Mercedes-Benz proved it could make a rival which would appeal to the driving enthusiast in the latest C-class, while Audi launched the impressive new A4 in March.
Then Jaguar came up with the X-type, which presents a strong challenge in the middle and top end of the premium upper-medium sector.
There was no criticism of how the existing 3-series looked, but dynamically it wasn't perfect — the main area of criticism being its woolly steering.
BMW has made few cosmetic changes to the revised 3-series saloon and Touring, save for subtle alterations to the headlights and making the rear light clusters a bit neater. But most of the changes have taken place under the skin — many of the new parts having already been aired in the new 3-series Compact.
Along with the new underpinnings there is a new 2.0-litre Valvetronic engine for the 318i, while the 320d has been given a power boost to 150bhp and gets a common rail head for the first time. Further up the range, the 325i and 330i have the option of BMW's Sequential Manual Gearbox (SMG) — and BMW expects a significant take-up, especially among company car drivers, offering some of the ability of an automatic, but with no fuel consumption and carbon dioxide emissions penalty.
Already available on the high performance M3, SMG operates along similar lines to the Alfa Romeo Selespeed gearbox. BMW thinks 40% of 330i sales will be SMG variants, while 30% of 325i models are expected to use SMG when the system becomes available in January 2002, at an expected premium of £1,700 over the standard car.
Drivers have the choice of shifting up and down manually, or letting the car do it. But it is a manual gearbox, and behaves like one for most of the time.
Little seems to have changed on first inspection of the new 3-series. The front end seems slightly more rounded while the rear lights have been fiddled with.
The interior is much the same as before, with nice detailing and an utterly clear and logical layout, while the rear compartment is roomier than you would expect.
The 318i did have a strangely patterned piece of plastic trim separating the top and bottom half of the dashboard, but at least it wasn't 'wood'.
One of the strange things about every BMW I have driven in the UK is that they have all been equipped with optional sports suspension. It was refreshing to try a standard model on a 150km test route from BMW's driver training centre near Munich.
The most noticeable difference is how much sharper the steering is. The car turns in more directly and even with standard suspension remains composed when attacking tight bends. Its 2.0-litre Valvetronic engine provides lively performance — power output is increased to 143bhp from 118bhp in the 1.9-litre in the previous 318i. But there is also a significant improvement in fuel economy — 39.2mpg instead of 35.3mpg. In fact progress is only hampered by a stubborn gearchange which will not be rushed.
After the sticky gearchange of the 318i it's easy to see why someone might be tempted by SMG on the higher models to achieve sporty shifts. The gearstick looks fairly conventional with reverse on dogleg, while neutral, manual and automatic alongside each other. There are two buttons on the steering wheel to change up and down through the gears, but the system takes some getting used to.
Either button will change up through the gears by pulling it back, while downshifts are engaged by pushing the buttons forward.
However, I prefer the simplicity of the Selespeed system on the Alfa Romeo 147 with up-changes by pulling on the right paddle and changing down by pulling on the left paddle. However, SMG is slightly more clever, because as well as changing down of its own accord, you can force it to kickdown like an automatic with a hard stab on the throttle. On one occasion it was persuaded to go straight from fifth gear to second.
Of course, the SMG is not an automatic, and in automatic mode up-changes are no smoother than a manual change. However, after some miles behind the wheel the car can change up faster than with a conventional gearchange, and take it on a twisty B-road and you can change up and down without taking your hands off the steering wheel.
BMW has made the 3-series more entertaining to drive, and can offer fleets the way to lower fuel consumption with its new Valvetronic and diesel engines. Company car drivers will also benefit from lower company car tax bills with some of the best CO2 ratings in its class.
The 3-series is already having a good year in the UK, with sales of the saloon and Touring increasing by 5.3% and 43.1% respectively from January to June. Sales of the coupe have risen by 17.8% over last year, while the convertible is up by 68.6%.
Diesel demand is outstripping supply, led by fleet interest in lower company car tax bills thanks to diesel's lower carbon dioxide emissions. More than 3,500 saloon and Touring models sold in the first six months of this year were 320d models, while a further 900 were 330d cars. The addition of common rail and a hefty hike in power, along with combined fuel consumption of 51mpg and a minimum BIK tax band for the first three years of the new emissions-based rules, will surely stretch supply further.