In 1890, Armand Peugeot met with car technology innovators Gottlieb Daimler and Émile Levassor and became convinced that reliable, practical, lightweight vehicles would have to be powered by petrol and have four wheels.

The engine was a German design by Daimler but was licensed for production in France by Panhard et Levassor and then sold to Peugeot.

It was a 15° V-twin and produced 2 bhp, sufficient for a top speed of approximately 18 kilometres per hour (11 mph).

His chief engineer Louis Rigoulot and rising workshop foreman Auguste Doriot proved the robustness of the design, as this demonstration car ran for 2,045 kilometres (1,271 miles), from Peugeot's factory in Valentigney to Paris, over the race course, and then back to Valentigney, at an average speed of 14.7 km/h (9.1 mph), without major malfunctions.

A lightened Type 3 was entered into the Paris–Bordeaux–Paris race in June 1895, finishing second and maintaining an average speed of 21.7 kilometres per hour (13.5 mph).