Tesla–SpaceX Merger Talks Gain Momentum Amid Chinese EV Offensive, Setting Stage for Shift Toward Robots and Space

EV profits decline as AI and robotics development costs mount
Combination with SpaceX pursued to secure funding and technology
Prospects for more advanced vehicle technology coexist with potential investment focus on robots

Tesla has sharply lowered its long-term vehicle sales target and begun reviewing a merger with SpaceX. As profitability in its electric vehicle business deteriorates, the plan is to pool the funding and technology needed to develop artificial intelligence (AI) and robots. If the merger goes through, the main scenarios include advancing autonomous driving using SpaceX’s AI and communications infrastructure and redirecting investment toward robotics. Both stronger EV competitiveness and a reduced share of investment in automobiles remain possibilities.

Tesla Sharply Cuts Annual Sales Target to 5 Million Vehicles

According to Bloomberg and other outlets on the 22nd (all dates hereafter are local time), Tesla CEO Elon Musk said during the previous day’s third-quarter earnings presentation that the company was expanding production capacity and set a goal of reaching annual sales of 5 million vehicles around 2030. That is one-quarter of the 20 million target announced in 2020, representing a substantial reduction in a sales ambition that had effectively disappeared from the company’s official targets in recent years. Given last year’s deliveries of 1.6 million vehicles, even the new target assumes sales will more than triple over five years. Deliveries in this year’s third quarter fell about 2% year on year to 486,532 vehicles, underscoring the need for additional drivers of sales growth.

Tesla identified AI-powered autonomous driving features as its key means of expanding sales. During the earnings presentation, Musk cited its Full Self-Driving (FSD) driver-assistance software as a major driver of vehicle demand. The company said it had more than 1.7 million paying users worldwide, half of whom use the service through subscriptions. This suggests a strategy of securing recurring revenue by adding software fees to vehicle sales. Tesla also outlined a more specific commercialization schedule for its Optimus humanoid robot. Musk said initial production had begun on a mass-production line at the Fremont, California, factory and indicated that deliveries to outside companies would begin around the end of next year. He added, however, that scaling up production would take time, as work remained to improve the robot’s hand and finger design, durability and AI performance.

Talks on a USD 3.5 Trillion Corporate Combination Spanning EVs to Space

Merger discussions with SpaceX, also led by Musk, have entered a formal process alongside plans to expand AI and robotics operations. At SpaceX’s earnings presentation on the 20th, Musk said the two companies had each established a special committee of independent directors at shareholders’ request. While describing a combination as a “good idea,” he explained that he could not participate in the special committees’ discussions because he was an interested party. The companies’ market capitalizations stand at approximately USD 1.5 trillion (approximately USD 1.55e+3 billion) for Tesla and USD 2 trillion (approximately USD 2.06e+3 billion) for SpaceX. A merger could therefore create a corporate giant worth a combined USD 3.5 trillion (approximately USD 3.61e+3 billion). The plan would bring electric vehicles, energy storage systems, rocket launches and satellite communications under one company. The combined entity would also include the AI business of xAI, which SpaceX acquired in February.

The two companies cite AI software, semiconductor design and manufacturing, robotics and satellite communications as the business rationale for a merger. Explaining the anticipated benefits of the combination, Musk emphasized the considerable scope for expanding cooperation in each area. The two companies announced a joint venture this year called “Terafab” to build a large-scale semiconductor manufacturing facility in Austin, Texas. The plan is to produce chips for autonomous vehicles, robots and orbital AI data centers, making it a joint investment linking vehicle computing technology with space infrastructure. During SpaceX’s earnings presentation, Musk said Terafab’s first test chips would be produced around May or June next year, with full-scale mass production targeted for the third quarter of 2028.

Table 1. Changes in Tesla’s Third-Quarter Profitability and Investment and Borrowing Plans

Tesla Seeks Cost Savings Through Merger as Profitability Deteriorates

With substantial funding needed for semiconductor production facilities and AI development, Tesla’s deteriorating profitability is adding weight to the merger discussions. Operating expenses rose 39% year on year in this year’s third quarter, pushing its operating margin down from 5.8% to 2.6%. Research and development (R&D) expenses in particular increased about 69% over the same period, from USD 1.63 billion (approximately USD 1.68 billion) to USD 2.761 billion (approximately USD 2.85 billion), adding to the cost burden. Combined with declining regulatory credit revenue and lower profits in the energy storage business, operating profit fell 56% to just USD 718 million (approximately USD 738 million). The company’s ability to generate profits has weakened just as demand for funding for new businesses is growing. In response, Tesla moderated the pace of spending by lowering this year’s capital expenditure forecast from USD 25 billion (approximately USD 25.8 billion) to USD 20 billion (approximately USD 20.6 billion). It also secured borrowing capacity of up to USD 30 billion (approximately USD 30.9 billion) in preparation for increased future investment.

The plan to deploy investment funds more efficiently is also seen as reflecting hopes of easing the management burden concentrated on Musk alone. Justus Parmar, CEO of Fortuna Investments, which has invested in both companies, said a merger could reduce duplicated work, the time Musk spends moving between the two companies, and legal and administrative costs. The idea is that combining administrative work arising from operating as separate listed companies would create room to jointly manage personnel and funds committed to shared businesses. JPMorgan also cited the companies’ shared technical personnel, AI infrastructure, and Musk’s management and development philosophy as business reasons for a merger. This appears to reflect the view that, as more businesses depend on Musk’s personal vision and execution, a merger could reduce the fragmentation of management resources. Investors also expect joint borrowing and the consolidation of support functions to ease the cash-flow burden of large-scale capital expenditure.

Combining AI and Communications to Strengthen EV Competitiveness

Two scenarios are being discussed for the direction of Tesla’s EV business after a merger. The first is that combining it with SpaceX’s AI and communications infrastructure could further strengthen its EV competitiveness. If the merger goes through, Tesla’s accumulated real-world driving data and the AI development capabilities of SpaceX subsidiary xAI could be used within the same company. This could bring closer cooperation in the development cycle of feeding vehicle data into AI training and then deploying improved software back to vehicles. SpaceX’s planned orbital data center business, if realized, is also considered a potential source of the computing resources needed for Tesla’s AI development. If these resources help improve autonomous driving performance and vehicle software quality, the infrastructure secured through the merger could underpin the competitiveness of the automotive business.

More advanced autonomous driving technology would also create greater scope to expand a business that generates revenue from transportation services after vehicles are sold. During the earnings presentation, Tesla proposed incorporating some customer-owned vehicles into its robotaxi network around the second quarter of next year. The plan is to add privately owned vehicles to its own fleet for paid transportation services, and the company is working to establish service areas and a vehicle management system. A combination with SpaceX raises the possibility of using Starlink as a communications network for robotaxis and autonomous systems. If plans to integrate satellite communications into vehicle services take shape, they could provide an additional means of linking vehicles to the operating network.

Maintaining EV Scale While Concentrating Investment on Robots and AI

The second scenario is for the merged entity to maintain the EV business at a certain scale while concentrating new investment and personnel on robots and AI. If Tesla shareholders gain exposure to SpaceX’s growth businesses through a share swap, the pressure to persuade investors on the basis of expectations for expanding vehicle sales is also expected to ease. Moves to repurpose production facilities for robotics are already underway. Tesla has converted the Model S and X production space at its Fremont factory into an Optimus manufacturing facility and is also building a robot production line in Austin, Texas. If robotics gains a higher priority in capital allocation after the merger, the EV division could focus on sales of its core models and cash generation, while the robotics and AI divisions lead new investment.

If Tesla moderates the pace of EV investment and production expansion, established automakers could gain more room to broaden their sales base. To translate that opportunity into market share gains, however, they will have to withstand the offensive from Chinese manufacturers competing on price. Trade barriers in the United States and Europe are expected to ease competitive pressure on local manufacturers in this process. The United States has raised its Section 301 tariff rate on Chinese-made EVs to 100%, while the European Union (EU) has imposed company-specific countervailing duties to limit the price advantage of Chinese-made vehicles. If tariff costs dampen sales of Chinese-made vehicles, automakers producing locally will have opportunities to capture replacement demand. Tesla, which has production facilities in the United States and Germany, is also positioned to benefit. Even if it concentrates new investment on robots and AI, it could still respond to increased demand and improve profitability by raising utilization rates at its existing EV factories.