NEW DELHI -- Renault SA and Nissan Motor Co., the allied automakers, plan to manufacture engines in India for a new range of small cars from the next financial year, a first for the allied companies.
Nissan's resurrected Datsun brand of cars will be powered by these engines, as will a new small car that Renault is developing in India, a person familiar with the matter told The Wall Street Journal recently.
"The engines are being developed in Japan and France," the person said. He said the new cars will have nearly 100% of their parts sourced from Indian companies when they are introduced in the financial year that starts April 1, 2014.
Nissan cars in India currently have around 85% to 88% of their parts sourced from vendors in the country.
Renault-Nissan needs to manufacture engines in India for its new vehicles to be competitive in an increasingly crowded market for small cars. Market leader Suzuki Motor Corp. (7269), Hyundai Motor Co., Tata Motors Ltd. and General Motors Co. (GM) manufacture engines in India, which helps them to keep prices low.
India levies duties of up to 60% on imported automobile engines.
Nissan said the Datsun will cost from $3,000 to $5,000. That price will be difficult to achieve without a locally made engine, which is the most expensive component of a car.
Manufacturing engines in India would also shield Renault-Nissan from currency fluctuations and save on shipping costs. The Indian rupee fell roughly 12% against the U.S. dollar since May.
Nissan will unveil the Datsun, a subcompact hatchback, on July 15. The car will be sold from early next year in India, and introduced simultaneously in Indonesia, Russia and South Africa.
Renault plans to build in India the cheapest car in its lineup in 2015, which will cost between 200,000 rupees ($3,279) to 400,000, Marc Nassif, managing director of Renault India, said recently.
Driving Renault-Nissan's decision to ramp up production in India is the country's rapidly growing hunger for cheap, small cars.
"India is slated to be the biggest small-car market in the next couple of years," said Rakesh Batra, who heads the automotive practice at head of the auto practice in India at consulting firm Ernst & Young LLP.
Other car companies see similar trends and have spent billions of dollars building and expanding factories in India, despite a slowdown in car sales in India.
Car sales slumped 12% in May, the seventh consecutive monthly decline, but automakers believe that the slowdown is temporary.
Sales figures show that India has a strong appetite for small cars.
Small cars, such as the Datsun, accounted for three quarters of the nearly 1.9 million cars sold in India in the last financial year that ended on March 31, 2013.
Auto makers and analysts expect small cars to continue to comprise the bulk of the car sales in India in the coming years, despite rising demand for sedans and sport-utility vehicles.
"The share of sedans and SUVs will continue to grow but it will happen only in stages and will be concentrated in the urban areas. The smaller towns and cities will continue to prefer small cars," Mr. Batra said.
Renault-Nissan also hopes to export cars made in India to the rest of the world, especially to other developing countries with middle classes looking to buy their first car.
The new small cars will be made at the Renault-Nissan factory on the outskirts of the southern port city of Chennai. By December, the plant will have the capacity to churn out 480,000 vehicles a year, which is two years ahead of schedule.