| Steptronic still has a torque converter...smg uses a clutch |
That's the big difference. Steptronic/tiptronic are still auto transmissions - torque converter, planetary gears and all. SMG is a fully manual transmission which has been "automated" - shifting is handled by electronics which actuate the clutch and associated gear via hydraulics.
SMG is basically an "automatic manual" if you get my drift - still replete with a real clutch, so you get the benefits of a bit more horsepower to the wheels (no torque converter) along with computerized shifting (perfect shift every time). The shifting logic will even blip the throttle for you (enabled by the fact that the e46 line is "drive by wire" - the computer can control the throttle easily).
How does one use the tiptronic?
Once you're in drive, slide the shifter over to the left. You're in sports mode now. It shifts at a higher RPM, and stays in gear much longer. This is great in things like traffic which is slowing down and speeding up lots, as you don't have to use your brakes as much.
Now, you're in sports mode - push the shifter towards the rear of the car. Now your in "manual" mode, where you can select the gears manually (you can also engage it by pushing the shifter towards the front of the car - one downshifts, the other way upshifts). The tranny control logic won't let you shift in to a gear if it will redline the engine, so it's a "safe" manual mode.
To get back into sport mode, slide the shifter to the right, then back to the left. Or just slide to the right to get back into fully auto mode.
It's not a bad feature at all - it's a great comprimise for those of us who had to get auto. It's NOT a manual or SMG, though.