The fortunes of Elon Musk’s companies have been relatively poor this year. SpaceX debuted on the Nasdaq in the largest public offering in history before quickly dropping below its IPO price. Meanwhile, a tepid Q2 earnings report led to Tesla’s worst week since 2022, causing the company’s stock to drop 18%.

Both firms have remained a major topic of discussion throughout the summer, with some analysts predicting that a merger may be on the cards in the near future. This Thursday, the Wall Street Journal reported that certain Tesla executives have been instructed to prepare for a separation between the company’s global entity and its Chinese arm.

Musk himself denied the rumors on X shortly after publication, calling them “absurdly fake news.” Regardless, this news was enough to move the needle in the stock market: Tesla shares closed up 3.5% for the day, with a further 2% gain during after-hours trading.

The market has valid cause for skepticism. In April 2024, Musk similarly denied a Reuters report that Tesla was discontinuing its $25,000 car project. Shortly afterward, company executives confirmed that the project was in fact shelved.

What a Tesla China separation would actually involve

Tesla’s China operation is a major generator of revenue for the company, accounting for around 18% of its sales in the first half of this year. It was always, however, designed to be jettisoned in case of emergency. The specific emergency in question is a potential war over Taiwan, which would disrupt supplies of battery cells and chips.

The Wall Street Journal’s report posits that such a severance would be a necessary precursor to a merger between SpaceX and Tesla. If Tesla's entities were not separated in advance, this would place two Chinese automotive factories under a company that launches classified American spy satellites, given SpaceX’s status as a U.S. defense contractor.

U.S. federal agencies accounted for around a fifth of SpaceX’s revenue last year. Its services are therefore often rendered under deals that restrict or classify information about its technology. On the other hand, the Chinese government would be faced with the prospect of a U.S. defense contractor managing the data of millions of Tesla-owning Chinese citizens, as well as two major factories in the country. The complications of appeasing regulators in both countries are therefore a major obstacle, according to analysts at JPMorgan.

So what exactly could a solution to this impasse look like?

Some have speculated that Tesla’s Chinese operation could be shuttered completely, sold outright to another firm, or continue operating independently. Others have posited that a total split is unnecessary, and a system of data firewalling and access control could be enough to appease regulators in both nations.

At any rate, such a split may not even be under consideration. A spokesperson for Tesla China told domestic reporters that no such plan is underway.

What a merged Tesla and SpaceX could look like

If that turns out to be untrue, it would represent a continuation of Musk’s consolidation of his various businesses. SpaceX acquired the one-time trillionaire’s AI venture, xAI, back in February. The same series of corporate mergers also saw it gain ownership over social media platform X. A merger between Tesla and SpaceX would simply continue this trend.

Already the family of businesses shares production infrastructure. In March this year, Musk announced the construction of the $25 billion fabrication plant Terafab in Texas, a joint venture between SpaceX and Tesla. RBC Capital has argued that a consolidation of the two would create a powerhouse with “vertical integration from orbit to ground” and $1 trillion in chip savings over the long term.

On a July 22 earnings call, Musk himself conceded that there was “more and more overlap” between the companies. When, or if, this will result in a corporate merger is still very much up for debate.