While Toyota Loses Its Hold...

New Jersey property developer Mitchell Heisler and his wife, Patricia Berry, an editor, are shopping to replace their aging Mazda 626, and they're leaning toward one of Chrysler Corp.'s sleek new LH sedans. For the moment, they're not even considering a Japanese model, making this the second year in a row that the once-loyal import buyers have ignored Japanese cars. Last year, they traded their Toyota Corolla for a $17,000 Ford Taurus wagon--largely because the Ford cost some $3,000 less than the Toyota Camry they were also considering. The Toyota dealer lost them when he wouldn't haggle over price. "They basically threw me out," recalls Heisler.

The surprising moral of the tale: Japanese auto makers are continuing to take a whomping in the U.S. market. In this year's first quarter, Japan's share of the U.S. car and light-truck market fell 2.5 points, to 22%--down from a peak of 25.8% in 1991. The big change this time around: Things have gotten so bad that even mighty Toyota Motor Corp., which pulled off a modest sales gain last year, is suffering. The U.S. sales of Japan's No.1 auto maker sank 8.3% in the first quarter, to 230,992 cars and trucks. Sales in the first part of April were stronger, but the trend seems clear. "Even the most invincible of the Japanese is now at risk, given the market dynamics that now favor the domestic manufacturers," says Christopher W. Cedergren, senior vice-president at market researcher AutoPacific Group Inc.

What happened? Toyota is caught between U.S. consumers demanding more for their money and a need to boost sagging profits. Under pressure from the strong yen, slumping profits at home, and a Japanese government that wants to reduce trade friction, Toyota's prices may just be getting too high. Analysts figure that Japanese cars now cost $2,500 more than their U.S. counterparts, on average--and Toyota's models cost more than most.

Of course, Toyota isn't the only Japanese carmaker facing this dilemma. In all, Japanese sales were down 6% in the first quarter. Honda Motor Co.'s sales fell 18%, largely because of flagging sales of the aging Accord, which has fallen behind Toyota's Camry and Ford's Taurus. Honda raised sticker prices an average of 1.1%, or about $200 a car, this month, anyway--on top of a similar hike in February. Nissan, Mitsubishi, and Isuzu racked up surprising gains--but apparently not enough to keep top execs in Japan happy. On Apr. 12, Thomas D. Mignanelli abruptly resigned as president and chief executive of Nissan Motor Corp.'s U.S. sales operation. Now, officials in Tokyo admit they're considering laying off 10% of the operation's employees.

Still, Toyota's troubles are the most surprising because its miscues are so rare. Toyota is suffering partly because it has shifted its cars dramatically upscale in size, price, and quality. The Camry, redesigned for 1992, now starts at $15,308, up more than $3,000 from the 1991 model. And the new version of the Corolla, launched last fall, has a base sticker of $11,198, vs. less than $10,000 for the 1992 model. Even Lexus, Toyota's luxury-car division, is off 14% so far this year, after a 30% gain in 1992.

`TOO MUCH QUALITY.' Part of the problem is that Toyota's new models may simply be overengineered. The compact Corolla, for example, uses sophisticated soundproofing technology derived from Lexus, such as costly panels of asphalt sandwiched in steel to damp vibration. From now on, admits Takayasu Honda, chief engineer of the Corolla: "We have to build a value-for-the-money car at a desirable price." Adds Toyota dealer Jon Lancaster of Jon Lancaster Inc. in Madison, Wis.: "They've built too much quality into the cars, and the public's not willing to pay for it."

With prices so high, some dealers say they're hurting badly. "Dealers have had to reduce their margins so that people can afford to buy," says David Wilson, who owns two Toyota and two Lexus dealerships in Southern California. "It has caused a severe decline in dealer profitability, and that's ultimately going to hurt Toyota."

Still, no one's counting Toyota out for long. "In two or three years, I suspect they'll be back with products as competitive as they were in their heyday," says Thomas M. Dukes, director of competitive assessment for market researcher J.D. Power & Associates. If he's right, shoppers such as Heisler and Berry may find it a lot harder to ignore Toyotas the next time they hit the showrooms.