In the early 1930s, the German authorities started placing orders for new aircraft, initially training and utility aircraft. Heinkel, as one of the most experienced firms in the country, received contracts for a number of two-seat aircraft, including the He 45, He 46 and He 50. The company also worked on single-seat fighter designs, which culminated in the He 49 and later with the improved He 51.

When the He 51 was tested in combat in the Spanish Civil War, it was shown that speed was far more important than maneuverability. The Luftwaffe took this lesson to heart and started a series of design projects for much more modern aircraft.

In October 1933, Hermann Göring sent out a letter requesting aircraft companies consider the design of a "high speed courier aircraft" – a thinly veiled request for a new fighter. Each company was asked to build three prototypes for run-off testing. By spring 1935, both the Arado and Focke-Wulf aircraft were ready, the BFW arriving in March, and the He 112 in April.

In early May 1934, despite Germany being under a prohibition from the development of new military aircraft, the Reichsluftfahrtministerium (RLM) issued a request for a new single-seat monoplane fighter under the guise that the proposal was for creating a new 'sports plane'. The Technisches Amt outlined specifications, for the supply of a new fighter aircraft, that submissions for the competition had to meet certain characteristics, including;

• Must be of all metal construction
• Have a monoplane configuration
• Must have retractable landing gear
• Must be capable of achieving a top speed of at least 400 kph (250 mph) at an altitude of 6,000 m (20,000 ft)
• Be able to endure ninety minutes at full throttle at 6,000 m (20,000 ft)
• Be able to reach an altitude of 6,000 m (20,000 ft) in seven minutes and have a service ceiling of 10,000 m (33,000 ft)
• Configured to be fitted with a Junkers Jumo 210 engine
• To be armed with either two 7.92mm fixed machine guns or one 20mm cannon
• Have a wing loading of less than 100 kg/m^2.

In February 1934 three companies, Arado, Bayerische Flugzeugwerke (BFW) and Heinkel, were awarded contracts to develop prototypes for the competition with a fourth company, Focke-Wulf, being awarded the contract more than six months later in September 1934. The prototypes that were eventually submitted for the competition were the Arado Ar 80, Focke-Wulf Fw 159, Heinkel He 112 and the Messerschmitt Bf 109. Heinkel had begun development of their submission in late 1933 in anticipation of the announcement. At the helm of their design project were the Günter brothers, Siegfried and Walter, designers of the He 111, who were then working on the design for the He 112. The first prototype had its first flight in September 1935.

Heinkel's design was created primarily by twin brothers Walter and Siegfried Günter, whose designs would dominate most of Heinkel's work. They started work on Projekt 1015 in late 1933 under the guise of the original courier aircraft, based around the BMW XV radial engine. Work was already under way when the official request went out on 2 May, and on 5 May the design was renamed the He 112.

The primary source of inspiration for the He 112 was their earlier He 70 Blitz ("Lightning") design. The Blitz was a single-engine, four-passenger aircraft originally designed for use by Lufthansa, and it, in turn, was inspired by the famous Lockheed Model 9 Orion mail plane. Like many civilian designs of the time, the aircraft was pressed into military service and was used as a two-seat bomber (although mostly for reconnaissance) and served in this role in Spain. The Blitz introduced a number of new construction techniques to the Heinkel company; it was their first low-wing monoplane, their first with retractable landing gear, their first all-metal monocoque design, and its elliptical, reverse-gull wing would be seen on a number of later projects. The Blitz could almost meet the new fighter requirements itself, so it is not surprising that the Günters would choose to work with the existing design as much as possible.

Ernst Heinkel's He 112 submission was a scaled-down version of the He 70, a fast mail-plane, sharing numerous features with it including; an all-metal construction – including its oval cross-section fuselage and two-spar monoplane wings which were covered with flush-head rivets and stressed metal skin-, similar inverted semi-elliptical gullwings and retractable landing gear. The wide-track of the undercarriage, a result of having outward retraction from the low point of the wing's gull-bend, granted the aircraft excellent ground handling for take-off and landing. The open cockpit and fuselage spine behind the headrest mounted into the deep-section fuselage offered the pilot a good view when taxiing and were included to provide excellent vision and make the biplane-trained pilots feel more comfortable.

Prototypes
The first prototype, V1, was completed on 1 September 1935. Specifications of the Technisches Amt required that the competing aircraft be fitted with the Junkers Jumo 210, however, as the engine was unavailable, a 518 kW (695 hp) Rolls-Royce Kestrel V was fitted instead. The V1 prototype of the Heinkel had comparatively large wings and was heavier than its contemporaries, however, due to the wing size, the mass was more evenly spread out resulting in lower wing-loading. The upshot of this was that the aircraft had better turn performance; the downshot was that it generated more drag than expected and had a slowed roll rate.

The second prototype, V2, was completed in November. It was powered by a 480 kW (640 hp) Jumo 210C engine and fitted with a three-blade propeller, but was otherwise identical to the V1. Meanwhile, the data from the V1 factory flights was studied to discover where the unexpected drag was coming from. The Günter brothers identified the large, thick wing as the main culprit, and designed an entirely new smaller and thinner wing with an elliptical planform. As a stop-gap measure, the V2 had its wings clipped by 1.010 m (3 ft 3.8 in) to allow it to compete with the 109. This made the He 112 creep over the wing loading requirements in the specifications, but with the 109 way over the limit, this was not seen as a problem, and the V2 was sent off for testing. The V2, like its predecessor, had problems with spin stability and eventually crashed and was destroyed when test pilot Gerhard Nitschke bailed from the aircraft after losing control during a set of spin tests.

The V3 took to the air in January. Largely similar to the V2 and powered with the same engine, the V3 had minor changes including having a larger radiator, fuselage spine and vertical stabilizer, having a single cover over the exhaust ports instead of the more common "stack", and it also included modifications to allow armament to be installed in the cowling. The V3 was the first prototype fitted with armament in the form of two 7.92 mm (0.312 in) MG17 machine guns. It was later modified once more to include a sliding canopy and a new fully elliptical wing. It was expected to join the V2 in testing but instead was assigned back to Heinkel in early 1937 for tests with rocket propulsion. During a test, the rocket exploded and the aircraft was destroyed, but in an amazing effort the V3 was rebuilt with several changes, including an enclosed cockpit.

The Contest
At the competing aircraft's demonstration flight for the RLM in October 1935, the thick high-lift aerofoil and open cockpit of the He 112 generated more drag than its contemporary opponent, the Bf 109, causing its performance to suffer despite being equipped with an identical engine. Whereas the Bf 109 prototype was able to clock in a top speed of 467 kph (290 mph), the He 112 could only manage 440 kph (273 mph). The other competing aircraft, the Arado Ar 80 and the Focke-Wulf Fw 159, had been plagued with problems from the outset and were outclassed by both the Bf 109 and the He 112 resulting in them being eliminated from any serious consideration. At the end of the demonstrations, Messerschmitt and Heinkel were awarded contracts to produce ten prototypes for further testing and competitive trials.

At this point, the He 112 was the favorite over the "unknown" Bf 109, but opinions changed when the Bf 109 V2 arrived on 21 March. All the competitor aircraft had initially been equipped with the Rolls-Royce Kestrel engine, but the Bf 109 V2 had the Jumo. From that point on, it started to outperform the He 112 in almost every way, and even the arrival of the Jumo-engined He 112 V2 on 15 April did little to address this imbalance.

The He 112 had better turn performance due to its larger wing, but the Bf 109 was faster at all altitudes and had considerably better agility and aerobatic abilities. During spin tests on 2 March, the Bf 109 V2 showed no problems while the He 112 V2 crashed. Repairs were made to the aircraft and it was returned in April, but it crashed again and was written off. The V1 was then returned to Heinkel on 17 April and fitted with the V2's clipped wings.

Meanwhile, news came in that Supermarine had received a contract for full-scale production of the Spitfire. The Spitfire was far more advanced than any existing German aircraft and this caused a wave of concern in the high command of the Luftwaffe. Time now took on as much importance as any quality of the winning aircraft itself, and the RLM was ready to put any reasonable design into production. That design was the Bf 109, which in addition to demonstrating better performance, was considerably easier to build due to fewer compound curves and simpler construction throughout. On 12 March RLM produced a document called Bf 109 Priority Procurement which indicated which aircraft was now preferred. There were some within the RLM who still favored the Heinkel design, and as a result the RLM then sent out contracts for 10 "zero series" aircraft from both companies.

Testing continued until October, at which point some of the additional zero series aircraft had arrived. At the end of September, there were four He 112s being tested, yet none was a match for the Bf 109. From October on, the Bf 109 appears to have been selected as the winner of the contest. Although no clear date is given, in Stormy Life Ernst Udet himself delivered the news to Heinkel that the Bf 109 had entered series production in 1936. He is quoted as saying, "Pawn your crate off on the Turks or the Japanese or the Romanians. They'll lap it up." With a number of air forces looking to upgrade from biplanes and various designs from the early 1930s, the possibility for foreign sales was promising.

Sources:
Gunston, Bill & Wood, Tony - Hitler's Luftwaffe, 1977, Salamander Books Ltd., London
Wikipedia - He 112