next few years. Both Volkswagen <VOWG.F> and Renault <RENA.PA> are launching key new products in the next couple of years.

He 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," said Hirth, noting that the 700 million euro sum ($682.3 million) indicated a low investment per unit.

Peugeot is also building a new plant in the Czech Republic with Japanese carmaker Toyota <7203.T>.

Overall auto demand in western Europe has fallen almost four percent so far this year, but Peugeot, helped by a raft of new products, has stolen market share in Europe from the area's biggest carmaker, VW, which is suffering from an ageing model range.