Washington: Tesla’s extensive operations in China could become a major obstacle to a potential merger with SpaceX, as the automaker’s reliance on the country for manufacturing and sales clashes with the space company’s growing involvement in sensitive US government and defence contracts.
Speculation about combining the two Elon Musk-led companies has intensified in recent months, particularly following SpaceX’s record $75 billion initial public offering in June. Both companies are valued at more than $1 trillion.
Musk further fuelled speculation during Tesla’s latest earnings call by pointing to increasing overlap between the businesses. However, Musk rejected a report that Tesla executives had been instructed to prepare for a separation of the company’s China operations ahead of a possible merger, saying such a move had never been discussed.
Analysts and investors nevertheless see Tesla’s China presence as a potential regulatory challenge. SpaceX generated about one-fifth of its 2025 revenue from US federal agencies, according to its IPO filing, meaning a merger involving Tesla’s Chinese operations could attract significant national security scrutiny in Washington.
One possible solution could involve separating Tesla’s China business. Analysts have identified several potential approaches, including spinning it off while retaining a majority economic interest, selling the business while maintaining long-term licensing arrangements, or disposing of the operation entirely.
Such a restructuring would be complicated by the importance of Tesla’s Shanghai Gigafactory, the company’s largest and most productive manufacturing facility. The plant has historically accounted for more than half of Tesla’s global deliveries and serves as a major export hub for Europe, Canada and the Asia-Pacific region.
Any separation would also require navigating Chinese regulatory requirements. Beyond manufacturing, Tesla’s Chinese operations are connected to its global business through software, intellectual property, artificial intelligence systems, data governance and supply chains.
Long-term licensing arrangements could allow a standalone Chinese operation to continue using Tesla’s technology and brand. However, experts warn that ongoing transfers of technologies such as autonomous-driving software could potentially encounter US regulatory restrictions.
China also remains important to Tesla’s core vehicle business, which helps finance the company’s investments in autonomous driving, artificial intelligence and humanoid robotics. Separating the Chinese operation could therefore create significant manufacturing and financial challenges.
Some investors, however, argue that Tesla’s longer-term valuation increasingly rests on autonomous driving and robotics rather than traditional vehicle manufacturing. That could make a restructuring more attractive if it ultimately clears regulatory obstacles to a closer relationship with SpaceX.
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