The engine originated from the P-Wagen project, developed by Porsche's subsidiary company Hochleistungsfahrzeugbau GmbH in 1932 under chief engineer Karl Rabe, with Josef Kales responsible for the V16 engine design. Porsche conceived a racing car built to the AIACR's new 750 kg formula, whose weight limit was intended to restrict engine capacity but instead enabled the construction of lightweight, enormously powerful cars. Auto Union purchased the P-Wagen project for 75,000 Reichsmarks in 1933 and relocated development to the Horch works in Zwickau.
The V16 engine had two cylinder blocks inclined at 45 degrees, with a single overhead camshaft operating all 32 valves. Intake valves were connected to the camshaft by rocker arms, while the exhaust valves were operated via pushrods passing through tubes above the spark plugs — a configuration that gave the engine three valve covers. The engine was supercharged and oriented with optimum torque at low engine speeds, a Porsche philosophy that distinguished it from rivals who favored higher-revving designs.
The defining feature of the installation was its placement: the engine sat behind the driver and fuel tank, making the Auto Union cars a rear-mid-engine, rear-wheel-drive design at a time when front-engined cars were universal in Grand Prix racing. From front to rear, the car's layout ran: radiator, driver, fuel tank, engine. With the fuel tank centrally located directly behind the driver, the front-rear weight distribution remained unchanged as fuel was consumed — the same engineering reasoning used in modern open-wheel cars.
The chassis tubes originally served double duty as coolant channels from the radiator to the engine, though this arrangement was abandoned after repeated leaks.
The V16 grew substantially across its active years. The initial 1934 specification displaced 4,360 cc and produced 295 PS (217 kW). For 1935, the engine was enlarged to five litres, producing 370 bhp (276 kW). By 1936, displacement had grown to the full six litres, yielding 520 bhp (388 kW). At its peak, the engine enabled speeds of 258 mph (415 km/h) in the hands of Bernd Rosemeyer. The tremendous power and flexibility were demonstrated dramatically when Rosemeyer drove an Auto Union around the Nürburgring in a single gear to prove the engine's torque characteristics.
The extreme power-to-weight ratio and the rear-heavy weight distribution made all V16-engined Auto Unions difficult to control. Wheelspin could be induced at speeds above 100 mph (160 km/h), and pronounced oversteer was a constant characteristic. All models used independent suspension with parallel trailing arms and torsion bars at the front, while early cars employed a swing axle rear suspension designed by Porsche to counteract oversteer tendencies. A Porsche-developed limited-slip differential, manufactured by ZF, was introduced at the end of the 1935 season after testing revealed severe inside rear wheel spin when accelerating out of corners.
Because Auto Union lacked a racing driver turned designer like Mercedes' Rudolf Uhlenhaut, the team developed clockwork-driven paper disc recorders to capture engine revs and other data during testing, enabling engineers to study the car's behavior after the fact.
Between 1935 and 1937, Auto Union cars powered by the V16 won 25 races, with drivers including Bernd Rosemeyer, Hans Stuck, Achille Varzi, and Ernst von Delius. Rosemeyer was crowned European Champion in 1936 — Auto Union's only drivers' championship — in a year when the full six-litre V16 in the Type C dominated the season. Rosemeyer won the Eifelrennen, German, Swiss, and Italian Grands Prix, as well as the Coppa Acerbo.
In 1937 the V16 Auto Unions won five races against the seven of the formidable new Mercedes-Benz W125, remaining genuinely competitive against the most powerful rival car of the era.
When the Grand Prix regulations changed for 1938, limiting supercharged engines to three litres, the V16 was retired from championship racing. The Auto Union Type D that followed used a new supercharged V12 of 3 litres. However, hillclimb variants continued to use the 16-cylinder engine, since the capacity limit was not enforced in that discipline.
The V16 mid-engine concept anticipated by decades the layout that would become universal in Formula 1 from the late 1950s onward, when British constructors led by Cooper proved that rear-mounted engines offered decisive handling advantages. The Auto Union had demonstrated both the potential and the difficulty of that layout more than twenty years earlier.