Nov. 9 (Bloomberg) -- Renault SA, France's second-largest automaker, and Mahindra & Mahindra Ltd. will build a car factory in India together to expand in Asia's fourth-largest economy.

Nissan Motor Co., 44.3 percent owned by Renault, may join the venture and will make a decision within four months, Carlos Ghosn, head of both Nissan and Renault said speaking to journalists in Paris. Nissan canceled plans to build a factory with Suzuki Motor Corp. in the country.

Renault, Suzuki and General Motors Corp. aim to boost sales in India, where only seven in every 1,000 people own a car and economic growth of 8.2 percent a year is creating more affluent consumers. Mumbai-based Mahindra earlier agreed to build Renault's Logan sedan, designed for first-time car buyers.

``By working with Renault and Mahindra instead of Suzuki, Nissan will be able to make the best use of its alliance,'' said Koji Endo, a senior auto analyst at Credit Suisse Group in Tokyo. ``Nissan and Renault already share engines and parts, so further cooperation is more cost effective.''

The plant will have capacity to build 300,000 vehicles a year by 2009 and 500,000 vehicles by 2012. The companies will invest as much as $1 billion in a factory to build cars in India, two people involved in the negotiations said prior to the announcement.

Growing Market

``The Indian market one of the fastest-growing in the world and offers an excellent opportunity for growth and profitability,'' said Ghosn. He expects the Indian market to grow to about 2 million vehicles by 2010. In the year ended March, Indians bought 1.14 million vehicles.

Mahindra will own 50 percent of the factory. The remaining stake may be shared between Renault and Nissan, the people said. Mahindra plans to export vehicles built at the factory, said Anand Mahindra, managing director of the company. The location of the factory has not yet been decided, Ghosn said.

The Indian plant will initially make Logan cars and will be capable of building a full-range of models, the people said. The automakers will also build engines and power trains, the people said.

The agreement intensifies cooperation between Renault and Mahindra, which last year formed a 125 million euro ($160 million) venture to build the Logan sedan. The companies have agreed to use a Mahindra factory to build as many as 50,000 cars a year for Indian buyers.

The Logan was originally designed to cost 5,000 euros and sells for 8,500 euros in Romania and 12,000 euros in Colombia, according to Renault.

Hyundai, Honda

It will compete against offerings from Hyundai Motor Co. and Honda Motor Co., which are introducing new models in India as rising incomes spur demand for cars. The Indian economy has expanded an average 8.2 percent annually since 2003, the fastest pace of any major economy after China.

Nissan, Japan's second-largest carmaker, had planned to build a factory in India with Suzuki, Japan's largest minicar maker. Nissan will still buy small cars from Suzuki for sale in India and Europe.

Nissan and Renault have set up factories in China, Eastern Europe and Latin America to benefit from economic growth in emerging markets as their sales in Western Europe and Japan slump.

Emerging Markets

Ghosn has targeted India, Asia's fourth-largest economy, as a market where the two automakers expect growth. The company expects to sell as many as 1 million Logans a year worldwide by 2010 as it sets up plants in Russia, Iran, Morocco, Colombia and China.

In the first nine months of the year, Renault's global sales fell 3.6 percent, led by an 8.5 percent drop in its home market of Western Europe. Nissan suffered a 7.6 percent drop in vehicle sales as domestic demand plummeted 17 percent and U.S. sales declined 9.8 percent on a lack of new models.

Nissan shares rose 0.6 percent to 1,474 yen at the close of trading in Tokyo. Mahindra shares rose as much as 1.2 percent to 789.5 rupees in Mumbai. Renault shares gained 1.1 percent to 94.8 euros in Paris yesterday. Shares of Maruti Udyog Ltd, Suzuki's Indian unit, fell 3.7 percent to 903 rupees.

Nissan, based in Tokyo, expects to sell 4.2 million vehicles in the year ending in March 2009, helped by growth in emerging markets such as India and Russia.

To contact the reporter on this story: Kae Inoue in Tokyo at kinoue@bloomberg.net

Last Updated: November 9, 2006 03:35 EST