The speculation that Tesla will merge with SpaceX is so rife these days that leaks are starting to show just how complex the process may actually be. In an exclusive article, the Wall Street Journal reported that Tesla has been exploring scenarios of how to separate its China operations in order to clear national security hurdles for a merger with SpaceX (link here). What’s intriguing about the Journal’s article is that it quotes sources saying Tesla had been researching such a scenario for years in case of political strife in the region, but is now contemplating its implementation for a merger with SpaceX. Given that Tesla’s China factory (“Giga Shanghai”) has provided around 70% of global profits for Tesla in the past 5 years (and more, as discussed below), this would literally be like killing the golden goose. Details about why Tesla is so profitable in China are in this deep-dive report from January 2025 (here), but the main reasons are as follows:Labor costs are roughly 10% of those of US auto workers. Electronic components are roughly 20% cheaper in China. China gives a 13% tax rebate for all components in any vehicles exported from China, boosting EBIT margins on the Model Y to around 20%. The Wall Street Journal’s reporting about how Tesla has been preparing for a “separation” of Tesla China for years, which now even includes “a spinoff, sale or closure” of Tesla China, is backed up by numbers in Tesla’s financials over the past few years. Figure 1 below shows my earnings estimates of Tesla’s China operations, and note that 2025 has an asterisk next to it due to a large amount of money being taken from China and/or other foreign subsidiaries. The key points about why the Journal’s article on Tesla eyeing a separation of its China operations are as follows: China cash holdings have dwindled: In its quarterly financials, Tesla discloses a dollar amount of how much of their cash is held in foreign currencies, which is mainly Chinese yuan. This has gone from $7.8 billion, or 45% of total Q1 2021 Cash and Equivalents, to $3.8 billion, or 9% of Q2 2026 Cash and Equivalents. Tesla China likely paid a huge dividend in 2025: In Note 12 of Tesla’s 2025 10-K, there is a breakdown of tax details by major regions, which shows that Tesla China paid $361 million of withholding tax last year. Since the withholding tax rate in China is 10%, this implies that Tesla withdrew $3.61 billion from its China operations last year. US independence from Chinese supply chains: Tesla has plans to have its US operations as independent of Chinese supply chains as possible by 2027, albeit Tesla Energy is still forced to import LFP battery cells from China’s CATL. Tom Zhu got a lateral promotion: Zhu was being groomed as Musk’s replacement as Tesla’s CEO years ago, but was called back to China in mid-2024. While this appeared like a demotion at the time, it looks more like a “lateral promotion”, as Zhu currently sits as Chairman of the Board of multiple distinct Chinese legal entities, including Tesla Insurance Brokerage and various Tesla Auto Sales Service entities. This directly matches the Journal’s reporting of Tesla creating a separate sales entity for exports and barring China-based employees from other company systems.