The race to build really cheap cars

To automakers' astonishment, cheap cars are also proving to be just as popular in established markets as they are in the developing world. Renault originally expected to sell the Logan only in Eastern Europe and other emerging markets. But in 2005, the automaker started offering it across Western Europe. Buyers have flooded showrooms to get behind the wheel of the no-frills model. Yesterday's cheap cars (remember the laughably bad Yugo?) failed to take off in the West because of poor quality. The new generation of cheap cars will be sturdy and reliable and will appeal to Western consumers who want to spend money on things other than transport. "It's all about price for performance," says Frankfurt music teacher Elmar Kolle, who in November replaced his Ford (F ) Mondeo with a marine-blue Logan sedan. "I'd have to pay 5,000 euros [$6,500] more for a comparable car" from another manufacturer.

The shift to cut-rate wheels is jarring for an industry that has fixated for at least a decade on premium cars and their fat margins. BMW earns an estimated $3,300 per car on average, vs. Logan's $400 per car, according to Ferdinand Dudenhöffer, director of the German Center for Automotive Research. And when you get down to a sub-$3,000 sticker price, some experts say it'll be tough to cover the cost of the parts involved. "Any way you look at it, it will be difficult to be profitable," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

So why bother? Western automakers who don't join the fray risk being shut out of the growth in emerging markets. Even worse, they could give ambitious challengers a dangerous foothold in the West — not unlike the one they gave the Japanese by ignoring their low-cost, fuel-efficient models in the 1970s. China's Geely makes a model for $3,900 and it's aiming to export a car to the U.S. by 2010. Suzuki Motor Corp., which sells cars starting at $4,400 in India, will launch a new compact in 2008 and export it to Europe. Tata's $8,500 Indica compact sedan already sells in southern and eastern Europe. "The Chinese and Indians are coming," says Patrick Pelata, chief of strategy and product planning at Renault. "If we don't do our job, we will give them a huge slice of market share. We have to keep moving."

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The majority of low-cost cars will range from $5,000 to $10,000, depending on size and features. Analysts say adding equipment required for safety and emissions control in Western markets would automatically bring the price of a cheap Chinese or Indian car up to $6,000 to $7,000. Many cars in India, for example, are sold without airbags or antilock brakes, standard features in the West. "There is a huge cost element to safety," says Hormazd Sorabjee, editor of Autocar India, noting that crash-test facilities alone are a gigantic investment.

Still, India remains the chief test bed and battleground for really cheap cars. Hyundai uses its plant outside Chennai as a global hub for its small-car production. By tapping local suppliers and manufacturing, the Korean upstart is able to offer a popular entry-level subcompact, the Santro, at a starting price of $6,300 in India, while still making features such as air conditioning and power steering standard.

Moving along the pristine, high-tech production lines of its Chennai plant are also cars for export to Europe, Russia, and Latin America. Outside the plant, a vast sea of new cars, some 65 percent of them earmarked for export markets, fills Hyundai's orderly lots. "My only problem," says Lheem Heung-Soo, managing director of Hyundai India, "is limited capacity." He's ramping up production fast: So are all his rivals.

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