Media365
Tesla is preparing contingency plans to separate its China business as Elon Musk explores a potential merger between the electric vehicle maker and his space company SpaceX, The Wall Street Journal reported on Friday.
The report said Musk had, over the past few years, directed Tesla executives to organise the company’s US and China operations with what he described as a “laser” between them, creating a clear operational divide to protect the company from escalating geopolitical tensions between Washington and Beijing.
That strategy is now taking on greater significance as Tesla executives have reportedly been asked to prepare for a possible separation of the China business ahead of any merger discussions with SpaceX.
Multiple options under consideration
According to the report, Tesla advisers have discussed several options for separating the China business, including a spinoff, an outright sale or even shutting down the operations.
However, it remains unclear how quickly such a move could be executed, and the discussions are still preliminary, meaning the plans could ultimately change.
Geopolitical risks behind the strategy
The report said Musk’s contingency planning predates the merger discussions.
The billionaire was reportedly concerned about Tesla’s dependence on China for lithium iron phosphate (LFP) battery cells and its reliance on semiconductors produced by Taiwan Semiconductor Manufacturing Co. (TSMC), amid fears that a conflict over Taiwan could disrupt global supply chains.
According to people cited by the Wall Street Journal, Tesla aimed to be prepared by 2026 or 2027 for the possibility of a major geopolitical crisis between China and the United States.
Separating Tesla’s China operations would also help address potential conflicts arising from SpaceX’s role as a major US defence contractor. SpaceX launches classified military satellites, provides communications services for the US government and operates Starlink internet services in conflict zones, making it subject to stringent national security regulations.
The report added that one proposal under consideration involves creating stronger firewalls between Tesla’s Chinese subsidiary and the US business. Measures discussed include separate office systems, restricting China-based employees’ access to global operations and establishing a dedicated export entity for vehicles produced at Tesla’s Shanghai factory.
China remains central to Tesla
China is Tesla’s second-largest market after the United States, accounting for around 18 per cent of the company’s global sales in the first half of 2026, according to the report.
Tesla operates two major facilities in Shanghai that manufacture electric vehicles and batteries for both the domestic Chinese market and exports to other countries, although they do not ship vehicles to the United States.
Unlike many foreign automakers operating in China, Tesla owns its manufacturing operations outright rather than through a joint venture with a Chinese partner.
Any separation of the China business would therefore mark one of the biggest strategic changes in Tesla’s history and could significantly affect the company’s valuation.
Musk leaves merger door open
Speculation over a possible Tesla-SpaceX combination intensified after Musk declined to rule out a merger during Tesla’s recent earnings call.
“Obviously we can’t talk about combining companies on earnings calls,” Musk said, adding that any such move would have to follow the appropriate corporate process.
Investor interest in a potential merger has grown following SpaceX’s record-breaking IPO in June, which raised $86 billion and further cemented the aerospace company’s position among the world’s most valuable private enterprises.
Musk has also increasingly highlighted the technological overlap between Tesla and SpaceX, particularly as both companies expand their artificial intelligence capabilities.
Regulatory hurdles likely
Any merger between Tesla and SpaceX would likely face intense regulatory scrutiny in both the United States and China.
According to the Wall Street Journal, Chinese authorities could raise concerns over a major US defence contractor gaining control of Tesla’s factories, technology and supply chain in China. Beijing may also seek safeguards to ensure that SpaceX has no influence over Tesla’s China operations or access to data generated by the company’s roughly two million Chinese vehicle owners.
Cross-border mergers involving multinational companies typically require approvals from regulators across several jurisdictions, particularly when national security concerns are involved.
