Mumbai: Tata Motors Ltd, India’s largest automobile company by revenue, may enter the Indonesian market by striking a contract manufacturing deal with a local company, according to four people familiar with the company’s plans who did not want to be identified.

Making inroads: A file photo of the Nano assembly line in Gujarat. By Abhijit Bhatlekar/Mint

Tata Motors earlier had plans to set up a greenfield unit in Indonesia to make the Nano small car and Ace mini truck.

A spokesperson for Tata Motors said the company is in the process of crystalizing its plans for Indonesia and that “the products to be included or the manufacturing route to be adopted is being discussed".

Two of the people familiar with the matter said the approach was a low-risk one that would entail a lower investment and also help the company quickly launch its products.

“After the tepid response in the home market to the car (Nano), the company doesn’t intend to invest too much," said one.

The contract manufacturing route, another said, would not only help the firm share risk in terms of investment but also expedite the project. A third person familiar with the matter said Tata Motors is currently in talks with a few companies in Indonesia.

The move makes sense, said an expert.

“Given the current global environment, when manufacturers have redundant capacities, it makes sense for Indian auto makers like Tata Motors and Mahindra and Mahindra Ltd, which are looking at getting a foothold in the region, to opt for this route as opposed to a greenfield unit,“ said Vikas Sehgal, managing director and global head of the automotive practice at financial advisory firm Rothschild.

LMC Automotive Ltd, an automotive sales and forecasting firm, estimates the Indonesian market for light vehicles (those below 6 tonnes) to expand 16% to 792,000 units by the end of the current calendar year, over the previous year. This is expected to further go up to 1.148 million units in 2014, by which time the country will overtake Thailand to become the biggest light-vehicles market in South-East Asia.

LMC projects Thailand’s sales volumes to reach 1.145 million units that year. It expects the sales gap between the two markets to continue to widen owing to higher growth potential in Indonesia. By 2018, 1.59 million light vehicles will be sold in Indonesia against Thailand’s 1.36 million.

The fourth person familiar with the matter said production at the chosen contract manufacturer will likely commence in the second quarter of fiscal 2012-13 and that in the first year, the plan is to produce 100,000 units of Ace and Nano.

Tata’s move in Indonesia comes at a time when the country’s government is in the process of finalizing a policy to incentivize companies to build small, fuel-efficient cars.

This is along the lines of Thailand’s Eco car project that has attracted companies such as Toyota Motor Corp., Honda Motor Co. Ltd and Suzuki Motor Corp.

For Tata Motors, which opted out of the Eco car project, there’s an opportunity in Indonesia to participate in the project with its Nano model, said Puneet Gupta, an analyst at IHS Automotive, a forecasting firm.