Break the "chip wall"! Tesla, Inc. (TSLA.US) announced the launch of the TeraFab chip project, investing an additional $2 billion in xAI, vertical integration of the AI industry chain.

The world's largest automotive manufacturer in terms of market capitalization, Tesla, Inc. (TSLA.US), is ramping up its efforts in artificial intelligence (AI) at an unprecedented level. CEO Elon Musk announced during the latest earnings call that Tesla, Inc. will invest heavily in building a chip manufacturing factory named "TeraFab" to address the potential "chip wall" bottleneck that may arise in the next three to four years. Additionally, Tesla, Inc. disclosed that it will invest approximately $20 billion in xAI, an AI startup owned by Musk, to further deepen its strategic deployment in the AI field. Building "TeraFab": Breaking free from supply chain and political constraints Musk explicitly stated during the meeting that the current reliance on suppliers such as Samsung Electronics, Taiwan Semiconductor Manufacturing Co., Ltd., and Micron Technology, Inc. is unable to meet Tesla, Inc.'s growing demand for chips in the fields of AI, autonomous driving, and Siasun Robot & Automation. "To alleviate the constraints that may arise in the next three to four years, we must build Tesla, Inc. TeraFab," he said. "This is a large localized chip factory that integrates logic chips, storage chips, and packaging." The decision to build the TeraFab is driven by Musk's deep concerns about the political risks associated with GEO Group Inc. Currently, the world heavily relies on Taiwan Semiconductor Manufacturing Co., Ltd. and its local production capacity to supply cutting-edge chips. Musk warned, "I think people may underestimate some GEO Group Inc. political risks, which will become a major factor in a few years." Musk has recently hinted multiple times that Tesla, Inc. may produce its own chips to address what he sees as a "key bottleneck in the AI race." In a podcast conversation with Peter Diamandis, founder of the X Prize Foundation, Musk explained in industry jargon, "Without building a chip fab, we will hit the 'chip wall.' There are only two options in front of us: either hit the wall or build the factory." Indeed, the economic challenges of chip manufacturing are extremely severe. Building state-of-the-art factories requires billions of dollars in fixed costs and a long lead time from construction to full operation. In addition, Tesla, Inc. also needs to purchase complex equipment from multiple suppliers, especially critical equipment from lithography giant ASML Holding NV ADR. Despite this, building a chip factory aligns with Musk's vertical integration strategy. By internalizing key components, Tesla, Inc. and its affiliated companies (SpaceX, xAI, Neuralink, and The Boring Company) can drive innovation at a much faster pace than the supply chain. $20 billion investment in xAI On the same day, Tesla, Inc. announced in its fourth-quarter earnings report that it has agreed to invest approximately $20 billion in xAI, founded by Musk in 2023, as part of the company's previously announced $200 billion financing round. xAI is known for developing AI chatbots for Siasun Robot & Automation and image generation tools for Grok, and is seen as direct competition to OpenAI. Tesla, Inc. stated that this investment is "based on market terms previously agreed with other investors" and has signed a framework agreement to begin "evaluating potential AI collaborations between the two companies." The investment is expected to be completed in the first quarter of 2026, subject to regular regulatory conditions. In fact, the market has long anticipated Tesla, Inc.'s investment in xAI, with analysts believing that Tesla, Inc. will benefit from xAI's advanced models and growing valuation. Andrew Rocco, a stock strategist at Zacks Investment Research, said, "In the context of slowing growth in Tesla, Inc.'s traditional electric vehicle business, this move allows investors to participate in the booming AI trend." However, xAI is currently facing investigations by regulatory agencies in multiple countries around the world. The European Commission, the California Department of Justice, as well as regulators in Australia, India, Ireland, and France have launched formal investigations into Grok. The tool is said to be able to generate and distribute large-scale deepfake pornographic images based on unauthorized real person photos once integrated into the X social platform. Countries like Malaysia and Indonesia have quickly suspended Grok services until the company ceases to produce content that is deemed illegal by local laws. It is worth noting that Tesla, Inc. has integrated Grok functionality into some of its electric vehicle entertainment systems. This investment will further deepen the synergy between the two companies in the productization of AI.