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Karl Benz's lifelong hobby brought him to a bicycle repair shop in Mannheim owned by Max Rose and Friedrich Wilhelm Eßlinger. In 1883 the three founded a new company producing industrial machines: Benz & Company Rheinische Gasmotoren-Fabrik, usually referred to as, Benz & Cie. Quickly growing to twenty-five employees, it soon began to produce gas engines as well.

The company gave Benz the opportunity to indulge in his old passion of designing a horseless carriage. Based on his experience with, and fondness for, bicycles, he used similar technology when he created an automobile with a four-stroke engine of his own design between the rear wheels. Power was transmitted by means of two roller chains to the rear axle. Benz finished his creation in 1885 and named it the Benz Patent Motorwagen. It was the first automobile entirely designed as such, not simply a motorized carriage, which is why Karl Benz is regarded by many as the inventor of the automobile.

The beginnings of the Motorwagen in 1885 were less than spectacular. The tests often attracted many onlookers who laughed mockingly when it smashed against a wall because it initially was so difficult to control. The Motorwagen was patented on January 29, 1886 as DRP-37435: "automobile fueled by gas"<ref>DRP's patent No. 37435 (PDF, 561 kB, German) was filed January 29, 1886 and granted November 2, 1886, thus taking effect January 29.</ref>. The first successful tests were carried out in the early summer of 1886 on public roads. The next year Karl Benz created the Motorwagen Model 2 which had several modifications, and in 1887, the definitive Model 3 with wooden wheels was introduced.

Benz began to sell the vehicle—advertising it as the Benz Patent Motorwagen—making it the first commercially available automobile in history. The first customer, in late summer of 1888, is alleged later to have been committed to an insane asylum. The second buyer, the Parisian Emile Roger, who purchased an 1888 Benz, had a profound effect on Benz's success. Roger had been building Benz engines under a license from Karl Benz for several years, and in 1888, decided to add his automobiles to the line. Many of the early Benz automobiles were indeed built in France and sold by Roger, since the Parisians were more inclined to purchase automobiles at the time.

Early customers faced significant problems. At the time, gasoline was available only from pharmacies that sold it as a cleaning product, and they didn't stock it in large quantities. The early-1888 version of the Motorwagen had to be pushed when driving up a steep hill. This limitation was rectified after Berta Benz made her famous trip driving one of the vehicles a great distance and suggested the addition of another gear to her husband. The popular story goes that, on the morning of August 5, 1888, Berta Benz took this vehicle (without the knowledge of her husband), and embarked on a 106 km (fifty miles) trip from Mannheim to Pforzheim to visit her mother, taking her sons Eugen and Richard with her. In addition to having to scrounge for fuel at pharmacies on the way, she also overcame various technical problems and finally arrived at nightfall announcing the achievement to Karl Benz by telegram. Today the event is celebrated in Germany with an antique automobile rally.

Benz's Model 3 made its widescale debut to the world in the 1889 World's Fair in Paris, and about twenty-five Motorwagens were built during the period between 1886 and 1893.

Benz & Cie. expansion

1885 Benz Patent Motorwagen

1885 Benz Tri-Car

Three wheels
Electric ignition
Differential rear end gears

(mechanically operated inlet valves)

Water-cooled engine
Gas or petrol four-stroke horizontal engine
Single cylinder. Bore 116 mm, Stroke 160 mm
Patent model: 958 cc, 0.8 hp, 600 W, 16 km/h
Commercialized model: 1600 cc, ¾ hp, 8 mph
Steering wheel chained to front axle

The great demand for stationary, static internal combustion engines forced Karl Benz to enlarge the factory, and in 1886 a new building located on Waldhofstrasse (operating until 1908) was added. Benz & Cie. had grown in the interim from 50 employees (1890) to 430 (1899). During the last years of the 19th century—Benz & Company—was the largest automobile company in the world with 572 units produced in 1899.

Because of its size, in 1899 the Benz & Cie. became a joint-stock company with the arrival of Friedrich Von Fischer and Julius Ganß, who came aboard as members of the Board of Management. Ganß worked in the commercialization department.

The new directors recommended that Karl Benz should create a less expensive automobile suitable for mass production. In 1893 Benz created the Victoria, a two-passenger automobile with a 3 hp engine, which could reach the top speed of 11 mph and a pivotal front axle operated by a roller-chained tiller for steering. The model was successful with 45 units sold in 1893.

In 1894 Benz improved this design in his new Velo model. This automobile was produced on such a remarkably large scale for the era—1200 units from 1894 to 1901—that it is considered the first mass-produced automobile. The Benz Velo also participated in the first automobile race: Paris to Rouen 1894.

In 1895 Benz designed the first truck in history, with some of the units later modified by the first bus company: the Netphener, becoming the first buses in history.

In 1896, Karl Benz was granted a patent for his design of the first boxer engine with horizontally-opposed pistons. His design created an engine in which the corresponding pistons reach top dead centre simultaneously, thus balancing each other with respect to momentum. Flat engines with four or fewer cylinders are most commonly boxer engines and are also known as, horizontally-opposed engines. This continues to be the design principle for high performance, automobile racing engines such as Porsches.

Although Gottlieb Daimler died in March of 1900—and there is no evidence that Karl Benz and Daimler knew each other nor that they knew about each other's early achievements—eventually, competition with Daimler Motors (DMG) in Stuttgart began to challenge the leadership of Benz & Cie.. In October of 1900 the main designer of DMG, Wilhelm Maybach, built the Mercedes-35hp to the specifications of Emil Jellinek under a contract for him to purchase thirty-six of them and for him to become a dealer of the model. Maybach would quit DMG in 1907, but he designed the model and all of the important changes. After testing, the first one was delivered to Jellinek on December 22, 1900. Jellinek continued to make suggestions for changes to the model and obtained good results racing the automobile in the next few years, encouraging DMG to increase their production of automobiles.

Benz countered with his Parsifil automobile, introduced in 1903 with 2 vertical cylinders and a top speed of 37 mph. Then, without consulting Benz, the other directors hired some French designers. France was a country with an extensive automobile industry based on Maybach's creations. Because of this action, after difficult discussions, Karl Benz announced his retirement from design management on January 24, 1903, although he remained as director on the Board of Management until his death in 1929. Benz's sons Eugen and Richard also left the company, but Richard returned in 1904 as designer of passenger vehicles.

By 1904 the sales of Benz & Cie. were up to 3480 automobiles and the company remained the leading manufacturer of automobiles. Along with continuing as a director of Benz & Cie., Karl Benz soon would found another company—with his son, Eugen—that was closely held within the family, manufacturing automobiles under another brand.

In 1909 the Blitzen Benz was built by Benz & Cie. and the racecar set a land speed record of 228.1 km/h, said to be "faster than any plane, train, or automobile" at the time. The racecar was transported to several countries, even to the United States, to establish multiple records of this achievement. The bird-beaked, aerodynamically-designed vehicle contained a 21.5-liter displacement, 200-horsepower engine. The land speed record of the Blitzen Benz was unbroken for ten years.

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