The World's Cheapest Wheels.(Business)(Tata Nano)

Byline: Jason Overdorf; With Keith Naughton and George Wehrfritz

When Tata Motors set out to build a $2,500 car, people said it couldn't be done. This week the company will unveil its vehicle of the future.

Tata Motors is best known as a maker of industrial trucks from India's rust belt that launched the country's first completely indigenous passenger car, the Indica, 10 years ago. Next week the company will unveil another revolutionary new vehicle that will throw down the gauntlet in the highly competitive race to capture the first-time-buyer segment of the world's automobile market. Tata's not-so-secret weapon: the car is cheap. Unbelievably cheap.

Back in 2003, when chairman Ratan Tata revealed his plans to build a car that would cost less than 100,000 rupees (about $2,500 in today's dollars), rival carmakers said it couldn't be done. As time passed, and Tata kept at it, they hedged. Maybe it will be more like an enclosed motorcycle, they said. As tantalizing details about the car's design leaked, they started to get worried. Finally, in April, Renault-Nissan's Carlos Ghosn announced his own plans to build a $3,000 car in partnership with Indian motorcycle maker Bajaj Auto.

The move signaled that the race to create the world's best-selling starter car was on. The stakes are incredibly high, which is why the international auto industry is descending in unprecedented numbers on the New Delhi Auto Expo, where Tata will reveal the design for its People's Car for the first time on Jan. 10. The vehicle could have almost as large an impact in India as the original Volkswagen had in Germany back in 1938 -- perhaps doubling the size of India's passenger-car market overnight, and delivering a much-needed boost to the manufacturing sector in a country that has long suffered from so-called jobless growth. By encouraging parts suppliers to develop innovative ways to slash costs, it could also help build a highly efficient supply chain for the Indian automotive industry.

But the tremors won't be felt only in India. Small cars like VW's Gol, Nissan's Tsuru and Renault's Clio are already the top sellers in Latin America and Europe, and PricewaterhouseCoopers estimates that about half the growth in automobile sales between 2006 and 2011 will come from Brazil, Russia, India and China, countries that are expected to buy mainly small, cheap vehicles. Even in gas-guzzling America, where the cheapest car is today the $10,000 Chevy Aveo, buyers are warming up to subcompacts. As a result, virtually all of the world's major automakers are striving to develop cheap, fuel-efficient small cars that can first be sold in emerging markets, then exported to the West.

Until the past year, these cars were meant to be sub-$10,000 vehicles like the Renault Logan. Now, with Tata setting the limbo stick much lower, the price target has been slashed to below $5,000. Add to that Tata's pole position in the bidding to buy the premium Jaguar and Rover brands from Ford Motor Co., and it truly looks like the Indian carmaker has arrived.