Indian customers' unmatched sensitivity to pricing has meant the market has been dominated for nearly 30 years by Maruti Suzuki India Ltd. The unit of Japan's Suzuki Motor Corp has been able to build $5,000 cars such as the Maruti800 hatchback by using old, fully depreciated equipment provided by its parent in the 1980s.
Tata Motors took the low-cost theme to the next level with the release last year of the $2,000 Nano, which has achieved only modest success so far.
While the 10 new compact cars launched at the Delhi auto show this week will not be matching that level of pricing, rivals are seeking to inch closer.
Japanese automakers, for one, will enter uncharted territory by expanding parts procurement to Indian suppliers for goods such as sheet steel normally imported from Japan.
"The key to lowering costs was to look for locally available materials," said Yoshinori Noritake, chief engineer of Toyota Motor's Etios family car, one of the highlights of the Auto Expo this week.
The Etios is expected to be the cheapest offering in Toyota's global line-up when it goes on sale in late 2010 in India, with parts sourced from suppliers aligned with Maruti Suzuki and Tata Motors, such as Tata Steel, Noritake said.
Toyota said it has not set a price for the Etios. But most expect it to compete head-on with Honda Motor's hatchback based on the New Small Concept also unveiled at the auto show and which Honda said would cost less than 500,000 Indian rupees ($10,990).
The need for big volumes to lower per-unit costs means that some, including General Motors and Nissan Motor, will use India as an export base for their tiny cars, joining market leaders Maruti Suzuki and Hyundai Motor.
GM, which generated buzz at the Delhi show with an aggressive sticker price of 343,000 rupees ($7,111) for the Chevrolet Beat, is earmarking one-fifth of the car's production for exports.
"The Beat can be a real game changer in the Indian mini-car segment," Karl Slym, chief of General Motors India said at the launch. GM India expects a 50 percent rise in sales this year, with production of the Beat due to start at the end of 2010.
Nissan, for its part, is due to start producing a new compact car at its first Indian factory in May, supplying it to more than 100 countries. Export volumes will start at 110,000 units in 2011 -- more than what Honda will make after 12 years of producing cars in India.
"We want to raise this to 180,000 units in the near future," Nissan Motor India CEO Kiminobu Tokuyama told Reuters.
Despite being a newcomer to India, Japan's No.3 automaker will use 97 Indian suppliers covering 85 percent of the car's parts, Tokuyama said.
Germany's Volkswagen, which began production of the Polo hatchback at a new factory near Mumbai last month, also plans to leverage its recent comprehensive tie-up with Suzuki Motor to share components with Maruti Suzuki.
The Polo will start with 50 percent local content, which Volkswagen plans to raise to 75-80 percent in two to three years.
Unlike its Japanese rivals, Honda has no plans to export its compact car, code-named 2CV. A variant of the car will be produced and sold in Thailand, also in 2011, where Honda will use its ample capacity to export to neighbouring countries.
But Honda will embark on a different kind of experiment.
With the addition of the 2CV, Honda's 100,000-units-a-year factory near Delhi will produce a fifth model on its sole assembly line -- a first for Honda, known for being among the most flexible manufacturers in the industry.
"Going from four to five is a huge step, and impossibly difficult if you're familiar with the production process," said Yuji Matsuzaki, director of manufacturing at Honda's local unit.
"In that sense, India is going to be the stage for a very important undertaking."