Tesla executives have been told to evaluate a separation or sale of the company’s China business, The Wall Street Journal reported, citing a person familiar with the matter. The move is being examined as a way to clear regulatory obstacles ahead of a potential merger with SpaceX.
The idea has gained traction as discussion around a Tesla-SpaceX combination has picked up. Elon Musk said earlier this month that he would not rule out a merger between the two companies, pointing to growing overlap between their businesses. In a June interview with CNBC, SpaceX President and Chief Operating Officer Gwynne Shotwell said a merger might make Musk’s cross-company management “a little easier.”
China operations emerge as a central merger hurdle
According to the report, one of the biggest problems in any Tesla-SpaceX deal is SpaceX’s dual role. The company is an important participant in U.S. national security satellite programs and also serves as a defense contractor to the U.S. government, making it highly sensitive in the eyes of Chinese regulators.
If Tesla and SpaceX were merged, Tesla’s wholly owned manufacturing plant and supply-chain assets in China would come into direct legal and geopolitical conflict with U.S. defense interests. Unlike most foreign automakers that entered China through joint ventures, Tesla operates there through a fully owned structure. That arrangement once gave Tesla a commercial edge. In this situation, it has become a major complication.
JPMorgan analysts said obtaining approval from Chinese regulators would be the key bottleneck for such a merger.
Three options under review: spin-off, sale, or closure
The report said Tesla advisers are discussing three possible routes for separating the China business: a spin-off, a sale, or a direct shutdown.
At the same time, senior executives are considering setting up a separate sales entity for exports from the Shanghai factory. They are also discussing isolation measures that would prevent China-based employees from directly accessing office systems used by other business units.
The report added that Musk had already asked Tesla executives years ago to build what was described as a “laser-like” firewall between U.S. and China operations. The goal was to preserve the U.S. side of the business if geopolitical tensions between the two countries were to intensify. Even so, the timeline for any separation of Tesla’s China business remains unclear, and the plan is still subject to change.
Shanghai factory would be difficult to give up
Any decision to carve out the China business would force Tesla to reconsider one of the most important manufacturing assets in the global auto industry. Gigafactory Shanghai is the company’s largest and most efficient plant, according to the report. It has annual capacity of more than 950,000 vehicles, contributes more than half of Tesla’s global deliveries, and serves as an export hub for Europe and the Asia-Pacific region.
Its cost advantage is tied to a deeply localized supply chain. China-made Model 3 and Model Y vehicles have local parts content above 95%, supported by about 400 domestic suppliers. More than 60 of those suppliers also serve Tesla’s other factories worldwide.
In the second quarter of this year, total sales and exports from the Shanghai plant rose 32.8% from a year earlier. In June alone, China deliveries of the Model 3 and Model Y climbed more than 24.4% year over year.
Tesla faces a difficult trade-off in its second-largest market
China is Tesla’s second-largest sales market after the United States. The company is also dealing with intensifying competition there from domestic automakers including BYD.
Spinning off the China business would mean giving up a large local supply chain and what the report described as Tesla’s lowest-cost production base. Keeping it, on the other hand, could leave a SpaceX merger stuck in regulatory review for an extended period.
The report also noted that SpaceX completed a record-setting $86 billion IPO last month. As of Thursday’s close, its stock was down 16.8% from the offering price, giving it a market capitalization of about $1.48 trillion. Tesla’s market value was listed at about $1.22 trillion.