Musk's $470 million political bet: Why Tesla, SpaceX's Texas expansion faces a regulatory test after US midterms

It seems Elon Musk's political bet on Republican candidates, especially in Texas, in the US midterm elections has failed to deliver the outcome he may have hoped for. The shares of his companies have tumbled spectacularly in the last two trading sessions, losing $456 billion since Tuesday's close. With Democrats flipping several Republican held seats to take control of both chambers of Congress and winning the governor race in Texas, investors are increasingly concerned that Tesla and SpaceX could face tougher regulatory scrutiny, particularly over their ambitious artificial intelligence (AI) and data-centre expansion plans in the state, according to a report by CNBC.Tesla shares fell more than 11% on Thursday, while SpaceX shares declined nearly 9%.

By the end of the session, the combined market capitalisation losses for the two companies had reached about $456 billion since Tuesday's close. Musk's $470 million political bet backfiresThe world's richest man was the biggest donor to Republican candidates during the midterm elections, contributing more than $470 million, the Financial Times reported. However, most of the candidates he backed lost their races as Democrats secured control of both the House of Representatives and the Senate.

The results were particularly important in Texas, where both Tesla and SpaceX are headquartered. Democratic candidates James Talarico and Gina Hinojosa won the Senate and governor's races, respectively, defeating Republican candidates and longtime Musk allies Ken Paxton and Greg Abbott. The outcome in Texas, once a deep red state, has raised concerns among investors about the possibility of a more challenging regulatory environment for Musk's companies, especially as they expand their AI infrastructure in the state.

Why Tesla and SpaceX's Texas expansion is under scrutinyData-centre development has emerged as a political flashpoint in Texas, with concerns around water consumption, electricity costs, local control and tax incentives becoming part of the election debate. Both Tesla and SpaceX are investing in AI infrastructure in Texas. Musk has announced plans for Terafab, a massive joint chip-manufacturing complex involving the two companies in Grimes County.

The facility is expected to include a data centre and a large semiconductor factory, with a Reuters report putting the cost at $119 billion. SpaceX is also planning to build a supercomputer at its Starbase launch facility and company town in Texas. These projects could face delays or higher costs if the state introduces tighter rules governing data-centre construction and operations.

Could the SpaceX-Tesla merger face hurdles? The election outcome could also complicate a potential merger between SpaceX and Tesla, another prospect that has attracted investor attention. Musk has previously described a merger between the two companies as a good idea.

He said on SpaceX's third-quarter earnings call last month that special committees at both companies were exploring a potential deal. However, the possibility of increased regulatory scrutiny could make such a transaction more difficult.CNBC reported that tighter oversight could affect the prospects of a merger. Expectations around a possible SpaceX-Tesla merger had been a major positive factor for investors this year, but concerns over the political implications of the election quickly overshadowed optimism around the companies.

What the governor-elect said on data centresGina Hinojosa, the governor-elect, made data centres a major campaign issue. She had called for a moratorium on new approvals until the state legislature introduces stronger protections on water use, electricity costs, local control and incentives. She had also criticised tax breaks for large facilities.

Gina on Thursday said ​that the state will introduce laws to protect its residents with regards to ‌data centers, citing their impact on rural communities, according to Reuters."Data centers have moved ​into mostly rural communities, and there are no rules and laws to protect Texans," said the ​Democrat.