(FORTUNE Magazine) – HAVING LOST THE WAR for the bottom tier of the U.S. auto market, Detroit is struggling to keep a grip on the upper crust. U.S. defeats have been humiliating. Sales of European cars costing $20,000 and up have more than doubled in the past decade, while the number of American luxury cars sold has remained about flat. Bloodied and suddenly feisty, Detroit is mounting a counteroffensive. But the battle back will be extraordinarily long and hard -- especially since the biggest wave of restyled European luxury cars ever to hit U.S. shores is landing this year. Part of Detroit's comeback plan is to give the public what it so obviously wants: European cars, or at least European-looking cars. In February, Cadillac introduced a two-door Italian-bodied convertible called the Allante, priced at a healthy $54,700 -- more than twice as much as its run-of-the-mill Fleetwoods and De Villes. Buick is readying its own two-seat coupe called the Reatta, to + sell next year for an estimated $25,000. Ford is rushing out an all-new, front-wheel-drive Lincoln Continental this fall. After a five-year absence, Chrysler reenters the luxury market this autumn with an Italian-bodied convertible as well as new limo-size sedans. But look what's coming the other way. Jaguar, which has increased U.S. sales eightfold in the 1980s, is launching an all-new successor to its 17-year-old sedan, the XJ6. BMW has overhauled virtually its entire line for a bold assault on the uppermost reaches of the class, cars selling for up to $60,000 (see box). Austin Rover and Volvo are also introducing new models. And the Japanese, who made their debut last year with Honda's Acura Legend sedan, followed up in March with a sporty Legend coupe. Luxocars are the fastest-growing segment of the U.S. auto market. According to the research firm J.D. Power & Associates, car sales in the $20,000-and-up category have nearly doubled since 1980, to 1.2 million, while the auto market overall has grown only half as fast. Fueled by a growing number of well-to-do households, the $20,000-and-up segment is expected to expand another 25% by 1990. The spoils are rich. While subcompact cars such as the Ford Escort contribute only a few hundred dollars each to manufacturers' profits, cars in the $20,000 price range can put $5,000 each in the bank. It is far from clear whether Detroit's new models will recapture the hearts of its Lost Generation -- the 45-and-under crowd who constitute a growing proportion of the top-of-the-line market. Detroit lost them early to Volkswagens and Toyotas, and these buyers are not eager to return to domestic offerings. To them a luxury car is sleek, fast, and nimble. GM and Ford still sell models that are soft-riding and gadget-laden, stuffed with thick carpets and imitation wood. As a result the average age of Cadillac buyers is 56, compared with a median of 46 for Mercedes. The appeal is not just performance. Europeans deliver better manufacturing and service. The latest J.D. Power surveys of buyer satisfaction rank Cadillac a woeful 14th -- behind, among others, Mercedes-Benz, BMW, Volvo, Saab, and Jaguar. Buick and Oldsmobile place even lower. Lincoln, the highest-ranking American line, is fifth. EUROPEAN AUTOMAKERS are also better marketers, skilled at identifying and reaching profitable market segments. Buyer surveys show that Jaguar has developed a clear reputation for elegance, Volvo for safety, and Porsche for handling. At least for those attributes, their reputations are unassailable. Ask a Cadillac or Lincoln owner what his car stands for. The answer is likely to be less clear-cut. Car, dealer, and marketing all contribute to the real key to upper-market success: image. Just as no one buys a Rolex watch merely to tell time, nobody spends $61,970 on a Porsche 928S 4 (plus $650 for the gas-guzzler tax) just for transportation. A Chevrolet Caprice Classic can carry six people in satisfactory comfort and safety for a mere $12,000. Luxury car owners are making a statement about themselves. Says New York trend consultant Arnold Brown of Weiner Edrich & Brown: ''Everyone owns a Cadillac. Mercedes has attained a higher status. All the doctors these days drive Mercedes.'' Mercedes' U.S. sales accelerated 14% last year despite a series of price increases that pushed its least expensive model, the 190E 2.3, over $28,000, and its most expensive, the 560SEC sports coupe, to $70,650. Stodgy in design, spartan in feeling, Mercedes nevertheless has a reputation for superlative engineering that is reflected in quality, handling, and durability. Demand is stretching factory capacity; these days a buyer can wait two to three months for delivery. For a time it seemed that West Germany's Audi might approach Mercedes in U.S. volume, but no more. Audi sales plunged 20% in 1986 and fell another 50% in the first two months of 1987. Reason: Some of the 245,000 top-of-the-line 5000S cars with automatic transmissions sold since 1978 apparently tend to accelerate suddenly after being shifted from park into reverse or drive. Hundreds of related accidents and several deaths attributed to the problem have been reported to the government. Audi recalled the cars twice but exacerbated its woes by trying to blame the sudden acceleration on driver error. Though it still claims that nothing has been found wrong with the cars, it recalled all of them a third time in January to install a device that prevents the transmission from being shifted out of park unless the brakes are on. Audi expects to restore sales to 1985 levels by 1990. Others doubt that forecast. ''This has been a major, major setback,'' says Paine Webber analyst Ann Knight. CADILLAC is another fallen angel. The onetime ''Standard of the World'' has been struggling for a decade. In 1982 Cadillac made an abortive bow to youth by attaching its crest to a compact model called Cimarron, which buyers correctly perceived as little more than a gussied-up Chevrolet Cavalier. The nadir came in 1985, when Cadillac introduced slimmed-down versions of its Seville and Eldorado. At around $25,000 a copy, the cars cost several thousand dollars more than their predecessors, but they were smaller and looked like some other General Motors cars that cost significantly less. Sales of the newly styled models fell as much as 50%, forcing Cadillac to cut prices 5% in 1987. In the worst of all possible worlds, it had antagonized its traditional big-car customers without drawing younger small-car aficionados. Now Cadillac is on an intensive program to get back up to speed. Until the look-alike cars can be reconfigured, designers are hurriedly trying to restore panache any way they can -- by adding inches to the rear deck of the Eldorado, for instance. Analyst Maryann Keller of Furman Selz Mager Dietz & Birney observes tartly: ''Attempting to disguise the current models by adding fender extensions will not reverse Cadillac's problems.'' General manager John Grettenberger likes to brag that Cadillac has been the luxury leader for 38 years. But its 300,000-car-a-year volume has been stagnant for a decade. Even if the Allante is a sellout, as seems likely, its annual production of 7,000 will be scarcely noticeable. Sniffs Mercedes' U.S. marketing boss Hans Jordan, whose customers the car is aimed at: ''The Allante may be a very good car, but it is still a Cadillac.'' One beneficiary of Cadillac's woes has been Ford's Lincoln-Mercury division. The elephantine Lincoln Town Car ($23,126), a throwback to the land yachts of the 1960s and early 1970s, nevertheless has picked up sales from buyers who did not want pocket-size Cadillacs. The Mark VII LSC ($25,016), a luxury two- door with a sporting flair, is drawing somewhat younger buyers and now accounts for about 75% of Mark VII sales. But the German-built Merkur XR4Ti ($17,832), introduced in the U.S. in 1985 as a high-performance coupe, flopped. It was too dowdy in appearance for U.S. buyers, and only 9,000 were sold, instead of a projected 20,000. Repositioned as a sports car, XR4Ti sales rose to a respectable 14,315 last year. Lincoln-Mercury tries again this spring when it imports a German-made four- door to be called the Merkur Scorpio and offered at around $25,000. Says Edsel Ford II, great-grandson of the company's founder and head of marketing at Lincoln-Mercury: ''We talk to people who won't even consider a domestic car. They say, 'I've made money; I need a European car.' This car is for them.'' Chrysler is trying both approaches: sporty European and old-style gargantuan. It is launching a $28,000 two-seat convertible, once known around Detroit as the Lido (for Chairman Lee Iacocca's first name) but now called the Chrysler TC (for turbo convertible) by Maserati, the Italian sports car maker that built the body. Chrysler is also rolling out a behemoth, a new New Yorker with a padded half-roof and decorative wire wheel covers. The double play may be tough to execute. Observes John McNeil of Data Resources, the economic consulting firm: ''Chrysler's image is now as a maker of small, sporty cars. I think they have a ways to go before they get into doctor and dentist territory.'' AMERICAN manufacturers could do worse than imitate the Swedes. In 1980 Saab sold 15,000 of its funny-shaped cars, mostly, it seemed, to English professors at small New England colleges. Then Saab went on a performance kick, improving handling and adding turbochargers. The effort culminated last year in the 9000 Turbo ($26,000), which can reach 140 mph. Saab's U.S. sales have more than tripled since 1980. Volvo has steadfastly cultivated an image of safety and durability for its boxy cars, and it sold 113,267 last year -- twice as many as in 1980. This year Volvo introduces new models at the low and high ends: the 480, a $12,000 smaller car for new Volvo buyers, and the Italian-bodied 780, for Volvo owners who want to spend $35,000. Other new entrants are rushing into the U.S. The Sterling by Austin Rover blends traditional British coachwork and interior styling with an engine and drive train made by Honda. At $19,000 and up, the Sterling could nip into the niche for English elegance beneath Jaguar, whose new XJ6, the least expensive car in its line, will go for $40,500. But it is a risky venture. American buyers shunned Rover cars in the 1970s and again in the early 1980s because of abysmal quality. Sterling's advertisements carry few hints of its corporate parentage. More somnolent members of the Euro-luxury class are energizing their U.S. efforts. Italy's Alfa Romeo doubled the number of cars it sold in 1986, to 8,195. It will introduce a sedan selling for $30,000 or so by 1989. Peugeot of France has languished since the fading of the energy crisis took the spark out of its diesel sales. Now it is back with new television advertising that touts its 505 model, which costs up to $24,000, as a sexy but sensible performance sedan. Renault expects to make its debut in the up-scale market next year, shipping $30,000 Alpines to the U.S., though the eventual terms of its deal with Chrysler could alter that plan. Even stiffer competition is on the way, courtesy of the Japanese, naturally. Honda was first to attack the high-price market with the Acura line, launched last year. Concedes Mercedes' Jordan: ''Acura is a legitimate contender in the $20,000 to $30,000 price range.'' In March, Acura introduced a two-door Legend sport coupe that sells for up to $26,000. That's as much as the fanciest Saab or a small BMW. Acura expects to sell up to 50,000 Legends this year. By year-end Mazda will introduce the 929, a four-door sedan that looks like the hot-selling Mercedes 300E. George Peterson of California's AutoPacific Group says he expects to see Nissan in the market perhaps as early as 1988 with a big-engine car based on the superstreamlined CUE-X show car; Toyota should join the fray by 1989.

THE JAPANESE have no choice. Korean and Malaysian cars are attacking them at the lower end of the market, where they cannot make much money, and Japanese exports to the U.S. are constrained by an informal agreement. Solution: Sell bigger cars, which return more bang for the buck and give a make's current owners a way to move up.

That simple strategy will be tough to execute. The Japanese have little experience building luxury cars because the category barely exists in Japan, where big cars are slapped with an extra tax. The strong yen is pushing prices higher. And no car can achieve an upscale image merely by claiming it. Says Jaguar marketing chief Michael Dale: ''Nobody has managed to sell both a $10,000 car and a $40,000 car. How many people today would buy a $40,000 Toyota?'' European manufacturers figure their U.S. sales increases will slow in 1987 to 5% or so. Buyers need time to adjust to steeper prices. As Jaguar's Dale points out, ''The pound is up 10% in the last 12 months. We can't jump prices 10% overnight.'' Can Detroit take advantage of the lull? U.S. automakers have a history of responding sluggishly to foreign conquests of domestic markets. Their missteps so far in losing much of the luxury car market do not augur well.