Small. It’s The New Big.

When gas prices shot up last summer, Millie Richardson had had it with her minivan. So the Lawrenceville, New Jersey, mom traded in her Dodge Caravan for a $17,000 Nissan Versa, a subcompact car that gets more than 30 miles per gallon. Richardson, 55, likes spending less at the pump, but she's most excited about how roomy her little car is. "My son is 6 foot 6, and he drove it," she marvels. "So it's small, but it's big—does that make sense?" What makes even more sense to Richardson, though, is this $2,500 car she's heard about that was introduced in India last month: the Tata Nano. Though there are no plans yet to bring it to America, Richardson is ready when they do. "Oh, boy, would I ever love to drive one," she says. "I would look at it as a disposable car. We have so many things in our lives now that are disposable—why not disposable cars? It would be so cheap, you could always afford a new one."

Around the automotive world, small is the new big. Driven by growing earning power in emerging markets, and rising gasoline prices and global-warming concerns in developed countries, small-car sales are hitting high gear. By 2012, forecasters expect consumers around the world to buy a record 38 million small cars annually, up 65 percent from a decade earlier. In Western Europe, the market for microcars—the tiniest runabouts on the road—is projected to rise nearly 50 percent by 2011 from 2004 levels. Even in the United States, land of the large, sales of small cars are expected to grow 25 percent by 2012 to a record 3.4 million, while SUVs and pickup trucks continue to tank. Last year subcompact sales soared 33.7 percent in the United States, driven by hot sellers like the tiny Toyota Yaris and the Mini Cooper. And Daimler had 30,000 orders in hand before it even launched its three-meter-long Smart Fortwo model in the U.S. last month. "This is not a fad," says Smart USA president Dave Schembri. "It's a trend."

But the car generating the most buzz hasn't even hit the road yet: the Nano. A car for the price of a laptop computer is transformational. Before it even goes on sale later this year, the Nano is changing the rules of the road for the auto industry and society itself. Millions of emerging-market commuters can now own four-wheel transportation, creating unheard-of mobility for the masses. But the Nano and its expected rivals will also lead to more traffic congestion, more global warming, more highway fatalities and more demand for oil. As the world approaches 1 billion vehicles on the road, the Nano and its ilk raise a daunting prospect for society: global gridlock. If the rest of the world begins buying cars at the same rate as America, the global parking lot will swell to 5.6 billion vehicles, figures Sean McAlinden of the Center for Auto Research in Ann Arbor, Michigan. "The Nano is the 21st-century equivalent of the Model T," says Global Insight auto analyst John Wolkonowicz. "The Nano will put the Third World on wheels, and that will have far-reaching implications. It's going to affect every citizen of the world."

It's already shaking up the industry. All the major car companies dispatched teams to the New Delhi Motor Show in January to snap photos and build a dossier on the new Nano. The little car from India could lead to an overhaul in the global auto industry, which was always geared to earn big profits from big cars. Now the car czars will have to learn to make a business out of selling lots of little cars that make less money, instead of relying on big rigs to make most of their money. Detroit is going through a wrenching overhaul as it retools its product line to offer more small gas sippers and fewer big guzzlers. General Motors, which last week reported a record $38.7 billion loss for 2007, can't make money at home, but turns a tidy profit in Asia selling smaller cars. "The whole story in the auto industry today is that the profits are shifting to the developing markets," says Renault- Nissan CEO Carlos Ghosn, who is working with the Indian motorcycle maker Bajaj to try to develop a $3,000 car to go against the Nano. "I'm very bullish on the $3,000 car. We're not trying to do it in Japan or Paris; we're asking Bajaj to do it. We don't know how to do a car like this, but for them it's a natural evolution."

Consumers see it as natural, too. A new generation, weaned on mini mobile phones and iPods, equates small with high tech, not cheap. "For the first time in the history of the auto industry, we have a generation that's connected globally," says J. Mays, chief designer for Ford Motor Co., which in 2010 will begin importing its stylish Fiesta subcompact from Europe. "They see an iPod or a Nokia phone or a $1,200 woman's handbag and think, 'Just because it's small doesn't mean it can't be fantastic'."

This is where the West parts company with the Nano. Today's car buyers in developed nations expect small cars to have all the accouterments they enjoyed in their XL rides. The hot-selling Mini Cooper is a prime example: sporty and stylish, it's loaded with luxurious items like a 10-speaker stereo, leather seats and an optional voice-activated navigation system, and it's priced accordingly. The well-appointed new Mini Clubman S starts at $24,600—or roughly the price of 10 Nanos. "People like the Mini Cooper because it's so well designed and well equipped; there's nothing spartan about it," says Mini U.S. chief Jim McDowell. "I don't think American consumers are looking for a car with less safety features and fewer windshield wipers."