The "generational" decision for Tesla (TSLA.US): Advisors reportedly studying a spin-off or sale of its China business to remove obstacles to a potential merger with SpaceX.

Zhitong Finance APP has learned that, according to reports, Tesla (TSLA.US) is considering a potential spin-off of its China business to pave the way for a possible future merger with SpaceX (SPCX.US). The report states that some Tesla executives have already been informed to prepare for this change, citing a source familiar with the matter. Another insider revealed that Tesla’s advisory team has discussed several options, including spinning off, selling, or directly closing its China business.

Since Space Exploration Technologies Corp. (i.e., SpaceX) went public last month, speculation that Elon Musk will push for a merger between the two companies has been rising, due to highly overlapping strategic layouts in the artificial intelligence field.

Musk has repeatedly mentioned the “convergence” trend among his companies. In last week's earnings call, he acknowledged the increasing overlap between Tesla and SpaceX businesses, but stated that a merger is not a topic that can be discussed on a Tesla earnings call.

In February this year, SpaceX acquired Musk’s artificial intelligence company xAI, which has now been renamed SpaceXAI. In addition, there are already business dealings between SpaceX and Tesla: Tesla supplies SpaceX with Megapack energy storage batteries and the Cybertruck electric pickup, while the AI chatbot Grok is installed in some Tesla models.

The report notes that separating Tesla's China business (including its Shanghai factory) would help avoid potential conflicts of interest stemming from SpaceX’s position as a major U.S. defense contractor. Such transactions aim to establish a “firewall” between the Chinese subsidiary of Tesla and its U.S. operations.

China is a crucial market and manufacturing base for Tesla. The Shanghai Gigafactory contributes more than half of the company’s global deliveries and serves as an export hub for markets such as Europe, Canada, and Australia. Earlier this year, Musk, along with American business leaders like Apple’s Tim Cook and Boeing’s Calhoun Ottoborg, accompanied U.S. President Trump on a visit to Beijing.

Tesla enjoys a uniquely privileged status among foreign enterprises in China. It was the first international carmaker permitted to operate in China without forming a joint venture with a local automaker—an exception not granted to traditional giants such as Volkswagen or General Motors. This advantage has helped Tesla establish a strong foothold in the world’s largest auto market, while traditional competitors like Volkswagen and BMW are struggling.