Elon Musk has spent the summer declining to rule out a merger between Tesla and SpaceX, the two companies he controls. On Thursday evening the Wall Street Journal reported the first sign that someone is preparing for one. Some Tesla executives, the paper said, have been told to get ready to separate the company's China operation, the business that generated about 18% of Tesla's sales in the first half of 2026.
Musk denied it within hours, posting on X that the report was "absurdly fake news" and that the subject had never come up in any discussion. A Tesla China representative told domestic outlets the claim was false. Tesla shares, which closed Thursday at $308.85 after a 3.5% gain, rose roughly 2% more in after-hours trading anyway.
The reason investors reacted at all is that a combined company would not be a car maker with a rocket division attached. SpaceX acquired Musk's AI startup xAI in February in an all-stock deal, and now owns Grok, the chatbot, along with the X social network. Adding Tesla would place self-driving software, humanoid robots, satellite internet and a frontier AI lab under a single owner. It would also place two Chinese factories under a company that launches classified American spy satellites.
What a separation would actually involve
Musk built Tesla's China arm to be detachable years ago, as insurance against a war over Taiwan cutting off battery cells and Taiwanese chips. That was a contingency plan sitting on a shelf. What the Journal describes is different: executives told to prepare for a separation of the China business ahead of a potential merger. The distinction matters because one is defensive planning and the other is deal preparation.
Advisers have discussed a spinoff, an outright sale, or closing the operation, according to the report. Lesser steps were also floated, including a separate corporate entity to handle exports from the Shanghai plant, separate internal systems, and barring China-based staff from other parts of the company. That would be a genuine change. Tom Zhu, Tesla's top executive in China, currently runs the company's global automotive business.
The pressure comes from SpaceX's customer list. Sales to the U.S. government made up 20.9% of its business in 2025, and much of that work sits behind export controls, meaning legal restrictions on who is allowed to see specific technology. Beijing has its own version of the problem. Chinese regulators would be handing a U.S. defense contractor control of Tesla's local factories and the driving data of roughly 2 million Chinese owners.
Why AI investors are watching
The clearest link between the two companies is a chip plant. In March, Tesla, SpaceX and xAI announced a $25 billion fabrication complex called Terafab near Austin. One half would make inference chips, the processors that run a trained AI model rather than train it, for Tesla vehicles and Optimus robots. The other would make radiation-hardened chips for satellites intended to run AI workloads in orbit.
Asked about a merger on the July 22 earnings call, Musk pointed to "more and more overlap, especially with Terafab." The connections already run deeper than silicon. Grok functions as the high-level planner assigning tasks in Tesla's Optimus work, and RBC Capital has argued a combination would create an orbit-to-ground platform with $1 trillion in chip savings over the long term. Tesla's China factories are the awkward piece in that picture.
The reasons to stay skeptical
Nothing has been approved, no timeline exists, and the plans could change. Musk's denial is also worth weighing in both directions. He called a Reuters report false in April 2024 when it said Tesla had killed its $25,000 car, and executives later confirmed the project was dead. A denial from him is not the same as a fact.
Regulators are the harder obstacle. JPMorgan analysts have called approvals in China a practical bottleneck for any merger. Qualcomm abandoned its purchase of NXP Semiconductors in 2018 after Chinese clearance never arrived, and that deal involved no defense contractor.
The financial backdrop is unforgiving. Tesla posted its worst week since 2022 after second-quarter earnings, falling 18% as capital spending guidance rose above $25 billion and free cash flow turned negative. SpaceX has traded below its June IPO price, which raised $86 billion, and reports results on Tuesday.
Musk says the separation was never discussed. The Journal says preparation has started. Both cannot be true, and the answer determines whether Tesla's China business is an asset or an obstacle.