Peugeot, the French car maker, has said it plans to build a large new car plant in central Europe as part of its expansion plans.

Analysts said the news was a further indication of the motor group's optimism, despite huge overcapacity and and difficult times in the sector as a whole.

Peugeot said it would decide on the exact location next year and begin production in 2006. It plans to build 300,000 cars a year at the site, making it the group's largest factory so far.

A factory in central Europe will allow the group to significantly reduce labour costs and meet growing demand from the region.

Outperforming

While car sales at rivals Volkswagen, General Motors and Fiat have been falling in western Europe, Peugeot has bucked the trend.

Maybe these latest plans show that [Peugeot] will have the industrial infrastructure to meet its long-term goal

Nicholas Hirth, Morgan Stanley

The French group, owned by PSA Peugeot Citroen, has outperformed rivals for the last four years thanks to its popular small and medium-sized cars such as the Peugeot 307 and Citroen C3.

Earlier this year, the company extended its reach into China, where it formed a joint venture with China's number three domestic carmaker, Dongfeng Motor Corp.

Analysts viewed the decision to build a new factory in Europe as a good sign.

"This is an extremely confident message," said one analyst.

Peugeot said the new factory would have the capacity to produce 300,000 cars a year, making it one of the company's largest plants.

It plans to spend 700m euros (�440m) on the new factory.

Cheery investors

The Paris-based company is also sticking to plans to increase its global car production from 3.25m in 2002 to 4m in 2006.

The move to central Europe will allow Peugeot to do this at a reduced cost, thanks to lower local wages and a solid availability of skilled labour.

Wages can be as much as eight times lower in Eastern European countries such as the Czech Republic, where Peugeot already has plans for a 1.5m euro plant as part of a joint venture with the Japanese motor group Toyota.

"Maybe these latest plans show that [Peugeot] will have the industrial infrastructure to meet its long-term goal," said Nicholas Hirth, a motor analyst at Morgan Stanley.