Tesla Considers Selling China Business as SpaceX Merger Expectations Heat Up

TradingKey - According to The Wall Street Journal, due to geopolitical tensions, Tesla ( TSLA) is preparing for a potential separation of its Chinese operations from its US operations, which could also clear regulatory hurdles for a future merger with SpaceX ( SPCX ).

People familiar with the matter said Elon Musk has in recent years requested Tesla to clearly distinguish its US and Chinese operations structurally, ensuring the US business can still operate independently in the event of a major shift in relations between the two countries.

As discussions of a potential merger between Tesla and SpaceX heat up, some executives were recently asked to assess the feasibility of divesting the Chinese operations prior to the transaction.

Options discussed by Tesla's advisors include a spinoff and listing, an outright sale, or even halting certain operations in extreme scenarios. Management has also studied establishing an independent sales entity for the Shanghai plant's export business, as well as setting up separate information and office systems to restrict Chinese employees from directly accessing internal data from other regions.

However, the discussions are still in the early stages, with specific plans and implementation timelines not yet determined, and they may be adjusted as the regulatory and market environments change. Neither Tesla nor SpaceX has publicly responded to the matter.

If Tesla and SpaceX were to merge, one of the biggest obstacles would be their vastly different regulatory environments. SpaceX is a major US defense and national security contractor whose operations involve military and classified satellite launches, government communications, and theater internet services, which are subject to export controls, information security, and government secrecy regulations. Tesla, conversely, has large-scale manufacturing, supply chain, and user data assets in China; a combination of the two companies would inevitably trigger strict scrutiny from both US and Chinese regulators.

However, the cost of completely divesting the Chinese business would also be massive.

China is Tesla's second-largest market after the United States, accounting for approximately 18% of the company's sales in the first half of 2026. Shanghai currently houses a vehicle Gigafactory and Megapack-related facilities, where the vehicle plant not only supplies the Chinese market but also serves as a crucial export hub for Tesla to Europe and the Asia-Pacific region.

The Shanghai plant has also long been one of Tesla's most productive and lowest-cost manufacturing bases. The Chinese business relies on hundreds of local suppliers to produce the Model 3 and Model Y, with most components already sourced locally.

While selling or spinning off these assets could generate significant capital and lower geopolitical risks, it could also undermine Tesla's global production capacity, supply chain efficiency, and profitability, while meaning the company gives up direct control of the world's second-largest electric vehicle market.

The escalating discussions over a potential merger are also linked to Musk's efforts to reorganize his business ventures in recent years. As Tesla intensifies its investments in artificial intelligence, robotics, and autonomous driving, the overlaps between the two companies in AI computing power, energy, communications, and automation have continued to grow.

Musk has not recently ruled out a merger, but stated that such a transaction would have to follow formal corporate governance and approval procedures. Gwynne Shotwell, president and chief operating officer of SpaceX, has also previously indicated that closer integration could help simplify the management of Musk's businesses.

SpaceX completed its initial public offering in June, raising approximately $85.7 billion, and currently has a market value of about $1.49 trillion, higher than Tesla's valuation of approximately $1.22 trillion.