In India, a Big Push Into Small Cars

With Tata Motors about to unveil a low-cost, very small car, automakers from Europe and the U.S. are poised to jump into the market

by Nandini Lakshman

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For the past four years, auto enthusiasts in India have been eagerly awaiting the launch of one of the industry's most ambitious projects, Tata Motors' ultra-low-cost car. Ratan Tata, chairman of India's largest private-sector conglomerate, announced in 2003 his intention to make a $2,200 car, which is now likely to debut at the Indian auto show next January in New Delhi.

Others are not just waiting to see what Tata unveils. The group's innovative venture into the very-small-car space has sparked the imaginations of a host of Indian entrepreneurs, who are planning to compete with products of their own. In the last couple of months, many Indian manufacturers—from scooter and motorcycle makers to automakers, auto component players, and various auto professionals—have announced plans to roll out low-cost cars. The price range: $3,000 and below, with engine capacities ranging from 660 cc to 1,500 cc in gasoline, diesel, and hybrid versions.

If Indians are gung-ho about the small car, so, too, are the foreigners. On Aug. 22, Toyota Motor (TM) Chairman Fujio Cho revealed at a press conference in New Delhi that Toyota plans to enter the small-car market, and India could be its first destination. Cho's announcement follows months of speculation that Toyota was considering a small car for India, based on its European hot seller Yaris, manufactured with subsidiary Daihatsu.

For a Growing Middle Class

German carmaker Volkswagen is also said to have plans for a two-door, rear-engine car. And speculation about the intentions of Ford Motor (F) is building. A Ford spokesman in India, contacted by BusinessWeek, would not comment on a news report that the U.S. company has plans for a sub-1.2 liter car.

This very-small-car segment is shaping up as a major Indian battleground, thanks to the growth in the Indian middle class and its disposable income. Companies are counting on the small-car projects to push aspirations further. "This segment is a large, but challenging, opportunity," says Ramesh Mangaleswaran, partner and head of the auto practice at consulting firm McKinsey & Co. According to him, everyone is using the price of the Tata car as a threshold. "This class of consumer is totally cost-driven, so it isn't just the initial cost but life-cycle costs that are critical," he adds.

Leading the race are ambitious multinationals that lost prior opportunities to be in India and are now anxious to catch up. The Franco-Japanese alliance of Renault (RENA.PA) and Nissan (NSANY) is one. In April, Renault and Nissan Chairman Carlos Ghosn—in India to launch Renault's compact car Logan—said he was watching the $3,000 car market and intended to offer a product for India's masses. In July, Renault began talks with Bajaj Auto, a leading Indian scooter and motorcycle company, for a $3,000 car.

Four-Wheeler Technology

Rajiv Bajaj, managing director of Bajaj Auto, told reporters that he has been working on a new indigenous technology for a four-wheeler which, if viable, the company will showcase at the New Delhi auto show in January.