Elon Musk's penchant for M&A within his own business empire seems to know no bounds. The sometime trillionaire may now be mulling a separation of Tesla's TSLA.O China business, the Wall Street Journal reported on Friday, citing sources. The move would help him swerve around looming obstacles to a potential tie-up with SpaceX SPCX.O. It also makes sense in an increasingly bifurcated global auto industry. But it's an idea that looks best on paper.
Tesla advisers have discussed options including a spinoff, sale or closure, the WSJ story added. Musk took to his social media platform X to dismiss the report as “fake news”, but the idea will be difficult to dismiss.
Without a split, hitching $1.2 trillion Tesla to SpaceX – something Musk has hinted at – would be hard given the U.S. rocket maker’s government defence contracts. It is already taking measures to avoid any Chinese influence, like instructing suppliers to employing Chinese nationals at facilities making products for SpaceX, the Nikkei reported.
The rewards for tolerating geopolitical risks from links to the People's Republic are also less alluring than in the past. Chinese drivers increasingly prefer local marques, which bagged 72% of market share in the first half of 2026, double their 2020 showing, according to consultancy Automobility. Tesla sold some 240,000 vehicles in the domestic market in the first half, 9% lower than the same period last year, per Automobility's data.
That suggests Chinese customers are only buying about half the number of vehicles it can make at its Shanghai plant. The factory is also an export hub, but U.S. and European import tariffs are biting.
Pricing a sale would be tough. Tesla's shares trade at over 200 times forecast earnings for 2027, per Visible Alpha. Toyota 7203.T, which sold six times as many vehicles last year and whose net margin is expected to be double Tesla’s next year, is valued at 10 times. Tesla's investor-fan base has long priced in the belief that Musk’s futuristic forays into robots and robotaxis pay off. But a buyer or spun-out entity wouldn’t benefit from that unless a deal were packed with multiple years-long contracts with the former owner, which would risk calling its new-found independence into question.
So even though China revenue made up nearly a fifth of the group’s $51 billion sales in the first half, the unit would surely have to go on the block at a discount to Tesla's overall valuation.
Other companies don’t face the same problem. Whether the deal happens or not, the idea of it alone could rev up a bigger debate about carmakers’ decoupling from troubled Chinese operations. A Tesla deal, though, would struggle to be the first to hit the road.
Context from the Reuters report
Some Tesla executives have been told to prepare for a separation of the Chinese business ahead of a possible merger, the Wall Street Journal reported on July 31, citing sources. Tesla advisers have discussed options including a spinoff, sale or closure, the report said, citing another source.
Tesla CEO Elon Musk denied the report in a post on X, calling it "absurdly fake news."
Tesla reported revenue of $4.7 billion from China in April to June, around 17% of its total $28 billion revenue in the quarter. Its Shanghai factory, which has capacity to make more than 950,000 cars a year per Tesla’s last quarterly update, is its largest plant.
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