updated 9/12/2007 3:39:05 PM ET 2007-09-12T19:39:05

Global automakers on the hunt for new and lucrative markets are jostling for a place in India, where the car market is growing at an average of 20 percent a year, outpacing even China.

Getting a foothold in the populous country and economic powerhouse can be a tricky affair — the key to success lies in keeping the price ticket low, squeezing margins. Still, that's not deterring automakers like Renault, Hyundai and others from trying.

"Not being in India would be a huge strategic mistake," Nissan Motor Co. Executive Vice President Carlos Tavares told The Associated Press on the sidelines of the Frankfurt auto show. "It's an investment for the future."

Indian car sales totaled 1.1 million in the year ended in March, with compact hatchbacks accounting for nearly three-quarters of that. Though that number pales in comparison to China, the market is growing much faster.

J.D. Power and Associates predicts annual vehicle sales will nearly double to 2 million by 2012. Manufacturers, using their Indian bases as a low-cost export hub, they say expect annual production to rise well above 3 million by that time.

"All the car makers know that India is one of the markets offering the best growth potential," said Pete Kelly, a director at J.D. Power and Associates' automotive forecasting unit.

India's demanding, frugal consumers want inexpensive and fuel-efficient cars, durable enough to withstand potholed roads and roomy enough to fit a family of five or six. Plus, of course, an arctic-level air conditioner.

Nissan has lagged behind its Japanese rivals in tapping opportunities in India, both as a market and as a manufacturing base.

Leading Japanese automakers, including Toyota Motor Corp., Honda Motor Co. and Suzuki Motor Corp., have significantly expanded their operations in India in recent years.

Nissan made its first move to enter India this year, signing up for a passenger car venture with its partner, Renault SA of France and Indian automaker Mahindra & Mahindra Ltd.

The three are building a large plant near the southern Indian city of Chennai, which Nissan would use to manufacture and export compact cars to Europe.

Renault CEO Carlos Ghosn said Tuesday that construction at the plant isn't likely to start before 2008, with production expected to begin in 2010.

Spurred by Tata's ambitions for a super-cheap car, Nissan and Renault also are exploring the viability of a sub-$3,000 vehicle.

Renault is talking with Indian automaker Bajaj Auto Ltd. about a possible alliance to manufacture ultra-inexpensive cars. Bajaj Auto, based in the western Indian city of Pune, is one of India's leading manufacturers of motorcycles and motorized rickshaws, but has no experience making cars.

Given import taxes that exceed 100 percent, carmakers looking to break into the Indian market need to think about producing locally.

India has a competitive advantage over China, as the Indian government allows carmakers to establish wholly owned local subsidiaries, an option chosen by companies like General Motors Corp., Hyundai Motor Co. and Ford Motor Co. In China, local partners are mandatory.

South Korea's Hyundai developed the Santro for the Indian market, designing extra head room for turbaned passengers and paying more attention to the back seat, where the owners of Indian cars often sit, Hyundai spokesman Thomas Rauh told The Associated Press.

Hyundai's Indian unit has shifted its entire production of the Santro, known outside India as the Atos Prime, to the southern Indian town of Sriperumbudur, just outside the port of Chennai.

A third of the cars produced at this plant are exported to 68 countries, from neighboring Sri Lanka to faraway Mexico. By October, Hyundai will complete a second factory nearby, doubling annual production to 600,000 cars — most of them compact hatchbacks that sell for about $7,000.

Rauh said car makers once questioned whether Indians were interested in making quality cars, long considered a luxury in this once-socialist style economy. Now, Hyundai is focusing on making cars for affluent Indians and for export, leaving others to fight for the lower end of the market.

"It's a dogfight down there," he said. "It would not help us to go downmarket."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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