On January 11, 1934, following specifications laid down by Heinz Guderian, the Army Weapons Department drew up plans for a medium tank with a maximum weight of 24,000 kg (53,000 lb) and a top speed of 35 km/h (22 mph). It was intended as the main tank of the German Panzer divisions, capable of engaging and destroying opposing tank forces.
At the time, it was widely held that tanks would be used in two ways. The first use was, of course, direct combat against other tanks and other armoured vehicles, requiring the tank to fire armour piercing (AP) shells. The second use was protecting other tanks against anti-tank guns and infantry, firing high explosive shells at such soft targets. It was the infantry, in prepared defences and equipped with anti-tank guns, that was thought to present the biggest threat to armour. Tanks designed to operate with friendly infantry against the enemy generally carried more armour and were heavier. A separate class, known as cruisers or mediums, were intended to exploit gaps in the enemy lines where opposition had been removed, moving through and attacking the enemy's unprotected lines of communication and the rear areas. These designs were lighter and faster. The Panzer III was built to this lighter standard, and was intended to be paired with the Panzer IV. The infantry-support role was provided by the turretless Sturmgeschütz assault gun, mounting a howitzer on a Panzer III chassis.
Daimler-Benz, Krupp, MAN, and Rheinmetall all produced prototypes. Testing of these took place in 1936 and 1937, leading to the Daimler-Benz design being chosen for production. The first model of the Panzer III, the Ausführung A. (Ausf. A), came off the assembly line in May 1937; ten, two of which were unarmed, were produced in that year. Mass production of the Ausf. F version began in 1939. Between 1937 and 1940, attempts were made to standardize parts between Krupp's Panzer IV and Daimler-Benz's Panzer III.
Much of the early development work on the Panzer III was a quest for a suitable suspension. Several varieties of leaf-spring suspensions were tried on Ausf. A through Ausf. D before the torsion-bar suspension of the Ausf. E was standardized. The Panzer III, along with the Soviet KV heavy tank, was one of the first tanks to use this suspension design.
A distinct feature of the Panzer III, influenced by British Vickers tanks (1924), was the three-man turret. This meant that the commander was not distracted with another role in the tank (e.g. as gunner or loader) and could fully concentrate on maintaining awareness of the situation and directing the tank. Most tanks of the time did not have this capability, providing the Panzer III with a combat advantage versus such tanks. For example, the French Somua S-35 only had a one-man turret crew, and the Soviet T-34 originally had a two-man turret crew. The practical importance of this feature is signified by the fact that not only all the further German tank designs inherited it, but also later into the war, most Allied tank designs either quickly switched to the three-man turret, or they were abandoned as obsolete.
The Panzer III, as opposed to the Panzer IV, had no turret basket, merely a foot rest platform for the gunner.
The Panzer III was intended as the primary battle tank of the German forces. However, when it initially met the KV-1 and T-34 tanks it proved to be inferior in both armour and gun power. To meet the growing need to counter these tanks, the Panzer III was up-gunned with a longer, more powerful 50-millimetre (1.97 in) gun and received more armour although this failed to effectively address the problem caused by the KV tank designs. As a result, production of self-propelled guns, as well as the up-gunning of the Panzer IV was initiated.
In 1942, the final version of the Panzer III, the Ausf. N, was created with a 75-millimetre (2.95 in) KwK 37 L/24 cannon, a low-velocity gun designed for anti-infantry and close-support work. For defensive purposes, the Ausf. N was equipped with rounds of HEAT ammunition which could penetrate 70 to 100 millimetres (2.76 to 3.94 in) of armour depending on the round's variant, but these were strictly used for self-defense.
The Japanese government bought two Panzer IIIs from their German allies during the war (one 50 mm and one 75 mm). Purportedly this was for reverse engineering purposes, since Japan put more emphasis on the development of new military aircraft and naval technology and had been dependent on European influence in designing new tanks. By the time the vehicles were delivered the Panzer III's technology was obsolete.
The Panzer III Ausf. A through C had 15 mm (0.59 in) of rolled homogeneous armour on all sides with 10 mm (0.39 in) on the top and 5 mm (0.20 in) on the bottom. This was quickly determined to be insufficient, and was upgraded to 30 mm (1.18 in) on the front, sides and rear in the Ausf. D, E, F, and G models, with the H model having a second 30 mm (1.18 in) layer of face-hardened steel applied to the front and rear hull. The Ausf. J model had a solid 50 mm (1.97 in) plate on the front and rear, while the Ausf. J¹, L, and the M models had an additional layer of offset 20 mm (0.79 in) homogeneous steel plate on the front hull and turret, with the M model having additional 5 mm (0.20 in) Schürzen spaced armour on the hull sides, and 8 mm (0.31 in) on the turret sides and rear. This additional frontal armor gave the Panzer III frontal protection from most British and Soviet anti-tank guns at all but close ranges. The sides were still vulnerable to many enemy weapons, including anti-tank rifles at close ranges.
The Panzer III was intended to fight other tanks; in the initial design stage a 50-millimetre (1.97 in) gun was specified. However, the infantry at the time were being equipped with the 37-millimetre (1.46 in) PaK 36, and it was thought that, in the interest of standardization, the tanks should carry the same armament. As a compromise, the turret ring was made large enough to accommodate a 50-millimetre (1.97 in) gun should a future upgrade be required. This single decision would later assure the Panzer III a prolonged life in the German Army.
The Ausf. A to early Ausf. F were equipped with a 3.7 cm KwK 36 L/45, which proved adequate during the campaigns of 1939 and 1940, but the later Ausf. F to Ausf. J were upgraded with the 5 cm KwK 38 L/42 and the Ausf. J¹ to M with the longer 5 cm KwK 39 L/60 gun in response to increasingly better armed and armoured opponents.
By 1942, the Panzer IV was becoming Germany's main medium tank because of its better upgrade potential. The Panzer III remained in production as a close support vehicle. The Ausf. N model mounted a low-velocity 7.5 cm KwK 37 L/24 gun - the same used by the early Panzer IV Ausf. A to Ausf. F models. These guns had originally been fitted to older Panzer IV Ausf A to F1 models and had been placed into storage when those tanks had also been up armed to longer versions of the 75 mm gun.
All early models up to and including the Ausf. F had two 7.92-millimetre (0.31 in) MG 34 machine guns mounted coaxially with the main gun, and a similar weapon in a hull mount. Models from the Ausf. G and later had a single coaxial MG34 and the hull MG34.
The Panzer III Ausf. A through C were powered by a 250 PS (184 kW), 12-cylinder Maybach HL 108 TR engine, giving a top speed of 32 km/h (20 mph) and a range of 150 km (93 mi). All later models were powered by the 300 PS (221 kW), 12-cylinder Maybach HL 120 TRM engine. Top speed varied, depending on the transmission and weight, but was around 40 km/h (25 mph). The range was generally around 155 km (96 mi).