Tesla should establish its own semiconductor factory
Elon Musk stated that Tesla Inc. must construct and manage what he refers to as a “TeraFab” for semiconductor manufacturing, a significant endeavor that will require billions of dollars and signify yet another expansion beyond the company’s foundational electric vehicle operations. “In order to remove the probable constraint in three or four years, we are going to have to build a Tesla TeraFab,” Musk said Wednesday on the carmaker’s earnings call. “A very large fabrication facility that encompasses logic, memory, and packaging, within the country.” Tesla, the world’s most valuable automaker, has staked its future on artificial intelligence, autonomous driving, and robotics—endeavors that have an unquenchable demand for chips, which the Austin-based company currently procures from Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co.
Musk stated that current suppliers, specifically TSMC, Samsung, and Micron Technology Inc., are unable to meet Tesla’s required supply levels. “That’s going to be very important to ensure we are protected against geopolitical risks,” Musk stated. “I think people maybe are underweighting some of the geopolitical risks that are going to be a major factor in a few years.” The global landscape heavily relies on Taiwan’s TSMC and its domestic production capabilities for the supply of advanced chips. In recent weeks, the world’s richest person has indicated that Tesla may begin producing chips independently to tackle a constrained supply that he identifies as the primary obstacle in the fiercely competitive AI race. “We’re going to hit a chip wall if we don’t do the fab,” Musk stated. “We’ve got two choices: hit the chip wall or make a fab.”
In November, Musk similarly informed Tesla shareholders that the company might need to construct a “TeraFab,” stating, “I can’t see any other way to get to the volume of chips that, that we’re looking for.” The economics of chipmaking are unforgiving. Establishing state-of-the-art factories requires substantial investments, often amounting to tens of billions of dollars in fixed costs, along with significant time to become fully operational. The process necessitates the acquisition of intricate machinery from various suppliers, notably Europe’s ASML Holding NV, which holds a commanding position in the market for a vital component of the fabrication process. While it may seem challenging, constructing a chip factory would align with Musk’s history of vertical integration. By bringing key components in-house, his empire of companies can operate at a pace that significantly outstrips their supply chains. Tesla, SpaceX, xAI, Neuralink, and the Boring Company are showing a growing overlap in their operations. The specific location in the US for the factory’s construction remains uncertain, as does the timeline for its establishment.
Tesla anticipates an expenditure exceeding $20 billion in capital expenditures this year for its current manufacturing facilities. The method of funding for “infrastructure plays” such as a solar cell manufacturing facility and the chip fab is yet to be determined. “We have over $44 billion of cash and investments on the books,” stated Vaibhav Taneja. “So we’ll use our internal resources, but there are ways where we can fund it.” He stated that “any time you have a consistent stream of cash flow, you can go and get money from the banks. And we have had conversations with banks about it, we will have to look at a little bit more in terms of how we fund it, whether it’s through more debt or other means.” Musk stated that Tesla will make a “bigger announcement” regarding TeraFab in the future.
