July 30 (Reuters) – Tesla executives have been told to prepare for a separation of its China business ahead of a potential merger with SpaceX, the Wall Street Journal reported on Thursday, citing a person familiar with the talks.
A merger between Elon Musk’s Tesla and SpaceX would raise geopolitical and regulatory hurdles, particularly in China, because SpaceX is a major U.S. defense contractor involved in national security and satellite programs, while Tesla operates wholly owned manufacturing facilities in China.
Tesla and SpaceX could not be immediately reached for comment outside regular business hours.
Tesla advisers have discussed possible options for a separation, including a spin off, sale or closure, the WSJ report said, adding that it was unclear how quickly Tesla could move on the China business and that the plans could change.
CEO Musk had in recent years instructed Tesla executives to organize the company with a “laser” between its U.S. and China businesses, aiming to ensure that in the event of geopolitical strife between the two countries, at least the U.S. half of Tesla would survive, the Journal said, citing sources.
Unlike many foreign automakers, Tesla’s Chinese vehicle business is not structured as a joint venture with a local partner.
Tesla’s Gigafactory Shanghai remains its largest and most productive plant globally, serving as its key export hub for Europe and the Asia-Pacific region.
The facility historically accounts for more than half of Tesla’s global deliveries, with an annual production capacity of more than 950,000 vehicles.
CHINA IS TESLA’S NO.2 MARKET
SpaceX went public last month after a record $75 billion initial public offering and was valued at $1.48 trillion as of Thursday’s close. Tesla has a market capitalisation of $1.22 trillion.
While Giga Shanghai acts as a vital export pipeline, China itself is Tesla’s second-largest market globally after the United States, though it faces intense pressure from local players such as BYD.
The Journal reported that executives have also discussed creating a separate sales entity to handle exports from the Shanghai plant. Tesla could create separate office systems and bar China-based employees’ direct access to other company units, it added.
Earlier this month, Musk left the door open to the EV maker merging with his other trillion-dollar-plus-valued firm SpaceX, declining to dismiss the possibility and citing growing overlap between the companies.
SpaceX President and Chief Operating Officer Gwynne Shotwell has also acknowledged potential benefits, telling CNBC in June that folding the companies together “might make Elon’s life a little easier” by streamlining management across his businesses.
However, JPMorgan analysts have pointed to the “practical bottleneck” of getting regulatory approvals for both companies, particularly in China, where national security concerns over SpaceX’s U.S. government ties could pose problems.
Through its China entity, Tesla achieved the lowest costs to manufacture its Model 3 and Model Y with the help of more than 400 domestic suppliers, a Tesla China executive has previously said, adding that more than 60 of them also supply Tesla globally.
Deliveries of China-made Model 3 and Model Y vehicles rose 24.4% year-over-year in June, while second-quarter sales and exports from the Shanghai factory increased 32.8%.
Tesla has said it sources locally more than 95% of the components in the China-made Model 3 and the refreshed version of the Model Y.
(Reporting by Fabiola Arámburo, Chris Thomas and Mrinmay Dey in Mexico City, Ju-min Park in Beijing; Editing by Christian Schmollinger, Muralikumar Anantharaman and Lincoln Feast.)
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