Entering the Ultra-Low-Cost Car Segment, as India's Tata Group intends to do with its $2,500 Nano car, is fraught with rewards and risks, an A.T. Kearney study finds.

While the profit margins are razor thin on ultra-low-cost cars (ULLCs), which the consultancy defines as those costing $5,000 or less, the volume potential is great, especially in emerging markets such as India.

“Literally the (profit) margins are 2%-3% on ULCCs,” Dan Oxyer, vice president, A.T. Kearney, tells Ward's. “That's amazing and alarming, because the smallest misstep in the launch process, or commodity indexes continuing to increase, will further erode those margins.”

Today, there are only 10 vehicles in the low-cost car (LCC) segment, defined as those vehicles priced at $6,000 or less. But the sector is growing at an incredible rate, with volumes expected to reach 17.5 million units globally by 2020, largely driven by India and Asia, with the exception of China, which has experienced a 5% decrease in the segment over the past five years due to increasing consumer wealth.

India has seen the world's largest growth in the LCC segment, with an 85% jump in the last five years. LCCs now represent 82% of all vehicles in the country, the study finds. While the LCC sector is fairly well established, the ULLC segment is in its infancy, making volume growth difficult to determine.

But when Tata surprised the world earlier this year with its plans to launch the Nano this fall, it set off a “flurry of excitement in the (ULLC) segment,” Oxyer says, noting both Hyundai Motor Co. Ltd. and the Renault SA-Nissan Motor Co. Ltd. alliance have since announced they are developing their own entries.