Henschel was a German locomotive manufacturer. Soon after Hitler's rise to power, Henschel decided to start designing aircraft, one of the first being the Hs 123. The aircraft was designed to meet the 1933 dive bomber requirements for the reborn Luftwaffe. Both Henschel and rival Fieseler (with the Fi 98) competed for the production contract requirement, which specified a single-seat biplane dive-bomber. General Ernst Udet, a World War I ace, flew the first Hs 123V1 prototype on its first public demonstration fight on 8 May 1935. The first three Henschel prototypes, powered by 650 hp (485 kW) BMW 132A-3 engines, were tested at Rechlin in August 1936. Only the first prototype had "smooth" cowlings, from that point on, all aircraft had a tightly-fitting cowling that included 18 fairings covering the engine valves. The Henschel prototypes did away with bracing wires and although they looked slightly outdated with their single faired interplane struts and cantilever main landing gears attached to smaller (stub) lower wings, the Hs 123 featured an all-metal construction, clean lines and superior maneuverability. Its biplane wings were of a "sesquiplane" configuration, whereby the lower wings were significantly smaller than the top wings.

The overall performance of the Hs 123 V1 prototype prematurely eliminated any chances for the more conventional Fi 98 which was cancelled after a sole prototype had been constructed. During testing, the Hs 123 proved capable of pulling out of "near-vertical" dives, however, two prototypes subsequently crashed due to structural failures in the wings that occurred when the aircraft were tested in high-speed dives. The fourth prototype incorporated improvements to cure these problems, principally, stronger centre-section struts were fitted. After it had been successfully tested, the Hs 123 was ordered into production with an 880 hp (656 kW) BMW 132Dc engine.

The Hs 123 was intended to replace the Heinkel He 50 biplane reconnaissance and dive bomber as well as acting as a "stop-gap" measure until the Junkers Ju 87 became available. As such, production was limited and no upgrades were considered, although an improved version, the Hs 123B was developed by Henschel in 1938. A proposal to fit the aircraft with a more powerful (960 hp (716 kW) "K"-variant of its BMW 132 engine did not proceed beyond the prototype stage, the Hs 123 V5. The V6 prototype fitted with a similar powerplant and featuring a sliding cockpit hood was intended to serve as the Hs 123C prototype.

Nonetheless, production of the type ended in October 1938 with less than 1000 aircraft in all series.

Sources:
Gunston, Bill - The Encyclodepia of the Worlds Combat aircraft, 1976, Chartwell Books, Inc., New York
Brown, Eric, Captain - Wings of the Luftwaffe, 1979, Airlife Publishing Ltd., Shrewsbury
Gunston, Bill & Wood, Tony - Hitler's Luftwaffe, 1977, Salamander Books Ltd., London
Donald, David - The Complete Encyclopedia Of World Aircraft, 1997, Brown Packaging Books Ltd., London
Wikipedia - Henschel Hs 123