THOSE FASHIONABLE GERMANS. The country that gave us the Volkswagen is now a leader in clothing design and manufacturing, topping France and Italy in sales. The formula for success: flair, with a small `f,' and Quality, with a big `Q'

EVERY one knows about German cars, German sausage, and German pretzels, but ... German fashion? When the Princess of Wales showed up at a royal polo match two years ago with a red-and-white, polka-dotted skirt and matching socks, designed and manufactured by the Mondi company in Munich, the outfit quickly sold out in British stores. Despite getting criticism for not buying British, the Princess shows up regularly at the Mondi showroom in London and carts away hip German outfits by the dozen.

``The success of German fashion is a very well-kept secret,'' says Klaus Steilmann, Europe's largest clothing manufacturer, from Bochum-Wattenscheid in Germany's Ruhr district. Mr. Steilmann exports 51 percent of his production to 41,000 stores in North America, South Africa, Asia, and Europe, for a turnover of $630 million last year.

Surprisingly, German clothing sales, totaling $12 billion last year, outstripped those of France and Italy. Germany ranks after Italy, Hong Kong, South Korea, and Taiwan in clothing exports, but well ahead of the United States and Japan. And German styles have made inroads everywhere, including such fashion capitals as London, Milan, Tokyo, New York - even proud Paris.

``A few years ago, we wouldn't have touched German clothes. They were too old-ladyish,'' says Ute Steiner, a German-born buyer at a discount shop in Paris's Latin Quarter. Today about a third of the store's merchandise is marked ``Made in Germany.''

Karl Lagerfeld, the German-born creator who designs for Chanel and Fendi, as well as under his own name, fled to France to pursue his craft years ago. But last year he agreed to design a special women's sportswear line (called ``KL'') for the Steilmann company. German-based designers such as Jil Sander and Wolfgang Joop have acquired international renown.

``Germans used to copy everybody else, but now we are beginning to have some real designers of our own,'' says Hanni Pandori of the German edition of Vogue. Ms. Sander likes to think of herself as a pioneer in German fashion, and she is. Ever since she showed her first collection in 1975, she has been crusading to free German fashion from ``a kind of kitsch.''

She describes her clothes as ``avant-garde classics.'' As in other German designs, the basics are trousers and tweed jackets; but instead of gussying up her clothes with busy prints and motifs, Sander gives them a smooth, uncluttered line. She likes oversized coat with big, rounded shoulders, and trousers with large, turned-up hems. Her colors are earthy: peat, brownish reds, beiges. Sander uses fabrics such as cashmere and silk to feminize the masculine cut of her designs, but she also experiments with new synthetics and blends.

The Germans don't claim to have cornered the market on original, avant-garde designs. But they seem to have found their own niche in the market: quality.

German companies have built a strong reputation based on their streamlined manufacturing methods and reliability in delivery, as well as high quality. Fabrics are often imported from France or Italy, but the ``Made in Germany'' label represents exceptionally good handiwork (some French designers like Louis Feraud have their clothes made in Germany).

H'el`ene Vahg, owner of a new Escada boutique in Paris on the famous Rue du Faubourg St. Honor'e, used to carry French and Italian brands, including Krizia, but she now sells Germany's Escada exclusively. ``Some of the other clothes were more original, but the quality of the manufacturing and the follow-up were a disaster in comparison,'' says Ms. Vagh. With Escada, there are no surprises. ``A Size 10 is always a Size 10.''

In the United States, many major department stores carry German brands. Mondi has 50 stores under its own name in the US, and sells in Korea, Taiwan, and Japan, as well as Europe, for an annual turnover of $210 million. Escada now does about one-fourth of its business in the US, with sales of $193 million in 1987, up from $26 million in 1980. ``Escada is the backbone of our clothes sales,'' says Don Cooper of the Popular Dry Goods Company in El Paso, Texas.

While German designers specialize in sporty classics, their originality, if any, lies in a multiplicity of coordinates. Mondi begins with a certain number of color themes, then designs complete outfits, with matching shoes, hats, and socks. Escada's owner and chief designer, Margaretha Ley, is famous for her sweaters with embroidered flowers and motifs. This season's Escada collection is built around blue and green jackets in Scottish plaid; the styles are laid back and feminine, with some dashes of daring. A gray-and brown checked tweed vest, for example, may be combined with a short, sleek leather skirt, with a rose at the hem.

Escada and Mondi use teams of stylists from France, Japan, the US, and Scandinavian countries. The result is a hodgepodge of designs, international in concept, that are durable and easy to wear for women of different ages, sizes, and pocketbooks.

``We don't go overboard. We translate avant-garde into something our customers can wear without looking silly,'' says Mondi president Herwig Zahm.

``We develop our own trends on the trends,'' says Steilmann.