Tata Motors Ltd. Chairman Ratan Tata had 500 engineers work for four years designing the world’s cheapest car, convinced cost-conscious Indian drivers could live without air-conditioning and cup holders. He was wrong.

“My children need to travel comfortably,” said Neelakandan Raveendran, 51, who ordered the most-expensive version of the Nano as his first car. The bank clerk earns 24,000 rupees ($500) a month and will split the cost of the car with his daughter.

Sales of more expensive versions with extras such as air-conditioning mean bigger margins for Tata and less chance of a profit-sapping price war with rival manufacturers such as Maruti Suzuki India Ltd., analysts said.

“There is no demand for a bare-bones car,” said Mahantesh Sabarad, a Mumbai-based analyst at Centrum Broking Pvt. “Based on this experience, it does give other automakers room for pricing their products higher. They don’t have to be drawn down to a pricing war.”

Toyota Motor Corp. and Renault SA, also planning to sell low-cost cars, may be able to charge more for their models on demand from customers in India where incomes have doubled in the past eight years. Higher prices may enable automakers to boost profits in India, unlike in China, where discounts have hurt earnings amid a boom in sales.

Maruti’s 800

Profit at Maruti Suzuki, maker of half the cars sold in the country, and Tata Motors, the No. 3 carmaker, more than doubled in the five years ended March 31, 2008, on new jobs in the world’s second-fastest growing major economy.

Maruti’s 800, its cheapest car, retailing for as little as 184,894 rupees ($3,923) in New Delhi, ended its almost two-decade reign as India’s largest-selling model in 2005. It made way for the Alto, which costs 21 percent more. The 800 now accounts for less than 5 percent of Maruti’s sales, said Mayank Pareek, executive officer, marketing and sales, at the carmaker.

The cheapest Nano retails for 123,360 rupees while the top-end variant goes for 172,360 rupees in New Delhi. “Higher versions of all cars have better margins,” Debasis Ray, a Tata Motors spokesman, wrote in an e-mail response to Bloomberg questions.

“It isn’t that the cheapest car sells the largest,” said Pareek. “There is a clear shift, and customers are not just buying the cheapest car. They are willing to spend a bit more.” Maruti, the New Delhi-based unit of Japan’s Suzuki Motor Corp., has said it won’t cut the price of the 800 to take on the Nano.

Tata Motors gained 0.4 percent to 347 rupees at 1:27 p.m. in Mumbai trading. The shares have more than doubled this year.

Salaries in India will jump an average 8.2 percent this year, after six successive annual increases of more than 10 percent, human resource consultant Hewitt Associates Inc. said in February.

Toyota plans to introduce a small car in India in 2010, with an initial annual production target of 70,000 units, said Paul Nolasco, a company spokesman. The company hasn’t disclosed the details of the car, he said. Toyota has an early prototype for a model that may be able to compete with the Nano, President Katsuaki Watanabe said in Detroit last year.

Renault, France’s second-largest carmaker, and Nissan Motor Co., Japan’s No. 3, are together building a $2,500 car with Bajaj Auto Ltd., India’s second-biggest motorcycle maker.

“The cost issue for the car is still crucial,” said Pauline Kee, a Nissan spokeswoman. “We will monitor the development of the Tata Nano rollout. It’s still premature to say whether this will change our strategy” for developing the ultra-low cost car, she said.

China prices

In contrast to India, combined profits at China’s top 19 automakers fell 48 percent to 10.8 billion yuan ($1.6 billion) in the first quarter, as Volkswagen AG and General Motors Corp. discounted models. Prices of locally made cars fell 4.08 percent in April from a year earlier. China has 52 car brands and more than 100 automakers.

China’s vehicle sales may rise 8.7 percent this year to 10.2 million units, according to the nation’s automakers group. That may be enough for the country to surpass the US as the world’s biggest auto market. US sales may drop to 9.7 million, according to CSM Worldwide Inc.

With Honda Motor Co., Volkswagen, GM and Ford Motor Co. among automakers building new factories and introducing new products in India, tighter competition and lower profitability is only a matter of time, said Puneet Gupta, a New Delhi-based analyst at CSM Worldwide.

“Competition is going to be really intense,” Gupta said. The carmakers “won’t be able to enjoy the margins that they are enjoying today.”

Tata Motors will begin deliveries of the Nano in July, choosing the first customers through a lottery. In contrast to the entry-level model, the more popular mid- and top-end cars will feature amenities such as air-conditioning, fabric seats, central locking, front power windows and cup holders.

“Today, everyone around me travels in an air-conditioned car,” said bank clerk Raveendren, who is abandoning the family’s two-wheeler. “My children too, wanted one. It’s a must.”

Source: Bloomberg