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If Jakarta’s roads seem clogged these days, just imagine how they might look if the price of the cheapest car on the market was cut in half.

Worries of a potentially traffic-worsening car-buying spree surround Indian automaker Tata Motors’ plans to make Indonesia its production base for “the world’s cheapest car,” the Nano.

Government officials were unable to confirm on Monday whether Tata had decided to scrap its initial plan to manufacture the cars in Thailand, where it built two other models for the Southeast Asian market.

However, the country’s investment chief said negotiations were already in advanced stages.

Gita Wiryawan, chairman of the Investment Coordinating Board (BKPM), said Tata was “still doing feasibility studies” and that the government might give the Indian firm a tax break if the project proved beneficial.

Tata hopes to build 50,000 Nanos per year at a plant in the outskirts of Jakarta starting in 2013, sources close to the matter said.

It will sell the cars in Malaysia, Thailand and the Philippines as well as Indonesia.

The Nano, launched in India in 2009 amid fanfare for its stripped-down $2,500 price tag, would likely cost about Rp 45 million ($5,200)
in Indonesia due to higher taxes, according to Budi Darmadi, a director general at the Industry Ministry.

Tata has met Industry Minister MS Hidayat but needs time to test the demand in the market for its products, Budi said.
Chinese low-cost car manufacturer Geely produces Indonesia’s lowest-priced car, the 1,300cc Panda at Rp 98 million. It is eyeing a 300 percent increase in sales to 2,500 units this year.

The Indonesian market is currently dominated by Japanese cars, which comprise more than 90 percent of market share.

Thailand’s Bangkok Post newspaper, citing an unnamed source in Tata who revealed the plans, also stated that Indonesia offered more attractive incentives while Thailand lacked political stability and automobile tax structures.

Sudirman M. Rusdi, the chairman of the Indonesian Automotive Industries Association (Gaikindo), said on Monday that it was hard to tell whether Tata and its Nano would do well.

“It is hard to define what a cheap car is, and the responses from the market are hard to predict,” he said.

Sudirman, who is also president director of Astra Daihatsu Motor, a subsidiary of Indonesia’s largest automotive distributor, said Astra so far had no plans to partner with Tata.

ADM, the sole distributor of products from Japanese firm Daihatsu, also has no plan to produce a cheaper car than its Xenia, which has been one of the best-selling cars in Indonesia. A new Xenia carries a showroom price of around Rp 150 million.

Daihatsu recently announced a Rp 2.1 trillion investment in a new 80-hectare factory in Karawang, West Java, to raise its annual output to 430,000 units.

Jongkie Sugiarto, president director of Hyundai and deputy chairman of Gaikindo, said if Tata wanted success in Indonesia, it had to convince buyers that its car was of high quality and had good after-sales services so that its resale value could remain high.

Andrew Siahaan, head of research at Reliance Securities, said the Nano would face tough competition because apart from having to fight Japanese brands, cheaper Chinese cars were also in the pipeline.