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As electric car maker Tesla Motors Inc. was preparing in 2008 to sell its first product, staffers offered test drives of its Roadster prototype with a glaring problem: the speedometer didn't work.

Operating on a shoestring from a small workshop in northern California at the time, the startup was racing to prove electric cars could be cool even if they had glitches. Today, the company has made more than 110,000 vehicles, and its pricey Model S sedan and Model X sport-utility vehicle are hailed as legitimate contenders to German performance cars.

Thursday's unveiling of its Model 3, its most affordable car to date, represents the capstone of Tesla Chief Executive Elon Musk's "secret master plan" to popularize vehicles with no tailpipe emissions. The Model 3 promises a sedan capable of seating five and going 215 miles on a charge—all at a starting price of $35,000.

Mr. Musk on Friday tweeted that deposits for 180,000 of the vehicles had been amassed in 24 hours. He said the Model 3 generated a $7.5 billion backlog in a day, calculating the average selling price at $42,000. After the speech, Tesla executives huddled with stop U.S. emissions regulators.

During a test drive, Tesla Vice President Doug Field floored a preproduction version of the Model 3, pinning occupants to their seat backs as he demonstrated acceleration billed to go from standstill to 60 miles an hour in less than six seconds. A panoramic roof, large telematics touch screen and futuristic steering wheel and door handles distinguish its interior.

The reservations and the extraordinary initial enthusiasm for the Model 3 contrasts lackluster interest in rival electric and hybrid cars now struggling for sales amid low gasoline prices. General Motors Co. will begin selling a Chevrolet Bolt electric small car later this year with some characteristics similar to the Model 3, but the Detroit auto giant doesn't have a waiting list.

The enormous interest in a car that won't ship for about 18 months, however, presents a difficult challenge for the Palo Alto, Calif., auto maker. Mr. Musk has just 20 months to ramp up production amid continuing quarterly losses and hefty cash outflows.

Even as he and other executives celebrated the latest unveiling with hundreds of cheering fans and Tesla owners at a hanger near Los Angeles, he reiterated a promise to achieve 500,000 total annual sales by 2020, up from about 50,000 last year. That is a very ambitious timetable for any auto maker.

On Friday, investors responded favorably, sending the stock up 3.4% to $237.59 Its current $31.77 billion market value is closing in on GM's $47.85 billion despite selling fewer cars in a year than the Detroit auto giant sells in two weeks.

Delivering desirable cars is only part of the equation. Tesla's sources of cash include selling regulatory credits, battery packs, financing packages and repair services. By early Friday, the company had added $180 million from new deposits, less than 10% of the company's expected annual operating expense.

But Tesla is spending big as it expands an assembly plant in California and opens a battery factory in Nevada. It plans to spend $1.5 billion in capital expenditures this year, or 20% more than its cash on hand, and expects operating expenses will grow 20%.

The company recently installed a new paint shop and stamping lines at a factory it bought from GM and Toyota last decade. More improvements are planned to make way for the Model 3's production.

And Tesla has struggled to meet past commitments on the Model X, a sport-utility vehicle that went on sale last fall. Design glitches, such as complex seats and falcon-wing doors, slowed its production launch and dented the company's bottom line.

Barclays auto analyst Brian Johnson on Friday said the new sedan's ramp could also prove tedious and costly. He doesn't expect full production of the Model 3 until 2019, and wouldn't be surprised if Tesla raised cash in the near-term despite the company's guidance that it has enough money.

"It's a big challenge to ramp up from 50,000 to 500,000," AlixPartners LLP's auto consultant Mark Wakefield said. Even with those challenges Mr. Wakefield reserved a Model 3 within the first 24 hours, has ordered a Model X and owns a Model S.

Mr. Musk isn't ignoring the potential hurdle. In his speech, he laughed about the company's proposed timetable for Model 3 deliveries, adding "I do feel fairly confident it will be next year." Mr. Wakefield said a substantial chunk of those wanting to buy the Model 3 will be patient because Tesla owners are still more interested in being first adopters than immediately filling a slot in their garage.

As Tesla's buyers wait, more rivals will come into view. In addition to the Chevrolet Bolt, luxury car maker Audi AG is preparing to sell an electric SUV and startups, such as California's Faraday Future, have big-spending Chinese backers eager to crack the global electric-vehicle market.

Still, "Tesla has a lot going for it despite these teething problems," Mr.

Wakefield said. Swimming against the tide is core to the company's business model.

Much like Tesla, Toyota Motor Corp. and Honda Motor Co. made headway in the U.S. market when Americans were looking for sleek alternatives to gas guzzlers. But the Japanese first found success with their inexpensive small cars—the Corolla and Civic—and then gradually went up market.

Mr. Musk, lacking scale or car-manufacturing experience, said he took a different route because getting the money and know-how to build a mass-market car wouldn't have happened if the company's hadn't first sold $100,000 sedans, two-seaters and SUVs.

"The S and the X are what pay for [Model 3] development…it was only possible to do that before going through the prior steps," he said.

Write to John D. Stoll at john.stoll@wsj.com

(END) Dow Jones Newswires

April 01, 2016 17:05 ET (21:05 GMT)

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