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I agree that the S4 feels more bespoke and special than a 335i (I'm not talking about handling, power, braking, balance, etc.). It has unique seats and a more upscale interior on the inside and different body panels for a more unique exterior. Without looking at the mirrors or the badge, I can tell an S4 from an A4. This is compared to how BMW just slots a different engine into the exact same car (à la C250 ---> C350).
But I think that the M-Sport 335i is not the competition to the Audi S4. BMW introduced the 335is for this very reason and now BMW will have a level of M-performance cars to compete directly with Audi's S-line. The BMW M135i has more power, unique rims, bigger brakes, different steering, different bushings, etc.
So at least they're trying to make something to slot between the 335i and M3, which would likely make the M3 more hardcore (just like how Ferrari made the 458 much more serious than the F430 after introducing the California).
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