BMW is banking on its all-new second-generation entry-level 1 Series hatch to meet a growing demand for small prestige cars with frugal engines but no sacrifice of amenity over the next decade.

With an even smaller city car still about three years away, the German manufacturer has employed a new-generation 1.6-litre turbocharged TwinPower petrol engine and eight-speed automatic transmission in the five-door, rear-drive 1 Series hatchback to drive down fuel consumption while meeting the performance expectations of customers.

The Munich-based company has stretched the 1 Series body in most dimensions to address accommodation shortcomings of the previous generation, while also sharpening the price of all models.

The cost of BMW entry has been cut by more than five per cent to $36,900 in a move that the importer expects to drag even more first-time buyers to the brand.

BMW Australia managing director Phil Horton said at the Australian launch of the second-generation 1 Series this week that BMW expected most of the growth in its car sales to come at the small end of the market between now and 2020, when BMW expects to sell two million vehicles a year.

But Mr Horton said he expected the top-selling 3 Series – which is due for a new generation about March next year – to remain the best-selling BMW for the life of the next 3, which would be about seven years.

The new 1 Series continues the march of turbocharging across the BMW range, with all three engines in the new, bigger F20 model getting forced induction as its engineers chase a balance of power and economy, without losing driveability.

The model line-up has been slimmed down from four to three at launch – 116i, 118i and 118d – with the top-of-the-range twin-turbo diesel 123d dropped.

However, that range is expected to return to four this time next year with the arrival of a turbo-six performance leader, in the mould of the 130i, perhaps using the 3.0-litre turbo six-cylinder engine of the 135i in the recently facelifted 1 Series Coupe and Convertible ranges.

While the 116i opens the hatch range at $36,900 (plus on-road costs), the mid-range 118i is priced at $42,800 – midway between the previous 118i and 120i – while the 118d is $43,500 – $1000 cheaper than the previous 118d.

The price of the 116i undercuts the most affordable Mercedes-Benz – the $37,875 B-class 180 – and cheapest Audi A3, the 1.4-litre TFSI Attraction ($41,000).

BMW has dismissed the normally aspirated 2.0-litre petrol engine of the previous BMW 118i and 120i, replacing it with the all-new TwinPower turbocharged 1.6-litre petrol engine in the 116i, and – in a higher state of tune – mid-range 118i.

The new 1 Series hatch is the first model in the Munich brand’s line-up to get the N13 1.6-litre TwinPower engine, although a 2.0-litre version surfaced in the new Z4 earlier this year.

Using the same alloy cylinder block as the 1.6-litre engine from the Mini Cooper S, the engine is nevertheless new in most other regards, using a twin-scroll turbo and what BMW calls high-precision fuel injection.

Thanks to the forced induction and other technical enhancements, the engine produces the same 100kW of power as the previous 2.0-litre engine, along with substantially more torque – up from 180Nm to 220Nm, delivered at a handy 1350-4300rpm.

This slices almost a second off the base 1 Series 0-100km/h sprint time, from 9.4 to 8.5 seconds.

The smaller engine capacity pays dividends at the petrol pump, cutting the combined average fuel consumption by almost 23 per cent, from 7.4 litres per 100km to 5.7L/100km in manual form (auto: 5.8).

In the 118i engine's higher state of tune, the 1.6 produces 125kW of power and 250Nm of torque, compared with the previous 120i’s 115kW and 200Nm.

Again, the new engine is punchier that the previous version despite its shrunken capacity, scooting from zero to 100km/h in a handy 7.4 seconds while also slicing a full 2.0L/100km off the combined fuel reading, to 5.9L/100km (auto: 5.8).

Just one diesel engine is offered – the 118d – which, confusingly, is 2.0 litres and a carryover from the previous model in which it caused something of a sensation, winning the World Green Car of the Year award when it appeared in 2008.

This time around, it gets a few tweaks to boost torque by 20Nm to 320Nm, which sharpens acceleration a fraction, to 8.9 seconds for the 0-100km/h dash, but fuel consumption is the same as before at 4.5L/100km, putting it on par with the rival diesel Audi A3 Sportback.

All 1 Series models come standard with a six-speed manual gearbox, while a ZF eight-speed automatic transmission is a $2693 option (the previous six-speed auto was $2200).

Just as the 1 Series is the only rear-drive car in its class, it is also the only one with an eight-speeder.

Manual and auto models both gain idle-stop, along with a range of other fuel-saving devices from BMW’s EfficientDynamics cupboard such as brake energy regeneration on the diesel, electric-assisted steering and low-rolling resistance tyres.

As well, there is an Eco driving mode that the driver can select on the ‘Driving Experience Control’ to shave a few more litres off the regular fuel fill-up, along with a Sports mode that provides sharper steering, sportier throttle response and, in the auto, stretched shift points.

The new body of the five-door hatchback is 85mm longer than the previous generation, at 4324mm, and 50mm wider at 1934mm, with wheelbase stretched by 30mm (2690mm).

This translates into greater roominess for passengers and luggage. The rear seat, in particular, gets more legroom – a bugbear of the previous generation – and wider rear door openings for easier entry and exit.

Luggage capacity is up 10 per cent, to 360 litres, while the cabin boasts more storage spaces than before.

The five-door 1 Series retains the trademark long bonnet and sawn-off rear, but the styling has been smoothed over, with a larger kidney grille that now slopes forward.

Double-round headlights have been retained, but get a metallic eyebrow across the top – what BMW describes as an accent. In models fitted with the optional bi-Xenon headlights, the accent is lit with a strip of LEDs for extra effect.

At the back, the L-shaped tail-lights comprise banks of LEDs, while BMW finally catches on to the trend for side indicator lights on the tips of the exterior mirrors.

Tiny lights are hidden on the underside of each doorhandle, lighting up at night when the unlock key fob is clicked to provide easier access.

Inside, 1 Series hatch customers now get a 6.5-inch freestanding LCD colour multi-function display, hands-free Bluetooth, cruise control with brake functions, keyless engine start (but not keyless entry) and six-speaker stereo.

The 116i gets 16-inch alloy wheels with run-flat tyres instead of a spare wheel, as do all new 1 Series hatchback variants.

The 118i and 118d step up with rear parking distance control, dual-zone climate-control, anti-dazzle rearview mirror, foglights, rain sensor and 17-inch alloy wheels.

Among the first-time options in the 1 Series are automatic parking assistant, rearview camera and lane-departure warning. As well, buyers can order up items once only available in top-line luxury cars, such as adaptive suspension ($1692) and variable sport steering ($669).

Buyers of the new 1 Series can also enhance their car with two new ‘Lines’ of accessories, Urban Line and Sport Line – the first time these have been offered on any BMW, but not the last with the new 3 Series around the corner.

These $1600 packs make it easier to transform the car with changes such as unique kidney grille, different bumpers, different lights, different interior trims – including the steering wheel – and more.

Naturally, the Sport Line has a sport bent, with sportier bumper treatment, sports seats and steering wheel with leather with contrast red stitching and red piping, different alloy wheels, high-gloss black interior trim and ‘matt coral accent strips’.

Both ‘lines’ get ambient cabin lighting, which can be switched between orange and white in Sport Line and orange and blue in Urban Line.

Among Urban features are white features – including a bizarre white-and-chrome grille, white alloy wheels (others can be chosen) and white exterior mirror scalps – as well as cloth-leather seats, ‘acrylic-glass’ interior trim and other dress-up bits.