(FORTUNE Magazine) – IN THE PAST two years, the upscale auto business has turned upside down. Lincoln has shed its me-too look by rolling out distinct models that appeal to ^ a new set of buyers. After years of decline, Cadillac has recaptured customers with extra length and fender skirts. Honda has buried doubts that the Japanese could crack the U.S. luxury market by selling 70,770 Acura Legends last year. European automakers have been staggered by price increases brought on by the weak dollar. Their U.S. sales have skidded 26% in two years. A 1986 Porsche 911 Turbo coupe went for $48,000; the 1989 version costs $70,975. For the $48,000 price of a Jaguar XJ6 Vanden Plas sedan, a buyer can get two $24,960 Cadillac Coupe de Villes after typical dealer discounts. (The prices cited in this story are base sticker prices that usually include automatic transmission, air conditioning, and power steering and brakes. Items such as sunroofs and leather seats are often extra, as are gas-guzzler and sales taxes and transportation costs, which can amount to $565.) There is light at the end of the tunnel, but it is an oncoming Japanese bullet train. By fall Toyota and Nissan will introduce luxury cars known as Lexus and Infiniti in spanking new dealerships. Both will be available in sleek flagship sedan models costing $35,000 to $40,000 and designed to offer comfort, performance, and technology equal to European cars costing far more. Within a year or two, Mazda and Mitsubishi are due to move in with their own upscale vehicles. More is at risk here than bragging rights at a polo match. Luxury cars -- generally those with sticker prices of $20,000 and up, many shown in the portfolio that accompanies this article -- are the jackpot in the rich U.S. auto market. Manufacturing profits are lush and dealers reap gross margins of 20%, vs. 12% to 16% on less expensive cars. High-glitz models create a halo for humdrum ones, which explains why so many ads for the $11,495 Chevrolet Camaro also display the $31,545 Corvette. Luxury car sales declined modestly last year to about one million units, out of a total of 10.6 million cars sold in the U.S. But they are projected to outpace the industry, perhaps reaching 1.5 million units by 1994, as the population gets older and presumably richer. Mystique and ostentation are no longer the main attraction. Today even status-seeking shoppers are more conscious of value, quality, and durability. Says Robert J. Sinclair, president of Saab-Scania of America: ''There has been a shift from ego- aggrandizement cars to safe-investment cars.'' Volvo's solid but sexless models outsell every other European luxury make. Ownership costs have risen from excessive to exorbitant. A 35-year-old Manhattanite owner of a $59,200 Porsche 911 pays $7,232 a year for collision and liability insurance ($1,200 more than a woman of the same age). With car payments stretching out six or seven years instead of four, buyers come into showrooms less often and their trade-ins are worth less. The government has stopped subsidizing ownership. The Tax Reform Act of 1986 phased out the deduction on consumer loans and eliminated the one on sales taxes. It now takes five years instead of three to write off the cost of a car used for business. ''People were stretching to buy the best,'' says BMW's U.S. marketing head Carl W. Flesher Jr. ''Now they buy what they want.'' What they want is sometimes not even a car. U.S. sales of Range Rover, a clunky-looking $35,800 four-wheel-drive vehicle, passed 3,400 last year even though owners spend more time exploring Rodeo Drive than they do the backwoods. Some 40% of them never drive off the road. Price alone does not a luxury car make. A fully loaded model from a mass producer, such as the $25,367 Pontiac Bonneville SSE, does not qualify as a luxury car while a $25,562 Lincoln Town Car does because of the brand and exclusivity. Pontiac outsells Lincoln nearly four to one. IF YOU WANT to park the most expensive American or Japanese cars available now in your driveway, you needn't part with more than $30,000 or so. Should you choose American, you get a big V-6 or V-8 engine, room for up to six passengers, worldclass air conditioning, and a pillow-soft ride. The Japanese build smaller, better-handling cars with more sophisticated engines that run more smoothly and consume less gas. Spending between $30,000 and $40,000 puts you into the bucket seat of an Autobahn cruiser that goes 120 miles per hour or more: the best Saab, Volvo, or Audi sedan, or a middle-of-the-line Mercedes-Benz or BMW. The ride will be harsher than in American cars but the handling will be superior. Creature comforts will be substantial though not lavish. Invest between $40,000 and $75,000 and you are associating with Europe's best: even higher speed, exquisite ride and handling, and greater amenities, such as a six-disc compact disc player. Examples: the $57,000 Jaguar XJ-S V12 convertible or the $72,280 Mercedes 560SEL sedan, a favorite of Swiss bankers. Spend more than $75,000 and you become an art collector. You own an example of hand-built machinery made in quantities of a few hundred or less. With exclusivity comes obligations. Your exotic car may demand more attention because more things can get out of adjustment. A few autos sacrifice so much comfort for speed and handling that you will not want to drive them every day. Choices range from the zoomy $83,800 Ferrari 328 GTS and the $183,000 Aston Martin Volante convertible (Prince Charles owns one) to the sublime $205,500 Rolls-Royce Corniche convertible. Image counts for a lot, which makes Cadillac's U-turn the more remarkable. Little more than a year ago, Cadillac's laurel-wreath crest was overgrown with weeds. The four-cylinder Cimarron, built on a Chevrolet Cavalier platform, was an embarrassment, and the downsized Eldorado and Seville were laughingstocks. The $56,533 Italian-bodied Allante, Cadillac's bid for international respectability, quickly turned into a white elephant. Beset by engineering problems, it sold at only half of production capacity despite dealer incentives up to $7,500. To recoup, Cadillac returned to its roots. While other luxury carmakers went prospecting for younger buyers, it embraced the sixtysomething crowd. It scrapped the Cimarron, lengthened the Eldorado, and made a hulking V-8 engine standard across the line. The already humongous de Ville and Fleetwood sedans grew another nine inches. With its dealers newly energized, Cadillac has increased de Ville and Fleetwood sales by 25% in the current model year. In 1989, Cadillac expects to sell 262,000 cars, still below the glory days of a decade ago when this General Motors division sold 351,000. Lincoln, Ford Motor's luxury brand, has focused on specific buyer groups to ring up equally flashy results. Americans bought 191,624 Lincolns last year, breaking a record set back in 1977. The typical owner -- a 60-year-old earning $60,000 a year -- loves the Town Car sedan, a squared-off, high-roofline holdover from the late 1970s. More affluent customers (median income $90,000) queued up for all 47,424 Euro-look front-wheel-drive Continentals produced last year, when they made their debut. The $28,032 sedan has a six-week waiting list. Lincoln still has two weak sellers: the perhaps too-contemporary Mark VII, and the German-made Merkur Scorpio, whose Teutonic looks scare off buyers. Honda's Acura has successfully captured younger customers (average age 45, median household income $88,000) who already own Japanese cars and might have | been tempted by a European model. It has skewered two popular myths. One, promoted by Detroit, was that no one would pay more than $20,000 for a Japanese car. The other, propagated by the Europeans, was that the Acura Legend, which starts at $22,600 for a sedan, would flop because it lacks heritage and breeding. All Acura offers is superb engineering backed by a dealer organization that leads every other in J.D. Power's customer satisfaction survey. Half of Acura's dealerships are unprofitable, not only because of high startup costs but because the cars rarely return for service. PROUD Mercedes-Benz saw its sales fall off only 7% last year. But in the lower reaches of the market, where the competition is stiffest, the Europeans are losing more ground. Most makers are chasing the same customer: a male aged 39 to 55, who lives in the Northeast or the Sunbelt, attended college, has a professional or managerial job, and makes $60,000 or more. More than one- quarter of all Porsche owners, to use one extreme example, live in California. Consider the plight of BMW. While launching a successful assault against Mercedes at the top end with its $70,000 V-12-powered 750iL, it lost its grip on less affluent buyers. Sales of BMW's 325 models, those once-omnipresent yupmobiles, tumbled 35% to 38,346 last year. BMW is working hard to revive the 325i by promoting a $24,650 version so it does not lose entry-level customers, but it may have created too rich an image for itself. Two other German makers, Porsche and Audi, have suffered grievously. Porsche committed a classic error by introducing a low-end model powered by an anemic -- by Porsche standards -- four-cylinder engine. Says Brian Bowler, Porsche's new U.S. head: ''We realize that we blurred our reputation a little bit in the past.'' The car has been discontinued, but Porsche's U.S. sales plunged 48% in two years. In March a federal government study finally exonerated Audi of the sudden acceleration problem that has bedeviled it for three years. The study concluded that drivers were probably to blame for stepping on the accelerator instead of the brake. But after seeing 62% of its sales evaporate since 1986, Audi has a long way to come back. To lure buyers, it offers to guarantee the resale price in a future trade-in by making up the difference between the value of a used Audi and an average of the resale prices of a comparable Mercedes-Benz, BMW, and Volvo. The British have also blundered. Austin Rover devalued the Sterling, introduced in 1987, with persistent defects and poor dealer relations. Instead of selling 20,000 cars a year, Sterling managed just 8,901 in 1988. It has since rebuilt its distribution network, developed a hatchback model, and conjured up a new advertising campaign emphasizing its British heritage. MAKERS of low-volume exotics have fared better. Buyers are waiting up to two years to pay $140,700 for the breathtaking Ferrari Testarossa coupe. Bentley sales have grown from only a handful in 1985 to 350 a year since Rolls-Royce started marketing it as a sporting alternative to the stately Rolls. Lotus, which has its hands in the deep pockets of new owner General Motors, boosted U.S. sales of its high-tech $67,500 Esprit two-seaters 91% last year. Even more exotica is on the way. Acura is readying a mid-engine 160-mph sports coupe with Formula One flash, the $50,000-plus NS-X. Corvette is preparing its own $50,000 speedster, the 180-mile-an-hour ZR-1. The car comes with an extra key that cuts off four of its eight cylinders so parking lot attendants cannot drag-race it. Mercedes is developing a $100,000 V-12-powered supercar for the early 1990s with active suspension that levels the car in a corner and windows that adjust their tint to the sunlight. As freeways fill with luxury cars, the most successful manufacturers will have to stick even closer to their customers. With more Japanese automakers entering the market, ''there simply is not room for all those cars,'' says BMW's Flesher. Since the population is aging, Cadillac and Lincoln can keep targeting their older buyers. Honda, Toyota, and Nissan will grow more quickly by coaxing American owners, 16 million strong, to trade up. Independent consultant George Peterson of the AutoPacific Group in Newport Beach, California, figures the Japanese will outsell the Europeans in the U.S. by 1991. The Europeans will have to find safe niches, hold prices down, and polish their images. As Jaguar marketing chief Michael Dale likes to point out: ''One of the things that the Japanese cannot make is a Jaguar.'' Not yet, anyway.

BOX: THE TEN TOP-SELLING LUXURY MAKES

U.S. SALES IN 1988 CADILLAC 266,548 LINCOLN 191,624 ACURA 128,238 VOLVO 98,497 MERCEDES-BENZ 83,727 BMW 73,359 SAAB 38,490 CHEVROLET CORVETTE 23,281 AUDI 22,943 JAGUAR 20,727

SOURCE: AUTOMOTIVE NEWS