[Digital Today intern reporter Seungah Yoo] Tesla's Shanghai plant posted its highest-ever output as of June, but weak sales in China continue, raising questions about the sustainability of its China business.

On Aug. 4, IT outlet Ars Technica reported that Tesla produced 93,579 vehicles in China in June, up 38 percent from June 2025, but the volume did not translate into stronger demand in China.

Data from the China Passenger Car Association show Tesla's sales in China have been declining on a quarterly basis for more than a year. It said the slowdown became more pronounced as buyers grew tired of the Model 3 sedan. Output has risen, but weaker domestic absorption has effectively pushed the Shanghai plant further into the role of an export base.

Nearly 40 percent of Tesla's electric vehicles produced in China in June were for export. For the second quarter as a whole, slightly more than half of vehicles made at the Shanghai plant went to Europe, Canada and other Asian markets. Exports totalled 128,394 vehicles, while China-made Teslas sold to Chinese consumers totalled 126,157.

Profitability at the Shanghai plant remains important to Tesla. Lower labour costs than in Germany or the United States, cheaper parts from local suppliers and Chinese government tax rebates related to exports combine to make the Shanghai plant a highly valuable asset for Tesla. The case for maintaining such a production base has grown stronger as profitability weakens.

Inside Tesla, a plan to split China and non-China operations is being discussed. The Wall Street Journal reported last week that some executives were tasked with separating the company's China and non-China units, but Tesla denied that such preparations were under way. Even after the company publicly drew a line, the possibility of a business restructuring remains a market focus.

Changes in the U.S. regulatory environment are already affecting supply-chain adjustments. In the United States, new rules banning China-linked connected-car software will apply to 2027 model-year vehicles. A ban on China-linked hardware will take effect for 2030 model-year vehicles. Tesla therefore does not currently import China-made vehicles for U.S. sales and is working with North American suppliers to ensure procured parts contain no unwanted China-made elements.

Still, it is difficult to explain a potential break with the China business solely through trade regulations. A more direct backdrop is talk of a possible tie-up with SpaceX. SpaceX has begun using some surplus Cybertrucks in parts of its operations, but a bigger aim is seen as investor access. Elon Musk earlier asked for existing S&P500 inclusion rules, such as the requirement of four consecutive profitable quarters, to be relaxed to fit SpaceX, but the S&P500 did not accept it.

Tesla was already included in the S&P500 at the end of 2020. Because of that structure, if SpaceX merges with Tesla, attempts by the S&P500 to separate SpaceX from passive funds could come to nothing, a view said. It also noted that Tesla and SpaceX shares have each fallen about 25 percent so far this year. SpaceX's annual share-price movement is based on the period since its June initial public offering.

The issue is that such a merger scenario would be hard to avoid U.S. government security screening. SpaceX has military contracts with the U.S. government worth tens of billions of dollars, and Tesla operates a large production base in China. For Tesla, it would not be easy to give up the Shanghai plant if it wants to sell more cars profitably. But as it is repeatedly highlighted that Elon Musk no longer views Tesla only as a car company, the strategic value of the Shanghai plant and group-level restructuring plans could still clash going forward.