Tesla Plans to Spin Off China Business to Pave Way for SpaceX Merger
Miles Bennett
Tesla executives have been told to prepare for divesting the company's China business — via spinoff, sale, or shutdown — to advance a potential merger with SpaceX, the Wall Street Journal reports. The Shanghai factory, the pillar behind Tesla's mass-market profitability, is turning from strategic asset into compliance liability.
Why cut loose the China business?
Musk has directed executives to create a "laser-cut" separation of U.S. and China operations, targeting 2026–2027 to brace for a potential escalation in the Taiwan Strait.
SpaceX is a major U.S. defense contractor handling classified satellite launches and warzone internet services. Government work accounted for 20.9% of SpaceX revenue in 2025.
This means → as long as Tesla keeps its China factory, the merged entity would face a structural block in defense-security reviews — a company with a Chinese manufacturing base cannot hold top-tier U.S. defense contracts.
What are the divestiture options, and why is it hard?
Tesla advisors are weighing three paths: spin off into an independent company, sell outright, or shut down the China business.
Transitional steps under discussion include a standalone export-sales entity and firewalling Chinese employees' system access.
In plain terms = the hardest part is people — China chief Tom Zhu also runs global vehicle operations. The two sides are deeply intertwined, not a line you can simply draw.
How critical is the Shanghai factory to Tesla?
The Shanghai plant is the pillar that enabled Tesla to achieve scale profitability and become a global mass-market EV leader.
Divesting it would hit Tesla's standalone valuation and directly reshape the pricing logic of the combined post-merger entity.
This reflects a core dilemma: the more valuable the China business, the higher the cost of cutting it — but without cutting it, the merger cannot proceed.
How would Beijing respond?
Once merged, a U.S. defense contractor would control Tesla's Chinese factories and supply chain. Beijing is concerned that related technology could be repurposed for military use.
Data from roughly 2 million Chinese Tesla owners would also fall under a U.S. defense enterprise — another sensitive pressure point.
Sources say Beijing may demand commitments and business firewalls to block SpaceX influence over China operations and prevent dual-use materials such as rare earths from flowing to SpaceX.
Where does the deal stand now?
Musk said on last week's earnings call: "We obviously can't discuss things like a merger on an earnings call — it has to go through the proper process."
SpaceX completed its IPO in June this year, raising $86 billion.
This means → whether the China business can be cleanly divested is no longer a question of "if" but the key prerequisite that determines whether this merger can even begin.
Content is for reference only, not financial advice.