Two versions of the E12 M535i were produced by BMW Motorsport GmbH exclusively for the European market, one in left-hand drive and another in right-hand drive. In addition, BMW of South Africa assembled its own right-hand drive version of the E12 M535i from German-supplied Complete Knock Down (CKD) kits. An updated M535i also existed as part of the "hybrid" E12/E28 range that was produced exclusively in South Africa between 1981 and 1984.

The E12 M535i is powered by the early version of the M30 inline-six with a bore of 93.4mm and a stroke of 84.0mm for a total displacement of 3,453cc. This SOHC iron-block unit utilizes Bosch L-Jetronic fuel injection and produces 218 hp (DIN) at 5,200 rpm and 224 lb/ft of torque at 4,000 rpm. This engine was not offered with emission controls. Note: South African-spec models, though powered by essentially the same engine, are rated at 214 hp (DIN) and 229 lb/ft of torque.

There were two different five-speed manual gearboxes fitted to the E12 M535i. All European-spec models were equipped with the Gertag close-ratio unit featuring a "dogleg" shift pattern and the following ratios: 3.72 (1), 2.40 (2), 1.77 (3), 1.26 (4), 1.00 (5). This same gearbox was also offered as an option on the South African-built model, though most were equipped with the more common Getrag overdrive manual transmission with the following ratios: 3.82 (1), 2.20 (2), 1.40 (3), 1.00 (4), .81 (5). Regardless of the gearbox option, all E12 M535i models were equipped with a 3.07:1 final drive and limited slip differential.

The basic suspension design of the E12 M535i is similar to that of all E12 5 Series models, with MacPherson struts in front and a semi-trailing arm design in the rear. However, it has been tuned by BMW Motorsport and is therefore equipped with unique springs and Bilstein shocks. Steering is by recirculating ball, with engine-speed-sensitive power assist and an overall ratio of 16.9:1.

Every E12 M535i has four-wheel disc brakes. The vented front rotors measure 11-inches (280mm) in diameter and are no larger than those fitted to other six-cylinder E12 models. However, at 25mm in thickness, they are 3mm thicker than all other E12 rotors. The solid rear rotors measure 10.7-inches (272mm) in diameter and are identical to those used on other E12 models. ABS was not available.

All E12 M535i models are fitted with 195/70VR14 tires but there were two different wheel options. All European-spec models are equipped with 6.5x14-inch BBS cross-spoke alloys while South African-spec versions use a slightly wider 7x14-inch version of a similar design made by BBS/Mahle. The latter also feature unique center caps bearing the BMW Motorsport logo.
The exterior of the E12 M535i can be identified by its unique body-color front airdam, black rubber rear spoiler and tri-color BMW Motorsport stripes on the side bodywork and front airdam. However, these items were technically listed as "special equipment" and could be omitted upon request in order to give the car the stealthy appearance of a standard 5 Series. In addition, the "M535i" grille and decklid badging could be deleted as well. However, the 14-inch cross-spoke allow wheels were fitted to every M535i.

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