Tesla is said to be considering a sale in China to facilitate a merger with SpaceX.

      Tesla is considering options regarding its operations in China, such as selling, spinning off, or shutting down the business to facilitate a potential merger with SpaceX, according to a report from the Wall Street Journal, which Elon Musk has categorically denied.

      This step would help disentangle Tesla's significant manufacturing presence in China from a defense contractor that is facing regulatory complications due to its connections with Beijing, aligning with a trend of more serious merger discussions since SpaceX’s initial public offering (IPO).

      The reasoning behind this consideration revolves around national security rather than financial concerns. SpaceX is a crucial player among Washington's space and defense contractors, and any association with Chinese ownership would attract rigorous scrutiny; thus, integrating Tesla’s operations heavily based in China would present clear challenges.

      Tesla has a substantial presence in China, particularly with its Shanghai Gigafactory, which produces over half of all Tesla vehicles globally and exports to Europe and Asia. This factory is seen as the company's most efficient and cost-effective plant. It achieved a significant milestone in December by manufacturing its four-millionth car in China, emphasizing the importance of the country to Tesla’s overall production. Extracting this operation would represent one of the most significant corporate restructurings the company has attempted.

      The Journal reported that advisors have explored three options: spinning off the operation, selling it outright, or gradually shutting it down. However, it noted that no decisions have been made, and timelines remain uncertain.

      Musk’s reaction was straightforward. He declared, “This has never even come up in a discussion ever. Absurdly fake news,” in a post on X, dismissing the report similarly to how he has previously disregarded other negative Wall Street Journal articles about his companies.

      Nonetheless, this reporting is not entirely inconsistent with Musk’s earlier directives. The paper indicated that he had previously instructed Tesla executives to maintain a clear separation between the U.S. and China divisions to safeguard the American business amid geopolitical tensions.

      Neither Tesla nor SpaceX responded to requests for comments from Reuters. This lack of response, coupled with Musk’s personal denial, leaves the market to judge between the public rebuttal and the detailed reporting.

      The merger itself has gained traction as a legitimate idea. Conversations about merging Tesla and SpaceX have become more substantial since the rocket company's remarkable IPO, as Musk increasingly views his ventures as a cohesive empire.

      He alluded to this connection during Tesla's recent earnings call, discussing "more and more overlap, especially with Terafab,” before stopping and deferring to the company’s general counsel for procedural reasons.

      This overlap is evident in areas such as manufacturing and AI. Tesla’s advancements in robotics and self-driving technology, including its Optimus program, alongside SpaceX’s efforts in computing and satellite technology, are increasingly drawing on shared engineering expertise and resources.

      Regulatory hurdles remain a concern. Analysts from JPMorgan highlighted a “practical bottleneck” regarding approval for any merger, especially in China, where national security concerns about SpaceX's ties to the U.S. government could hinder any agreement.

      Approval from Beijing would be as significant as that from Washington. China exerts influence over Tesla through its Shanghai facility, and it is unlikely to approve a restructuring that transfers a key asset to a U.S. defense contractor without requiring something in return.

      For Tesla investors, the stakes are exceptionally high. The Chinese market serves as both a vital asset and a potential risk, and any effort to separate it could disrupt the production framework that maintains Tesla's competitive margins.

      The push for consolidation is already evident in other areas. Musk has gradually been integrating his companies more closely, from incorporating SpaceX-related startups to consolidating AI and chip projects across the organization, making the prospect of a Tesla-SpaceX merger seem less speculative and more a matter of timing.