Will Tesla's China Business Become a Hot Potato? Merger with SpaceX Could Stall on U.S. National Security Review

If Tesla (TSLA-US) were to merge with SpaceX (SPCX-US), its China operations could become the biggest hurdle. Tesla heavily relies on the Chinese market and the Shanghai Gigafactory, while SpaceX increasingly depends on U.S. government and defense contracts—making their combination likely to face stringent national security reviews in Washington.

Speculation about a potential merger between the two companies, each valued at over $1 trillion, has intensified in recent months, particularly after SpaceX completed a record-breaking $75 billion initial public offering (IPO) in June. Elon Musk also mentioned during Tesla’s last earnings call that the overlap between the two companies’ businesses is growing.

The Wall Street Journal (WSJ) recently reported that Tesla executives have been told to prepare for a potential spin-off of its China business to pave the way for a possible merger. However, Musk denied these claims, emphasizing that spinning off the China business “has never been discussed.”

Three Paths to Splitting China Operations

Despite Musk’s denial, analysts and investors believe Tesla’s China operations could complicate the merger. SpaceX’s IPO filings show that about one-fifth of its revenue in 2025 will come from U.S. federal agencies. Combining with Tesla, which has extensive China operations, would inevitably invite stricter national security and regulatory scrutiny.

Seth Goldstein, an analyst at Morningstar, pointed out that Tesla has roughly three options if it decides to spin off its China business: first, creating an independent company while retaining majority economic rights; second, selling the business and signing a long-term brand licensing agreement; third, a full sale, potentially to another automaker. All three options could help alleviate regulatory concerns from both the U.S. and China.

Brian Mulberry, chief market strategist at Zacks Investment Management, said that carving out the China business could remove barriers to Tesla merging with SpaceX in the U.S., but it would also create new governance challenges.

The Shanghai Gigafactory is Tesla’s largest and highest-capacity production site, serving as a crucial export hub to Europe, Canada, and the Asia-Pacific region. It has accounted for more than half of Tesla’s global deliveries in the past. The Chinese government has previously granted Tesla preferential treatment, including corporate income tax reductions from 2019 to 2023, giving Beijing substantial influence over any restructuring plan.

Mulberry believes that an independent Tesla China company would need government support, and Beijing might demand board seats or insist on placing officials with state affiliations into management roles. If the spun-off entity lists in Hong Kong, most foreign investors might still accept it. But if it goes public within mainland China, concerns over shareholder rights and corporate governance could prompt some overseas shareholders to exit.

Software, AI, and Supply Chain Are Harder to Separate

From a hardware and manufacturing standpoint, Tesla’s China operations have a certain degree of independence, making them appear easier to split off compared to other regions. However, Bill Russo, founder of Automobility, points out that the real challenge lies in how to disentangle shared software, intellectual property, artificial intelligence (AI) systems, data governance, and supply chains.

A newly established Chinese company could continue using the Tesla brand and technology through long-term licensing agreements, but this could make it difficult to maintain consistency across global markets. Christopher Tang, a professor at UCLA Anderson School of Management, also warns that if Tesla continues providing autonomous driving software updates to the Chinese entity, it could violate U.S. technology transfer restrictions.

Moreover, while investors currently value Tesla based on Musk’s commitments to autonomous driving and robotics, the core automotive business remains the primary funding source for these new ventures—and China is indispensable to both sales and production. An investor who holds stakes in both Tesla and SpaceX questioned whether Tesla has alternative production capacity of comparable scale elsewhere if it loses the Shanghai factory.

Nevertheless, Steve Greenfield, founder of Automotive Ventures, believes that if Musk’s ultimate goal is to integrate Tesla into SpaceX and shift focus from automobiles to humanoid robots and autonomous driving over the next five to ten years, the short-term brand and manufacturing impact of exiting China might not be his top priority.