Today’s release of the Tata Nano heralds a new era of car production that could affect the automotive market as profoundly as Henry Ford’s Model T did almost a hundred years ago. Tata Motors’ new “People’s car”, costs less than half the price of Chery Automobiles’ QQ3 and the Maruti 800, previously the two cheapest cars in the world.

The international automotive industry is now attempting to meet the challenge posed by Tata Motors by producing smaller, low cost cars of their own.

PriceWaterhouseCoopers has projected that over the next five years about half the growth in automobile sales will come from Russia, India, Brazil and China and most of the demand will be for small cars.

Last year Consultancy firm Ronald Berger estimated that global demand for small cars, costing less than $10,000 (£5,000) would grow by 30 per cent. Already there is considerable demand for small cars throughout Europe and Latin America where Volkswagen’s Gol, Renault’s Clio and Nissan’s Tsuru sell extremely strongly.

But Ratan Tata, chairman of Tata Motors says that while the Nano will undoubtedly compete with other small cars, the Nano is actually the first car in a whole new area of the market.

“The way I see it, this vehicle will cannibalise some of the lower-end car market and some of the higher-end motorcycle and scooter market. It will eat into both of those markets but it will also create a market of its own,” said Mr Tata yesterday. “It will expand the market by creating a niche that did not previously exist. It may well cannibalise some of the higher-end car market, but to a small extent, and probably only when people look to buy a second or third car.”

Last year, most major manufacturers announced their intention to build low cost cars. Toyota, Volkswagen, Fiat and Peugeot are all intending to produce a car to rival Renault’s Logan. The French automaker announced production of the Logan in 1999 after the buyout of Dacia the previous year. Building the car in Romania and Russia and stripping it of complex parts and luxuries, Renault managed to keep costs low and the result proved a huge hit. Now in an effort to produce cars that cost less than $5,000, the major manufacturers are placing pressure on parts suppliers to cut their costs and will rely on subsidiary companies to design and produce their bottom end vehicles.

General Motors aims to use its Korean subsidiary Daewoo to design a car that will retail at around $7,000. Chrysler has been producing cars with Chinese marquee Chery to tap into the burgeoning Chinese market. Toyota is also working on a low cost car which is expected to be launched in emerging markets such as India by next year. But with the Nano going on sale in India later this year with an initial production run of 250,000 units a year, Tata has a huge head start on its rivals in the race for smaller, cheaper cars.

The five cheapest cars in the world

1. Nano. Produced by Tata Motors in India. Price: $2,500 (£1,250)

2. QQ3. Produced by Chery Automobiles in China Price: $5,000 (£2,500)

3. M800. Produced by Suzuki-Maruti in India. Price: $5,200 (£2,600)

4. Merrie Star. Produced by Geely Automobiles in China. Price: $5,500 (£2,750)

5. S-RV mini SUV. Produced by Geely Automobiles in China. Price: $5,780 (£2,890)