Erik Granholm's boy turned 16 and father and son headed for the Ford dealer to look at used cars. Years later, the elder Granholm still recalls the visit with distaste.

"There was this salesman, dressed in cheap clothing and walking around talking loudly, chewing gum and spitting," he says, the hard edges of his native German language making his tone vaguely arch. Granholm, a normally polite and gracious man, studied the fellow, and his anger built. Finally, he called him aside:

"You are a disgrace! You are the type who gives all car salesmen a bad name!"

Erik Granholm, too, was a salesman of cars -- the distinctive motor cars of Mercedes- Benz. The man in the cheap clothing stared at him blankly.

Says Granholm: "Some people you can't insult even when you try."

WELCOME to the top of the heap. Mercedes-Benz. Not the machine, but the metaphysical place where people arrive when they arrive. The feigned balance between long-suffering modesty and cock-crowing conquest. The timelessness of craftsmanship for people often one generation from the Sears catalogue.

Mercedes-Benz, the advertisements proclaim, a triumph of "ergonomic" science -- the blending of man to machine. The truth of that hyperbole goes further, because Mercedes-Benz has blended the psychic meaning of its machines with the yearnings of the American well-to-do -- particularly the educated, urban, technocratic elite common to Washington, where Mercedes sells at a rate almost three times its U.S. average. It was not always so.

In 1965, Mercedes sold only 12,000 cars a year in America. It was an odd luxury car then, usually sold without automatic transmission, air conditioning, power windows or power steering. Unlike America's "boulevard ride" luxury liners, Mercedes seats were rock hard, its suspension muscular. The company sold engineering. With shrewd advertising, studied Americanization of its cars, keen insight into the well-to-do's self- image, Mercedes became symbolic of tasteful consumption. Americans will buy 85,000 Mercedes autos this year, paying $22,850 to $56,800 each.

Sovereign Mercedes. It is the car 25- year-olds most often name as the one they would someday like to own. It is so ingrained in the American status psyche that research by R. H. Bruskin Associates for Mercedes shows that half of America's affluent describe its owners as people with "very good taste."

Mercedes has become so potent a symbol that it, ironically, now faces the same high- brow backlash that Cadillac suffered two decades ago. The urbane well-to-do turned from Cadillac to Mercedes, says Richard P. Coleman, coauthor of Social Standing in America, because people who owned bowling alleys drove Cadilacs -- people with "a lot more money than class."

"So all the people with money and class turned to Mercedes to show they had both," Coleman laughs. "Mercedes has become old hat as a way of showing you've made it . . . Now drug dealers are buying it!"

The never-ending battle of status one- upmanship has come full circle: "If someone picks you up in a Mercedes," says Joseph Epstein, editor of The American Scholar and an observer of America's status peccadillos, "it means, as they used to say at the race track, 'He's holding.' He's got the dough. But it doesn't say he's got taste."

The people at Mercedes are hardly deterred by such critics. The number of American families earning more than $50,000 a year is expected to jump 79 percent in the next five years -- and luxury car sales are expected to rise from about 1.5 million to 2 million. Everybody is chasing America's affluent: Germany's Audi, BMW and Porsche, Sweden's Volvo and Saab, France's Peugeot. A Toyota Cressida can cost $20,000. Lincoln-Mercury's Merkur bowed in this spring at $19,500 fully equipped. Cadillac will pview its new $50,000 two-seat sports car next spring. Lincoln-Mercury has positioned its Continental Mark VII LSC, a $25,000 European-style luxury car, grille-to-grille with Mercedes.

But Mercedes-Benz was first. It was selling engineering when Ford was selling girls in convertibles. It was selling safety when Corvairs were still in the showroom. It was selling details before General Motors had begun to sweat.

Today, Mercedes no longer sells only cars. It sells the Mercedes Mystique -- a concoction of engineering excellence, social status and customer pampering. Mercedes came upon the secret of selling to Americans by intuition, then by system. But the concept remains simple.

Says Erik Granholm: "Successful people like to deal with people who are successful." It is the heart of the Mercedes Mystique.

EDWARD SOBOTA is cut from the cloth of America' early Mercedes buyers.

Stationed in Berlin in the 1950s, he rode Mercedes taxicabs, decided they were the best cars in the world -- and that someday he would own one.

Back in Washington over the next two decades, he drove a Rambler, a Dodge, a Datsun -- the whole time coveting a Mercedes. It is clear to him now, at age 52: Mercedes was a gauntlet he'd cast down for himself. He'd grown up the son of a butcher in a Polish neighborhood of Chicago. He'd worked his way through Georgetown University. He'd spent years moving up the business ladder. He wasn't rich, but he was proudly comfortable.

So in 1973, he finally did it -- bought a Mercedes 220 diesel for $8,500, when a Chevy would have cost him $4,000. It was a practical choice, Sobota reasoned. The diesel got 27 miles to the gallon, didn't require tune-ups, and by reputation kept running for up to 200,000 miles -- Sobota replaced the engine last year, at 198,200 miles.

"You got a Mercedes?!" asked a cousin in Chicago. "I've never known someone who had a Mercedes."

"I can't deny the prestige value," Sobota says. "It's nice. I liked the idea that I had arrived."

Sobota worked on his own cars, and when replacing the brakes on his son's Datsun, screws snapped as he turned them. In 12 years, Sobota never had a Mercedes screw snap. In this, he saw a value lesson: such details, diligently added one by one, Sobota told his son, determine who is the best and who is not. Watching the details, after all, is how Ed Sobota got ahead. MERCEDES was selling fewer than 300 cars a year in the United States while Ed Sobota was admiring Berlin's taxicabs. The Vanderbilts owned a Mercedes. So did Al Jolson, Gary Cooper, Bing Crosby. Mercedes dominated European racing, its cars were considered among the finest in the world, but in America, they were exotic.

In 1965, Germany's Daimler-Benz created Mercedes- Benz of North America and formed an Aerican dealership network. It then went to Madison Avenue, where Hank Bernhard was a young ad man. "We were in on the creation," says Bernhard, who today is president of McCaffrey & McCall, which now handles the Mercedes ads.

The ad men inteviewed the owners of Mercedes and other luxury cars, and it was a revelation: Mercedes owners described their cars in surprisingly functional terms. They talked about suspension, steering and safety -- despite past Mercedes ads with an overt snob appeal.

The greatest surprise, however, was that Mercedes owners hadn't traded in Cadillacs or Lincolns. They'd traded Chevrolets. Mercedes owners weren't necessarily rich. They were engineers, architects, accountants, airline pilots -- precise, often self-made men used to the careful adding up of details.

In 1966, Mercedes launched an American ad campaign that has varied little since: "It won't mush on curves at 70, won't swerve in a panic stop at 80, and won't give a fig if you run it all day at 90. The Mercedes-Benz -- a most unflappable car." After the headline followed 24 paragraphs of copy, including a diagram of a reclining seat. The "long copy" concept, common in selling upscale products today, was laughed at by some auto ad execs. But it flattered the intelligence of Mercedes' somewhat defiant clientele, explained why an austere car cost $6,000, appealed to an emerging backlash against Detroit's planned obsolescence and tickled a nascent antistatus consciousness.

"Unconventional," a heavily British voice declared in Mercedes TV ads. "Defiantly so."

The approach seems transparent today: the old PBS/Alistair Cooke appeal. Twenty years ago it was something of a revolution.

RED LIPSTICK, red nails, designer clothes -- and a red Mercedes 380SL sport convertible, the $46,000 final touch in the creation of the new Sheila Katz.

Six years ago she was a 28-year- old housewife and property manager driving around in a Pinto station wagon and listening to beautiful music on the AM radio. She'd worked her way through college. She dressed conservatively. She didn't laugh a lot.

"Lady, you're growing old before your time," a client, who drove a Corvette, suddenly told her one day. The guy was right! That weekend she bought a burgundy MG convertible with silver stripes and wire wheels -- and through the new jobs, the new wardrobe, the new effervescent personality, the new Mercedes, Sheila Katz never looked back.

"I created a new me," she says.

"I'm not going to tell you it's an investment. It's part of me. It's a basic extension of my personality . . . I like to make a statement of my personality and demeanor: 'I'm alive and vibrant and I have so much to share.' That's more or less the image. I've come to party! . . . "

"I don't think I'm a princess or a snob. And it makes me sad that people see me driving it and that's what they think . . . I don't have to show I'm wealthy, but that I'm a free spirit . . . My husband pays for everything. I work to paint my nails and buy clothes and buy new skis. But I didn't always. I used to work to help pay the mortgage. I belong to the hairstyle-of-the-month club . . . As long as I can do it, I'll enjoy it. I like all the glitter and the glamor."

The Mercedes seems to say it all. "Sometimes, when I'm making coffee in the morning," she says. "I stand at the window -- and just look at it."

ERIK GRANHOLM was a natural Mercedes salesman.

He was friendly but formal, imposing but ingratiating. He disliked dickering, preferring to give his best price first. If a person was obnoxious about the price, Granholm might show him the door, saying, "Don't worry, I can't afford one either." His was a style absent of hype -- and it appealed to the well-to-do in a way that "PICK UP THE PHONE! GIVE US A CALL!" never could.

In 1966, Granholm's first year at American Service Center in Arlington, he sold about 60 cars. Last year, he sold 216 -- and earned more than $100,000. "I always try to be the best," he says.

As the marketing research had predicted, Granholm sold cars mostly to "pipe smokers with clipboards" in the early days. But that changed as Mercedes' U.S executives fought to Americanize the cars. It was a constant struggle to make Mercedes officials in Germany understand the American mindset. Hans Jordan, Mercedes U.S. marketing director, recalls this debate: The American climate demands air conditioning.

"We have sunroofs," the German engineers said. The engineers were driven across the American Southwest in the summer. Air conditioning was conceded.

"We will remove the sunroof," the engineers said.

"No, Americans want air conditioning and sunroofs."

"Well! These Americans are crazy!"

But by the early '70s, the balance was struck: new styling, air conditioning, power steering, automatic shift, power windows, leather interior -- and rock hard seats and muscular suspension.

The oil crisis hit in 1973 and sealed Mercedes' success when the company repositioned its new higher performance diesels -- always viewed as expensive economy cars because of their high fuel mileage, low maintenance costs and long life -- as strict luxury cars in America.

They became Mercedes' biggest seller -- and from 1965 to 1984 Mercedes U.S. sales jumped almost sevenfold.

During these years, Erik Granholm began to see a new clientele. The pipe smokers were still there, but also doctors, lawyers, accountants looking for a luxury car clients wouldn't consider gaudy -- and a car that would hold its resale value. But Granholm also saw more people buying pure status:

"Don't you have anything more expensive?" one customer asked Granholm of the Mercedes 500SEC, which costs $56,800.

KAREN TOBIA thought she'd die when her husband, Angelo, mentioned buying a Cadillac. "I wouldn't be caught dead i a Cadillac," she said.

Angelo didn't completely understand. At 32, he'd just been promoted to regional vice president of The Hecht Co. and figured it was time to "step up," time to get rid of the Audi he'd bought when he was promoted to store manager.

"There's just enough Long Island, New York, in him to want a Cadillac," Karen jokes. She grew up in Lake Forest, Ill. -- with the 16th heaviest concentration of Mercedes cars in America. She considered Mercedes the epitome of good taste. "There's just something about it," she says. "It's not status. It's class."

Angelo didn't disagree, but he wasn't sure he'd reached the proper station in life for a Mercedes. Nevertheless, he had wanted a Mercedes for more than 15 years -- since his older brother, a premed student at Purdue University, took him for a test ride in a Mercedes 250SL convertible sports car.

"If everything goes well," his brother told him, "I'm going to own one of these someday." Angelo never forgot that ride.

After a decade of 12-hour days, he decided his wife was right: They bought a $27,000 Mercedes 300 turbo diesel.

"It was an announcement to my family that I'd made it," says Angelo, who in the next few years adjusted to the world of Mercedes.

"They bring your car to you, not throw you the keys and say, 'Mr. Tobia, the car's in pod 43,' pamper you." At first, that made Angelo uncomfortable. He'd stand in the Mercedes waiting room and count the number of women in fur coats, the men dressed not like young executives but like chairmen of the board, in $600 suits.

"Here I am in my $300 suit," Angelo laughs. "I didn't feel in that arena. And then you grow into it. You get used to it."

THE KIND OF selling style that came intuitively to Erik Granholm eventually came to be the Mercedes sales system.

Marketing research revealed that non-Mercedes owners tendto describe the cars as having "prestige" or "status," but Mercedes buyers usually mention engineering, resale value and safety. Says an in-house Mercedes sales magazine: "The psychological reasons are obvious: to ascribe one's main buying impulse to anything so ephemeral as prestige, when dealing with a $30,000- plus autombile, would risk embarrassment and exposure as a social climber."

Tips for Mercedes salesmen from their magazines:

*Knowledgeably concentrate on Mercedes' engineering. It "reinforces the intelligence" of buyers and steers discreetly around the mine field of prestige.

*Being direct, honest and candid also can flatter the intelligence of people constantly bombarded by commercial hype.

*An "oblique" mention that a customer shares qualities with a Mercedes owner in the same profession can be a "useful approach," as is sending flowers or a bottle of "good wine" a few days after a purchase.

*Remind a new owner when it is time for his 1,000- mile checkup: It "clothes initial ownership with a special aura."

Mercedes also moved to extend the self-affirming, cocoonlike world of the "Mercedes ownership experience." It announced a four-year, 50,000-mile warranty (Mercedes owners in Europe get a one-year warranty). And it launched its exclusive Roadside Assistance Program giving America's 700,000 Mercedes owners an emergency service phone number to call seven days a week.

Then Mercedes stooped to conquer by introducing the compact 190 for about $23,000. It was in part aimed at the increasing number of 35- just above $50,000 a year. In two years, the 190 became Mercedes' most popular car -- with 75 percent of its buyers saying they wouldn't own a Mercedes if it weren't for the 190. They are, as Mercedes says, people "reaching up."

Not long ago Mercedes also introduced "The Exclusively Mercedes-Benz Collection" -- travel bags, pens, lighters, umbrellas, crystalware and mugs inscribed with the Mercedes three-pointed star.

If the changes at Mercedes seem to hint at increased attention to the sale of prestige, the detailed efficiency of it all still impresses Mercedes customers, most of whom are businessmen familar with marketing manipulation. Bill Blomquist, the 44-year-old president of Perpetual American Mortgage Co., has been buying Mercedes autos from Erik Granholm for 12 years. After each deal, Granholm's voice has gotten earnest:

"Bill, I've sold you the best car I have." "I know he's playing salesman," laughs Blomquist. "He knows I know!" But Blomquist still admires Granholm's skill. He even tried to hire him once. Blomquist says. "And successful people like to deal with successful people."

PRESTIGE is a hall of mirrors: For a product to confer prestige, those who can afford it and those who can't must agree on its value. The closer the fit, the better the sales. The beauty of the Mercedes image is that so many share it. Again, it is no accident.

Mercedes TV ads are aimed at nonowners as well as potential owners to maintain the car's "aspirational" value. The fleet of Mercedes cars available to Hollywood directors also polishes the car's mass image as an object of power and prestige -- J. R. drives a 500SEL.

America's affluent, according to the Bruskin study, believe that driving a Mercedes -- far more than Cadillac, Lincoln or BMW -- announces that a person has "made it."

In this case, perception is reality, because Mercedes owners are different: Their median household income is $87,500, compared with $57,700 for Cadillac owners; forty-one percent of Mercedes owners went to graduate school, compared with 24 percent for Cadillac owners; the median age of Mercedes owners is 47, compared with 59 for Cadillac. Mercedes owners are concentrated in and around America's major cities.

"The amazing thing is the purity of Mercedes elite clientele," says Bruce Mac Nair, of Claritas Corp., an Alexandria marketing firm. Mercedes owners in Washington, for instance, are concentrated in elite suburbs, such as Potomac, Bethesda and Great Falls, and affluent city neighborhoods, such as Georgetown and Cleveland Park. Cadillac also has many owners in these neighborhoods, but also in America's small towns and cities and blue-collar neighborhoods and poor sections of its cities, where a Mercedes is rare.

"That is the mystique!" says Mac Nair. "Mercedes is the unattainable dream for most people, but Cadillac is not. The price itself makes it elite. There are plumbers out there driving Cadillacs."

AUDRIE GUE didn't buy her new Mercedes 190E for image, but because it's all she could afford after the Cadillac.

Sure, her first two Mercedes autos, the one in Los Angeles and the one in New York, were for image. Se was a struggling actress then. But once she'd made it -- become the Glamorene Carpet Cleaner girl and moved to Montgomery County -- she settled on the 1983 Cadillac Coupe de Ville.

But the windshild leaked when it rained. The radio didn't work. The tape deck chewed up tapes. Things were never fixed right.

"I just figured, 'That's it!' she says. "I'm never going to buy another American car as long as I live." The 190E was all she could afford, but at least it was a Mercedes.

That is the glue of the Mercedes Mystique: Its ineffable benefits must be justified by a belief that it is the best car in the world -- and the justification exists.

A Ward's Auto World survey of European auto engineers this year ranked Mercedes the No. 1 car in the world. Automotive Industries magazine this year asked its readers which auto company builds the most defect-free cars: Mercedes was their overwhelming choice. And for the third year in a row, the independent J. D. Power & Associates satisfaction survey of new car buyers ranked Mercedes No. 1.

"They are among the best cars we've tested . . . ," says Robsumer Reports auto test division. "I'm not sure they are worth the money -- you can buy a car for half that price that will perform almost as well. But that is up to the people who buy expensive cars."

"I just figured, 'That's it!' says. "I'm never going to buy another American car as long as I live." The 190E was all she could afford, but at least it was a Mercedes.

That is the glue of the Mercedes Mystique: Its ineffable benefits must be justified by a belief that it is the best car in the world -- and the justification exists.

A Ward's Auto World survey of European auto engineers this year ranked Mercedes the No. 1 car in the world. Automotive Industries magazine this year asked its readers which auto company builds the most defect-free cars: Mercedes was their overwhelming choice. And for the third year in a row, the independent J. D. Power & Associates satisfaction survey of new car buyers ranked Mercedes No. 1.

"They are among the best cars we've tested . . . ," says Rob Knoll, chief of Consumer Reports auto test division. "I'm not sure they are worth the money -- you can buy a car for half that price that will perform almost as well. But that is up to the people who buy expensive cars."

Whether Mercedes cars are "worth the money" has been highlighted since the strong U.S. dollar created a dramatic difference in what a Mercedes costs in Germany and what it costs here, because the company did not lower its U.S. prices as the dollar rose. The gap fostered a burgeoning "gray market" in cars bought overseas with foreign currency and shipped to the United States by independent importers and converted to meet U.S. safety and emissions standards. Consumers can save $10,000 or more on a high-line Mercedes. The gray market has become Mercedes biggest competitor: U.S. gray market Mercedes sales in 1984 were a third of its authorized U.S. sales.

"Mercedes has got double the pricing in America over Europe," says international auto analyst Martin Anderson of Sector Research in Boston. "They are certainly doubling their profits on each car sale over Germany." He says a Mercedes 300 turbo diesel station wagon recently sold for about $34,000 in the U.S. and for about $12,500 in Germany. Even if the cost of meeting U.S. emissions and safety standards and the cost of adding U.S. luxuries were $5,000, Anderson says, it wouldn't come close to covering the difference. "Any way you slice it, all the European carmakers are earning incredible profits in North America -- Volvo, Saab, Audi, Mercedes."

Mercedes argues that gray market cars are jury-rigged and below the standards of other Mercedes autos sold here. To make up for the strong dollar, says Mercedes spokesman A. B. Shuman, Mercedes put its increased profits into numerous additional standard luxuries, added a 50,000-mile warranty, and began its Roadside Assistance Program. He says a U.S. Mercedes includes a higher profit percentage for U.S. Mercedes dealers than for European dealers. Mercedes resisted lowering its prices, says Shuman, because the move would undermine the high Mercedes resale value and hurt those who already own the car. Under pressure from the gray market, however, Mercedes last month dropped its prices to U.S. dealers by 3 percent. The drop allowed dealers to quietly cut prices.

Of course, Audrie Gue didn't worry about any of this when she bought her new Mercedes. "I don't know cars. I just want to get in and go. Everything works. It feels good, it looks good, and they don't change the styles often," she says. "Erik called and said, 'Audrie, it seems to me you should have 800 to 1,000 miles on your car by now.' Once you've been pampered, you don't want to go back."

ERIK GRANHOLM, lean and tailored, sits behind his desk before a map of the world. He is constantly interrupted by the telephone. His tie is made from the same material as his suit and his jacket pocket contains a silk handkerchief.

"I like to be sold the way I sell," he says. "I like to do everything with class . . . You really don't insult people's intelligence. You just don't play games . . . It is going to be done right! . . . Just be yourself. Don't be a phony. Don't throw a smokescreen. Just be professional."

The telephone rings and it is a Washington diplomat about to leave for Europe. While he is there, the man will either buy his wife a 380SL for about $42,500 or buy himself a 500SEL for about $45,000. He will purchase it through Granholm on the authorized Mercedes European pickup plan. Which car should he buy?

"Stick with the 500," Granholm advises.

The diplomat asks why.

"Because I make more money."