BMW was founded by Karl Rapp, originally as an aircraft engine manufacturer, Bayerische Flugzeug-Werke. The Milbertshofen district of Munich was chosen, apparently because it was close to the Gustav Otto Flugmaschinenfabrik site. The blue-and-white roundel BMW still uses (illustrated above right) alludes to the blue and white checkered flag of Bavaria and also indicates the origin of BMW by symbolizing a spinning white propeller on a blue-sky background.
In 1916 the company secured a contract to build V12 engines for Austro-Daimler. Needing extra financing, Rapp gained the support of Camillo Castiglioni and Max Friz, the company was reconstituted as the Bayerische Motoren Werke GmbH. Over-expansion caused difficulties; Rapp left and the company was taken over by the Austrian industrialist Franz Josef Popp in 1917, and named BMW AG in 1918.
After World War I, the Treaty of Versailles (1919) prohibited the production of aircraft in Germany. Otto closed his factory and BMW switched to manufacturing railway brakes.
In 1919 BMW designed its first motorcycle engine, used in a model called the Victoria, which was built by a company in Nuremberg.
In 1923 BMW built its first model motorcycle, the R32. This had a 500 cc air-cooled horizontally-opposed engine, a feature that would resonate among their various models for decades to come, albeit with displacement increases and newer technology. The major innovation was the use of a driveshaft instead of a chain to drive the rear wheel. For decades to follow, the shaft-drive boxer engine was the mark of the BMW motorcycle.
In 1927 the tiny Dixi, an Austin Seven produced under licence, began production in Eisenach. BMW bought the Dixi Company the following year, and this became the company's first car, the BMW 3/15. By 1933 BMW were producing cars that could be called truly theirs, offering steadily more advanced I6 sports and saloons (sedans). The pre-war cars culminated in the 327 coupe and convertible, the 328 roadster, fast 2.0 L cars, both very advanced for their time, as well as the upscale 335 luxury sedan.