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NOIDA, India (Reuters) - Toyota Motor Corp (7203.T) will start talks this week with its affiliate Daihatsu Motor 7262.T to build and sell small cars in India, where it has so far struggled to crack the cheaper end of the market. The Japanese carmaker aims to double its share of India's passenger vehicle market to 10 percent by 2025 and Daihatsu's small cars will be key to achieving this goal, a company executive said. The launch of Daihatsu cars in India could help Toyota increase its share of the entry-level, no-frills car sector, that accounts for about two-thirds of total sales in the country and is dominated by rivals such as Maruti Suzuki (MRTI.NS), Hyundai (005380.KS) and Honda (7267.T). "To fight in the small car market we need more support from Daihatsu ... Toyota by ourselves cannot develop it," Kyoichi Tanada, Toyota's CEO of Asia, the Middle East and North Africa told Reuters in an interview. The comments by the world's biggest carmaker are a tacit admission that it has failed to win over India's cost-conscious car buyers more than two decades after it started selling cars in Asia's third-largest economy. A decision on when Daihatsu cars will be brought to India will likely to be taken before the end of this year, Tanada said in an interview at India's biggest motoring event on the outskirts of the capital New Delhi. Toyota is to buy its remaining stake in Daihatsu as part of its push into compact cars for emerging markets such as India, which is expected to expand to become the world's third-largest car market by 2020 from fifth place now. "In a market like India there is still need for small cars. As soon as possible I would like to introduce that small car," Tanada said. He said Toyota would also need to consider the Indian government's policy on safety and environmental issues before deciding which models to launch and when. Toyota launched its first no-frills car, the Etios sedan, in 2010 and, a year later, the Liva hatchback. In trying to control costs and keep the price low, the company was criticized for compromising on quality and finish. Sales did not take off as expected, hurting plant utilization levels. Toyota will propose to Daihatsu to use part of the carmakers plant in southern India to build vehicles rather than setting up its own facility, Tanada said, adding that Toyota can spare about half, or 100,000 units a year, of manufacturing capacity. Another challenge for Toyota will be low awareness about the Daihatsu brand in India. To save spending on creating brand awareness and setting up a separate sales network, Tanada says it could consider selling Daihatsu cars under the Toyota brand. To avoid diluting its premium brand image in India, Toyota could look at a sales and dealership strategy similar to rival Maruti Suzuki, which sells its premium models through a separate network of dealerships called Nexa. Suzuki Motor Corp (7269.T), that controls Maruti Suzuki, said its position in India and other markets is under serious threat from Toyota's buyout of Daihatsu.
Writing by Sumeet Chatterjee; editing by David Clarke