Tesla Considers China Business Sale for Potential SpaceX Merger

Electric vehicle manufacturer Tesla is reportedly considering divesting or spinning off its China business unit to pave the way for a potential merger with space and satellite technology company SpaceX. According to the Wall Street Journal, citing sources familiar with the matter, Tesla executives have been instructed to prepare for a separation of its China operations. This strategic move is seen as part of Elon Musk's long-term vision to consolidate his technology empire, as he is CEO of both companies.

Reports indicate that Tesla's advisors have explored various options for the China division, including a spinoff, sale, or closure. Elon Musk had previously stated that he structured Tesla's China business to be easily separable from its U.S. operations due to geopolitical tensions between the two countries, a design that could also prove beneficial for a potential SpaceX merger. Musk's history of consolidating his ventures, such as integrating AI company xAI into SpaceX earlier this year and merging SolarCity with Tesla in 2016, highlights this pattern. Following its initial public offering (IPO) in June, SpaceX achieved a market capitalization of approximately $1.8 trillion, surpassing Tesla's market value of $1.5 trillion at that time. Musk holds about a 13% stake in Tesla (with options to increase to 20%) and is estimated to own 49% of SpaceX shares with 84% voting control after its IPO.

This potential merger is expected to have significant implications for the markets. Analysts anticipate that a combination would create a powerful “vertical integration from orbit to ground” AI ecosystem, by merging Starlink's connectivity, Tesla's physical-world AI deployment, and SpaceX's orbital compute infrastructure. Experts like RBC Capital Markets analyst Tom Narayan believe this merger could generate compelling long-term synergies. Furthermore, the Terafab collaboration between Tesla and SpaceX is projected to lead to substantial chip cost savings. However, a merger also presents potential challenges for Tesla shareholders, particularly given SpaceX's reported net loss of $4.3-$5 billion in 2025 and negative free cash flow of $9.1 billion in Q1 2026, raising concerns about potential share dilution.

In a broader economic and political context, the potential separation of Tesla's China business is closely linked to escalating geopolitical tensions and national security concerns between the U.S. and China. SpaceX's role as a U.S. government and military contractor could raise national security issues for Beijing, potentially triggering scrutiny from U.S. regulators. Tesla's China operations are critically important, accounting for approximately 50% of the company's total revenue and a significant portion of its global sales. Nevertheless, retail sales in China experienced a nearly 10% year-over-year decline in April.

Analyst and market expectations suggest a high probability of a Tesla-SpaceX merger. Analysts like Gene Munster now place the likelihood of such a merger at 90%. However, the exact timing and structure of the merger remain uncertain. Tesla shareholders might demand greater control or a higher valuation for Tesla within any combined entity. RBC Capital lowered its price target on TSLA to $480, implying that shareholders might be receptive to a deal at that valuation. Nonetheless, a 44% decline in SpaceX shares from their June peak introduces uncertainty regarding the timing of any potential deal.