BMW’s M division has built an enviable reputation for transferring race-winning technology to the road. But not every M car sees the light of day. Some are deemed too wild for sale, sentenced to a life of penance locked away deep within Garching’s top-secret prototype bunker.

The E36 M3 Compact is one such car. A tantalising mash-up of M3 muscle and hatchback form, it never made it past the BMW board. But had it done so, it might have redefined the hot hatch segment – years before the term ‘hyper-hatch’ entered the lexicon.

In the mid-90s, most hot hatches had around 150bhp. 200bhp was a lot, and the extra spicy homologation specials – like the Ford Escort RS Cosworth and Nissan Pulsar GTI-R – redlined at 227bhp. BMW did have a car in this segment with the 318ti Compact, but with only 138bhp it couldn’t hold a candle to the competition – even if it was rear-wheel drive. Given they weren’t used to lagging behind, the M division’s famous after-hours club came up with an idea that, in terms of performance and drama, would have blown away the rest of the market had it been put into production.

Their solution was to drop the 321bhp S50B32 straight six from the M3 Evo coupé into the Compact body – giving it an almost 100bhp advantage over the rest of the competition. With a quoted sub-1300kg kerb weight, the performance on offer would’ve left other manufacturers flat on their backs – scratching their heads and trying to scramble together a counter-punch. The projected, and rather conservative, 0–62mph estimate of 5.0 seconds was a considerable chunk faster than had ever been seen from any hatchback. In a time when the hottest of hatchbacks would’ve chopped their right arm off to clock sub seven seconds, even a 911 Carrera would have struggled to keep up – meaning the ‘hyper-hatch’ class of today, populated by RS3s and AMG A45s, would have arrived a decade sooner.

Yet, in typically M fashion, the M3 Compact didn’t scream and shout about its firepower. For obvious reasons, many M3 parts were pilfered. The front bumper with its extended lip and enlarged mesh grill bolted straight on, with the Compact sporting an additional set of brake vents in place of the fog lights. So did the side skirts, iconic twin spar M mirrors and polished LTW wheels. The boot is finished with a subtle ducktail spoiler and, had it reached production, the M3 Compact would’ve been the first M car to feature four exhaust tips – now a principal feature of the marque.

The inside is a little more hardcore - closer to the prototype mule it was than showroom slick - with a pair of composite Recaro bucket seats and an alcantara clad steering wheel and gearknob on display. Red seatbelts also added a flash of sporting colour. 

So what stopped the car being rubber-stamped for production? It had a clear market niche, and the economies of scale were clear to see.

The problem was the car’s rather lively handling balance, and the cause isn’t what you might assume to be a shortened wheelbase. In fact, at 2.3 meters, the M3 Compact and M3 Coupe share an identical span between the axles. But the Compact used the dated semi-tailing rear-arm suspension derived from the E30 3-Series rather than the newly developed, multi-link ‘Z’ axle pioneered by the E36. Whilst this had been used to great acclaim on the E30 M3, it was hopeless when faced with the S50’s 321bhp and 258lb-ft of torque, despite its linear delivery. 

The design has its limitations during hard cornering, causing changes in toe and camber as the suspension moves against its bushing, potentially leading to lift-off oversteer and poor handling. Stability during hard acceleration, and more concerningly, hard braking from autobahn speeds were both red flags. Remember, at the time, the M3 forewent any form of traction or stability control.

The lower weight was a contributing factor too. Normally a blessing, the 150kg saving over the M3 was actually a curse in disguise, because most of it was removed aft of the rear axle, upsetting BMW’s purist 50:50 weight distribution ideal. The upshot was even the M division's own website admits “If the car had ever gone into series production, engineers would probably have had to dial down its power in order to improve drivability. Due to the compact dimensions and low weight, it quickly became clear during test drives that the M3 Compact was an innovation best left in the hands of experienced drivers only.”

And yet, an M3 Compact of sorts did make its way down the production line in the form of the Z3 M Roadster and Z3 M Coupe, as the Z was based upon the Compact’s platform. Both still used the semi-trailing rear arm suspension, however the longer boot stabilised the weight distribution, and the added stiffness of the Coupe shell improved things even further. Still, they garnered a reputation for lively oversteer. 

No doubt it also wasn’t lost on BMW the Z3 was seen as the more premium car and could therefore command a higher list price.

The dream of a more accessible M car would remain dormant until the 1M Coupe arrived in 2011. The new entry level model became a landmark car for BMW M in more ways than one by introducing turbocharging. Ironically, this led to some spikey handling characteristics, showing the spirit of the E36 M3 Compact lived on. That torch is now carried by the BMW M2, with over 60,000 units produced.

The success of hyper-hatches like the RS3 and A45 AMG only strengthens the argument that BMW had the right idea in the 1990s. The origin of the hot hatch might always be up for debate. But while BMW never pulled the trigger on the M3 Compact, there’s little doubt where the genesis of the hyper-hatch began: Garching, Germany.