Tesla Motors CEO Elon Musk has announced plans to build a chip factory. The executive revealed on social media that SpaceX and Tesla will host a live stream on platform X around 8 p.m. Central Time to formally introduce the "Terafab" project, an in-house chip manufacturing initiative. Tesla also stated that it is collaborating with SpaceX and artificial intelligence firm xAI to construct the largest chip fabrication plant in history. Reports indicate that the Terafab project aims to produce over one terawatt of computational capacity annually, including logic, memory, and packaging capabilities, with approximately 80% allocated for space applications and 20% for terrestrial use.
Elon Musk is moving forward with plans to build the world's largest chip factory. On March 21, Musk announced on X: "SpaceX and Tesla will livestream the official unveiling of the 'Terafab' project tonight around 8 p.m. Central Time on X. The project targets an annual output exceeding one terawatt of computing power, encompassing logic chips, memory chips, and packaging capacity—about 80% for space and 20% for ground applications." Simultaneously, Tesla stated: "In partnership with SpaceX and AI company xAI, we are building the largest chip manufacturing facility ever, integrating logic chips, memory chips, and advanced packaging technologies with an annual capacity of one terawatt."
Tesla explained that to maximize solar energy utilization, it needs to launch 100 million tons of equipment into space annually to capture solar power. This requires massive deployment capabilities: the ability to send millions of tons of materials into orbit; AI-powered solar satellites; and millions of Tesla Optimus robots participating in construction. All these devices depend on chips—Optimus robots alone will need 100 to 200 gigawatts of chips, while solar AI satellites will require terawatt-level chip supplies. This demand far exceeds the combined capacity of all current global chip manufacturers, even projected growth through 2030.
"We are building the TeraFab to bridge the gap between current chip production and future demand, creating a future for interplanetary civilization," Tesla wrote.
Is Tesla aiming to lead in AI chips? While most of Tesla's revenue still comes from electric vehicle sales, CEO Elon Musk has stated that, long-term, returns from future projects will far exceed current earnings. Over the past decade, these projects have included autonomous driving technology, and since 2021, humanoid robots. At a recent shareholder meeting, another plan was added: Musk indicated that due to the high demand for AI chips from EVs and robots, Tesla will likely build a massive in-house factory.
Some international media point out that, similar to its strategy in battery production, Tesla intends not just to participate but to lead in this new sector. Musk wrote last November that he expects Tesla's AI chip output to eventually surpass the combined total of all other manufacturers. Currently, Tesla's Autopilot and Full Self-Driving processors are manufactured by Samsung and TSMC. The fourth-generation hardware is being deployed, and Musk has stated that preparations for the next-generation AI5 chip are well underway. Musk previously hinted at the AI5 chip and reiterated that Tesla continues to collaborate with TSMC and Samsung. These AI chips power Tesla's autonomous driving systems, including its Full Self-Driving software.
At the annual shareholder meeting in November 2025, Musk first publicly mentioned the concept of the Terafab project, stating that "even the most optimistic forecasts from foundries cannot meet our demand." He added, "Therefore, I think we may have to build a Tesla TeraFab. It's like a Gigafactory, but on a much larger scale. I don't see any other way to achieve the chip production we need. So I believe we may have to construct a huge chip factory. This must be done." During an earnings call in January, Musk further clarified that Tesla needs to build "a very large wafer fab in the U.S., covering logic, memory, and packaging."
According to public reports, the Terafab project plans to use a 2nm process node, integrating logic chips, memory chips, and advanced packaging within the same campus, with an annual target output of 100 to 200 billion chips. Recently, Morgan Stanley analyst Andrew Perkoko noted, "If Tesla achieves its long-term Optimus goal—producing over 100 million units annually—it will require more than 2 billion chips, over 50 times the current demand from its cars and robotaxis."
However, entering semiconductor production is highly challenging. Building a chip fab can cost tens of billions of dollars, with chip development requiring additional billions in investment. Tesla generated about $6 billion in free cash flow in 2025 but is not expected to produce positive free cash flow in 2026. The company plans to invest $20 billion in new equipment, significantly higher than the less than $9 billion spent in 2025. Constructing a chip factory is a high-risk, costly endeavor, but Tesla may have little choice.
Andrew Rocco, equity strategist at Zacks Investment Research, stated, "Currently, obtaining sufficient high-performance AI chips is becoming increasingly difficult due to chip shortages and supply chain bottlenecks." Ensuring ample supply and reducing reliance on external chip supply chains is critical for Tesla's growth plans. Rocco added, "Tesla's Terafab project will ensure self-sufficiency. As Tesla pivots further from traditional EV business toward AI, this project is vital to the company's success."
Tesla is unlikely to bear the full cost of building a chip fab alone. Rocco believes Tesla will adopt a hybrid model, seeking partners to participate. However, Tesla may not bring in financial partners. Wedbush analyst Dan Ives said, "We believe Terafab will be a Tesla-funded project, developed in collaboration with potential chip partners. This is a smart move and part of Musk and Tesla's broader AI strategy."
Today, Tesla's core stock value is entirely tied to AI. If a chip factory can help Tesla execute its AI strategy, investors are likely to support Musk's plan.
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