By Yoko Kubota
TOKYO (Reuters) - Japanese automakers like Honda Motor Co <7267.T> and the Toyota-Daihatsu group <7203.T> <7262.T> have a problem: the smallest cars they make are very big in Japan - and only Japan.
Consider Honda's hi-tech N BOX, a four-passenger microcar that combines some of the utility features of a much larger SUV - the seats roll down to load a bicycle or two - and the fuel-sipping economy of a tiny, 660-cc engine.
For the first half of 2013, the zippy N BOX was the best-selling car in Japan's popular vehicle category that now represents almost 40 percent of vehicles on the road.
But outside Japan, the concept of the so-called kei car, a term derived from the Japanese word light, is mostly unknown. Now that could change. The Japanese auto giants are considering exporting the technology to emerging market countries.
"We have fairly low-priced cars in those markets already, but in India and markets like Indonesia, we need even smaller, even more affordable cars," Honda's chief spokesman Masaya Nagai said.
Rising fuel costs and a fast growing middle class in the world's second and fourth most populous states make them likely to be the first microcar customers.
As a first step, companies such as Honda have designed their kei cars - the kei is pronounced like the letter "k" - in a way that makes it easier to produce them overseas.
"We spent a long time nurturing the kei car technology in Japan, and we think it has the potential to be useful not only in developed markets but also in emerging markets," Honda's Chief Executive Officer Takanobu Ito told reporters in June.
Honda is not alone.
Toyota Motor Corp is using technology from its affiliate Daihatsu Motor Co, a kei-car specialist, to develop minicars for Indonesia.
Mitsbubishi Motors Corp <7211.T> is looking at selling kei-concept cars in Africa, where President Osamu Masuko plans to attend a distributors' conference this month. Nissan's Chief Operating Officer Toshiyuki Shiga also said last month that kei cars have a potential of going global.
While few Japanese carmakers have tried to popularize microcars outside of Japan, there are exceptions.
Suzuki Motor Corp <7269.T> and Daihatsu have targeted India and Southeast Asia since the early 1980s, building a credible presence although their technology differs from that used to build Honda's kei.
More recently, General Motors Co
Honda believes its advanced microcar technology and the favorable marketing conditions in India and Indonesia mean that the time is right to export the kei concept.
Joost Geginat, an autos market expert with Roland Berger consultancy in Singapore, predicts Japanese companies will invest a total $1.8 billion to produce kei-concept cars in Indonesia.
MICROS IN MACRO RACE
Now the race in the microcar market is heating up. Honda, Japan's No.3 automaker most famous for its Civic and Accord cars, is betting on small cars to meet its aggressive target of selling 6 million vehicles globally a year by March 2017 from current sales of around 4 million.
To do so, Honda aims to double sales in emerging markets to account for half of total vehicle sales, and its kei car technology could play a key role in that.
Indonesia, where over a million cars were sold last year, is one such market. Last month, Jakarta rolled back fuel subsidies, raising motor fuel prices by an average of 33 percent. At around the same time, Indonesia signed into law a Low Cost Green Car (LCGC) program to promote small cars such as the kei, though it is on hold pending review.
Geginat says Toyota, Daihatsu, Suzuki and Honda could roll out a combined 500,000 LCGCs, valued at under at $10,000 each, a year once the new law is in place.
Honda is looking at taking the microcar technology to Indonesia and neighboring Malaysia, Hiroshi Takemura, who oversees Honda's small car operations, told Reuters last month.
The company has designed its N BOX to share certain structures with the Fit, Honda's global compact car also known as the Jazz, meaning the two cars can be manufactured on the same line, said Yoshiyuki Matsumoto, Honda's managing officer.
Honda currently builds the Fit or Jazz at 10 plants around the world, including Indonesia and Thailand.
One challenge for Honda and other Japanese automakers is pricing. Honda's N BOX starts from around $12,500, slightly more expensive than the outgoing model of the Fit that starts from about $12,200.
To produce a sub $10,000 no-frills car in Indonesia, features like the turbocharger, vehicle assist system and airbags may have to go, and an old-fashioned key used to start the car instead of an electronic smart key.
($1 = 101.0850 Japanese yen)
(Reporting by Yoko Kubota; Editing by Kevin Krolicki, Norihiko Shirouzu and Jeremy Laurence)