As Tesla (TSLA 1.47%) ramps up Model 3 production, it's preparing to expand deliveries beyond the U.S. and Canada. Earlier this month, Tesla started launching a display fleet of Model 3 units in Europe and invited reservation-holders to come see the vehicle in stores. And now Tesla is even taking orders for Model 3 in China, according to Electrek.

The timing of Tesla's international rollout will help set Tesla up to ship Model 3 in higher volumes in 2019. While Tesla seems focused on the domestic market for the second half of the fourth quarter as the company aims for another quarter of record Model 3 deliveries, an international expansion will ensure demand remains in line with growing supply as Tesla's Model 3 production rate increases.

A woman unlocks her Model 3 with a Tesla app on her smartphone

Model 3. Image source: Tesla.

Matching demand to production

Tesla's Model 3 production and deliveries have increased sharply recently. In the company's third quarter, Model 3 deliveries were over 56,000 -- up from about 8,000 and 18,000 in the first and second quarters of 2018, respectively. And Tesla says it expects Model 3 production and deliveries to be even higher in Q4.

With the Model 3's starting price still at a pricey $46,000, not yet down to the $35,000 price point the electric-car company wants to eventually sell the Model 3 for, Tesla likely needs to expand internationally in order for demand to continue supporting production levels of Model 3 at this high price point.

Tesla said in its third-quarter earnings call that it planned to begin Model 3 deliveries to Europe in early 2019, and in Asia Pacific (APAC) by no later than Q2. By expanding internationally, management believes it can prolong high levels of demand for its premium Model 3 versions before it brings to market its planned lower-cost version with a smaller battery. "Average selling price will remain high for several quarters as we expect a richer mix in the initial wave of Model 3 deliveries to Europe and APAC," Tesla said in its second-quarter shareholder letter. 

China: A wildcard market for Tesla

Tesla's expansion to China will be particularly interesting to watch. Though the market has shown promise in the past, with revenue in the market nearly doubling in 2017 compared to 2016, demand for Model S and X has been "challenging" in the market recently, the company said in its third-quarter shareholder letter. This is because of a 40% import duty on the two vehicles, management said.

Tesla vehicle production

Tesla factory. Image source: author.

To help address demand challenges in China, Tesla said in its third-quarter shareholder letter that it was accelerating the timeframe for its plan to build manufacturing capacity in the market in order to bypass important duties and increase the affordability of Model 3.

"We are aiming to bring portions of Model 3 production to China during 2019 and to progressively increase the level of localization through local sourcing and manufacturing," Tesla said.

Until Tesla can bypass a hefty 40% import duty in China, it's unclear how demand for the Model 3 will fare in the important market.

But Tesla CEO Elon Musk is optimistic that overall demand will continue to support further growth in Model 3 deliveries as the company expands internationally. "Looking ahead, we expect to produce and sell even more Model 3s in Q4," Musk said during Tesla's third-quarter earnings call. "I expect that trend to continue into Q1, and we're excited to bring Model 3 to Europe and China early next year, given that the market for mid-size premium sedans in those regions is even larger than in North America."