Tesla Inc (NASDAQ:TSLA) and Space Exploration Technologies Corp (NASDAQ:SPCX) have a compelling strategic case for joining forces, but the biggest obstacle to Elon Musk’s potential mega-merger may be a business Tesla already owns: its China operations.

JPMorgan says the combination of Tesla’s manufacturing footprint in the country and SpaceX’s U.S. government ties could create a regulatory conflict that forces Tesla to consider an unusual trade-off — separating control of its China operations while retaining a way to earn revenue from them.

Why China Complicates the Deal

In a research note dated Oct. 21, analyst Rajat Gupta said regulatory scrutiny could prove a bigger hurdle than shareholder approval for a potential Tesla-SpaceX combination. SpaceX’s defense and U.S. government relationships, alongside the absence of Starlink approval in China, could clash with Tesla’s substantial manufacturing presence in the country.

China accounts for roughly 20% of Tesla’s revenue, according to JPMorgan, and represents a significant part of its manufacturing footprint. Tesla has historically managed to operate as a wholly owned foreign automaker in China while advancing its Full Self-Driving technology, but a merger with SpaceX could change the regulatory calculus.

Gupta outlined a potential solution: ring-fence Tesla’s China business or transfer control to a China-based consortium. Under one possible structure, a Chinese consortium could hold a majority stake while Tesla continues earning revenue through licensing arrangements covering its brand, FSD technology and potentially future Optimus-related opportunities.

That is a scenario, not an announced plan. Neither company has disclosed an agreed transaction structure or said that a China restructuring is required.

The Value Tesla Could Keep

The proposal raises a question for investors: would Tesla be able to preserve much of the economic value of its China business even if it gave up direct control?

JPMorgan’s analysis suggests the impact on Tesla’s valuation may be smaller than the revenue exposure implies. The bank estimates China contributes about 10% of its roughly $1.7 trillion sum-of-the-parts valuation, despite accounting for approximately 20% of revenue. Its valuation places greater weight on longer-term opportunities in robotaxis, Optimus humanoid robotics, FSD subscriptions and AI compute.

That distinction matters because revenue share and valuation contribution are not interchangeable. JPMorgan also argues that China contributes a significantly higher share of Tesla’s earnings and free cash flow than its revenue share suggests, partly because spending on future technologies weighs on current profitability elsewhere in the business.

A licensing structure could offer a way to preserve some economic upside, but the terms, regulatory feasibility and potential costs of such an arrangement remain unknown.

Shareholders Face Another Uncertainty

The China question comes as discussions about a potential merger gain momentum. Elon Musk said on SpaceX’s third-quarter earnings call that special committees had been formed at both companies to discuss a possible combination.

JPMorgan sees strategic logic in bringing together Tesla’s automotive, energy and robotics businesses with SpaceX’s AI infrastructure and engineering capabilities. But it also identifies shareholder approval and regulatory scrutiny as major hurdles.

For Tesla investors, the central question is no longer just whether a merger makes strategic sense. It is whether the companies can structure a deal that preserves the value of Tesla’s China operations while satisfying regulators — without sacrificing too much of the business that makes Tesla valuable today.

Photo: Paulm1993 / Shutterstock – ek