Worlds Cheapest Car 2450$

June 27 (Reuters) - Nearly 50 years ago, France's Renault and India's Mahindra & Mahindra Ltd. planned to make a 7,000 rupee ($172) car for India, but were frustrated by local rules restricting foreign investment.

A lot has changed in the past half century, and more than a dozen car makers are now circling the global auto industry's new battleground -- to make cheap, small cars for the world's big emerging economies.

India's market for cars alone should nearly double to 2 million by 2010.

Rising incomes and new model launches are boosting sales of bigger sedans and premium cars, but manufacturers' focus is on the lower end of the market that accounts for about two-thirds of annual unit sales.

Stirred by Tata Motors Ltd.'s plans to launch the world's cheapest car, at just 100,000 rupees ($2,450), next year, Renault/Nissan <7201.T> and Mahindra are mulling a $3,000 model.

Toyota Motor Corp. <7203.T>, Honda Motor Co. <7267.T>, Fiat and Volkswagen AG are also looking to build low-cost cars to compete in fast-growth emerging markets from India and China to Russia.

But, despite technology advances, cost savings and shared platforms, there is precious little margin in cheap, no-frills models, so car makers need volume sales.

Analysts say Tata Motors will have an edge, but warn that making it a viable model will be a tough challenge.

"It was an idea the Tatas had that is close to becoming a reality, whereas for the others it is still only a concept," said Asit Bhandarkar, fund manager at brokerage JM Financial. "But whether they can also make a profit is anyone's guess."

NEW MARKET

Indian roads were revolutionised more than two decades ago by the arrival of a small car, the mini Maruti 800 from Suzuki Motor Corp.'s <7269.T> unit Maruti Udyog Ltd. , that was both affordable and appealing compared to the boxy, utilitarian Fiats and Hindustan Motors' Ambassador cars available then.

Maruti, which has more than half the local car market, has since launched new entry-level models such as the Alto, but still sold over 79,000 mini 800s in the year to March. The 800 sells for about $4,800.

Some analysts believe Maruti will cut prices of the 800 or reposition it, and rival Hyundai Motor Co. <005380.KS>, India's second-biggest car maker, will also take on Tata Motors.

Jim Press, a senior managing director at Toyota, has said a smarter option may be to buy a used Toyota for around $2,000.

There is a tax benefit to small car makers: India cut a tax on small cars to 16 percent from 24 percent last year, helping sales of models up to 4 metres long and with up to a 1.2 litre petrol or 1.5 litre diesel engine.

Tata Motors chairman, Ratan Tata, reckons the Indian market for his car alone could be 1 million units a year at a "mature stage" and could be extended to the rest of Asia and Africa.

Only 8 in every 1,000 Indians has a car, compared with 300-500 in many Western nations.

Tata has said its low-cost car will be a 4-door model with a 600cc rear engine for both petrol and diesel versions. Venture partner Fiat will advise on engineering and development, and Tata may use satellite units owned by local entrepreneurs for assembly. Analysts expect initial output of 100,000-250,000 units.

Some analysts expect a car priced as low as the Tata model could target up to a fifth of India's traditional two-wheeler market that hit more than 7 million units last year.

"There's an overwhelming desire to own a car, and upgrades from two-wheelers will be quicker if there are more small car offerings," said Mohit Arora at J.D. Power Asia Pacific.

The research firm estimates upgraders make up 27 percent of car buyers in India, with repurchasers accounting for two-thirds.

Indian motorbike maker Bajaj Auto Ltd. is also experimenting with a small car, though it says this won't be aimed at the cheaper end of that market.

THIN MARGINS

Tata would have to sell more than 41,000 cars a month to give it an operating margin of 8 percent at a retail price of at least 125,000 rupees, estimates Enam Securities -- versus margins of 9-14 percent on small cars priced at least double that.

Tata Motors sold 144,690 Indica cars in the year to March.

"They are looking to develop an entirely new market and even if margins are thin, you can make money on volumes and by selling a package of finance, servicing, spares, etc," said Pradeep Saxena, vice president of research firm TNS Automotive.

In addition to volatile fuel and component costs, there are concerns about meeting safety and environment standards.

Tata Motors has said it is exploring the use of re-engineered plastic from General Electric and modern adhesives instead of welding, prompting questions from rivals including the Suzuki chief.

Toyota has said it would be difficult to offer a cheap enough car that would satisfy its level of quality and reliability.

But analysts insist a low-cost car has its place in India.

"A cheap car will sell well," said JM Financial's Bhandarkar.

"Whether it's a Tata or a Maruti or any other brand is what remains to be seen."