Tesla considers separating China business amid SpaceX merger talks: Report
What's the story
Tesla is considering the separation of its China business in light of a possible merger with SpaceX, The Wall Street Journal reported. The company's advisers have discussed various options for this separation, including a spinoff, sale, or even closure. However, it's still unclear how quickly these plans could be executed, and they could change as discussions are still in early stages.
Strategic divide
Musk's strategy to mitigate geopolitical risks
Over the past few years, Elon Musk has directed Tesla executives to create a clear operational divide between its US and China business. This was done to protect the company from rising geopolitical tensions between Washington and Beijing.
Now, this strategy is taking on more importance as Tesla prepares for a possible separation of its China business ahead of any merger talks with SpaceX.
Supply chain fears
Preparing for potential geopolitical crisis
Musk has long been worried about Tesla's reliance on China for lithium iron phosphate (LFP) battery cells and its reliance on semiconductors from Taiwan Semiconductor Manufacturing Co. (TSMC).
He fears that a possible conflict over Taiwan could disrupt global supply chains.
The report added that Tesla hopes to be prepared by 2026 or 2027 for a major geopolitical crisis between China and the United States.
Conflict resolution
National security implications and regulatory challenges
Separating Tesla's China operations could also mitigate potential conflicts arising from SpaceX's defense contracts.
The company launches classified military satellites, provides communications services for the US government, and operates Starlink internet services in conflict zones.
These activities are subject to strict national security regulations.
One idea is to create stronger firewalls between Tesla's Chinese subsidiary and its US business.
Market impact
Impact of separation on Tesla's valuation
Tesla's China operations account for about 18% of its global sales in H1 2026.
The company has two major plants in Shanghai that make EVs and batteries for the local market and exports.
Unlike other foreign automakers, Tesla owns its manufacturing operations outright instead of going through a joint venture with a Chinese partner.
Any separation would be one of the biggest strategic shifts in Tesla's history and could greatly impact its valuation.
Merger challenges
Regulatory hurdles and investor interest in SpaceX's IPO
A Tesla-SpaceX merger would likely face regulatory scrutiny from both the US and China.
Chinese regulators may be concerned about a major US defense contractor controlling Tesla's factories, technology, and supply chain in China.
They may also seek safeguards to prevent SpaceX from influencing or accessing data generated by Tesla's two million Chinese vehicle owners.
Despite these challenges, investor interest has grown in the potential merger after SpaceX's record-breaking $86 billion IPO in June.