The short version
SpaceX (SPCX) and Tesla are building their own semiconductor factory. It is called Terafab, it sits on a former power plant site in Grimes County, Texas, and the first phase is reported at around $16.8 billion.
Construction is slated to begin in December, with the first phase targeted for completion around the end of 2028.
For a few days in October it looked like TSMC might be involved. Elon Musk confirmed early talks on 3 October, calling them just discussions that might come to something.
Four days later he closed the door. On 7 October he said Tesla and SpaceX will build and operate Terafab themselves, and that TSMC could at most sublease part of the site, meaning rent space rather than run it.
The reason he gives is scale. Musk has claimed the world's entire chip manufacturing capacity today amounts to roughly 2% of what SpaceX and Tesla will eventually need.
That is the whole story in one sentence: he would rather build the factory than queue for someone else's.
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What Terafab is
- 🏭 A semiconductor manufacturing complex announced in March as a joint project between Tesla, SpaceX and xAI.
- 📍 Located in Grimes County, Texas, on the site of the former Gibbons Creek power plant.
- 💰 First phase reported at about $16.8 billion.
- 🏗️ Construction slated to start in December, with phase one targeted for completion around the end of 2028.
What a fab actually is: a factory that manufactures semiconductors. It is among the most expensive and technically demanding kinds of plant a company can build, which is why almost nobody builds one. Most chip companies design chips and pay someone else to make them.
The someone else is usually TSMC. It manufactures for a large share of the industry, including the chips Nvidia designs. When Apple, Nvidia or AMD want silicon made, TSMC is generally who makes it.
And it is a formidable thing to compete with. TSMC made about $23.6 billion of profit in three months, keeping roughly 51 cents of every dollar of sales, on record quarterly revenue of NT$1.49 trillion. That margin is what decades of manufacturing experience buys, and it is the standard any new entrant is measuring itself against.
The two statements, four days apart
3 October: Musk confirmed early discussions with TSMC about joining Terafab, describing them as just discussions that might come to something.
7 October: he said Tesla and SpaceX will build and operate Terafab themselves, writing that there should be zero doubt about it, and that TSMC might sublease part of the complex but nothing more.
A sublease means renting space, not running the plant. The distinction matters: one version has the world's most capable chip manufacturer operating your factory, the other has it as a tenant.
What is driving it is a claim about scale. Musk has said the world's entire chip capacity today covers roughly 2% of what SpaceX and Tesla will eventually need. That figure is his, not an independent estimate, and it is best read as an argument about the size of his ambition rather than a measurement.
The context behind the ambition: SpaceX now runs Starlink, which had passed 13,000 satellites launched and over 10,000 operational by the end of October, alongside rockets and a frontier AI effort. Reporting puts its AI cloud contracts at around $120 billion, though that figure comes from secondary coverage rather than a filing.
Vertical integration, explained
Most companies buy the things they do not specialise in. A vertically integrated company makes them itself.
The normal arrangement in AI today:
- 🎨 Nvidia designs chips.
- 🏭 TSMC manufactures them.
- ☁️ Google, Microsoft and Amazon buy them and rent out the computing power.
- 🤖 Model builders rent that computing power.
Four companies, four margins, four sets of negotiations.
What Musk is attempting is to own the whole chain inside one group: silicon, data centre, cloud and model.
The argument for doing it:
- 🔓 No queue. You are not waiting behind other customers for manufacturing capacity.
- 💵 No supplier margin. Every layer you own is a price you are not paying someone else.
- 🎯 Designed for your own needs, rather than buying what the market happens to make.
The argument against:
- 💸 It is extraordinarily expensive, and the money goes out years before anything comes back.
- 🧠 Specialists are specialists for a reason. TSMC has decades of accumulated manufacturing knowledge, which is not something capital alone buys.
- ⏳ It takes years. Construction starts in December for a plant targeted at late 2028, by which time the requirements may have changed.
The question Intel is asking from the other side
Here is what makes this genuinely interesting. We wrote this week about Intel's foundry booking $6.7 billion of revenue with only $411 million from external customers.
Intel is trying to persuade other companies to let it manufacture their chips. Musk is declining to let anyone manufacture his.
Same question, opposite answers: should chip manufacturing be a service you buy, or a capability you own?
- 🏭 Intel's bet: the industry wants an alternative to TSMC, and will pay for one.
- 🚀 Musk's bet: the capacity he needs will not exist, so he must create it.
- 🇹🇼 TSMC's position: it manufactures for much of the industry and, in this instance, declined to be anything other than in charge.
Nobody knows yet who is right. But watching two very different companies answer the same question in opposite directions is more informative than either answer alone.
The cash question
All of this has to be paid for while the money is going out.
SpaceX burned roughly $9.9 billion of free cash flow in the most recent quarter. Its shares fell about 8.7% last week, during a month in which the Nasdaq 100 shed enormous value as investors reassessed AI spending across the sector.
It is not alone. We wrote this week about Alphabet's free cash flow turning negative by $9.1 billion and Amazon's trailing twelve-month free cash outflow of about $42.4 billion. Meta went free-cash-flow negative for the first time since 2012.
That is the backdrop against which a $16.8 billion first phase gets announced. Several of the largest companies in the world are simultaneously spending more cash than they generate, deliberately, on the same bet.
What could go wrong
- 💸 Fabs are the most expensive factories in the world to build, and $16.8 billion is the first phase, not the total.
- ⏳ Nothing arrives until late 2028 at the earliest, and semiconductor construction timelines slip routinely.
- 🧠 Manufacturing expertise is not purchasable. TSMC's advantage is decades of accumulated process knowledge, and new entrants have historically found this much harder than expected.
- 📉 The cash is going out now. SpaceX burned about $9.9 billion in a quarter, and investors spent October reassessing exactly this kind of spending.
- 🔄 Plans have already changed once. The TSMC position moved from open talks to sublease-only in four days, which tells you how early this is.
- 📊 And one key figure is Musk's own. The claim that global capacity equals 2% of future needs is his assertion, not an independent estimate.
SPCX and TSM are examples to research, not recommendations. Semiconductors are a highly cyclical sector.
What should investors take from this?
When a company decides to make something it used to buy, ask why.
Vertical integration is usually a response to one of two things: a supplier with too much power, or a supply that does not exist at the scale you need. Musk's argument is the second. Whether he is right determines whether $16.8 billion is foresight or a very expensive detour.
Three habits:
- 🔗 Map the supply chain behind any theme you are interested in. The AI story runs through designers, manufacturers, power and storage, and the bottleneck moves.
- 💰 Watch who is funding construction from cash flow and who is funding it from reserves. The distinction matters more the longer the build.
- 🧺 And remember the diversified route. If the theme is AI infrastructure broadly rather than one company's factory, funds spread that exposure across many names.
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FAQs
What is Terafab? A semiconductor manufacturing complex announced in March as a joint project between Tesla, SpaceX and xAI, located on the former Gibbons Creek power plant site in Grimes County, Texas. The first phase is reported at around $16.8 billion, with construction slated to begin in December and phase one targeted for completion around the end of 2028.
Is TSMC involved? Elon Musk confirmed early talks on 3 October, then said on 7 October that Tesla and SpaceX will build and operate the facility themselves, with TSMC able at most to sublease part of the site.
What is vertical integration? Owning several stages of your own supply chain rather than buying from specialists. In this case it would mean designing chips, manufacturing them, running the data centres and building the AI models inside one group, rather than buying chips from Nvidia, which has them made by TSMC.
Why would a company build its own chip factory? Usually because supply is constrained or a supplier holds too much pricing power. Musk's stated reason is scale: he has claimed the world's entire chip capacity today is roughly 2% of what SpaceX and Tesla will need. That figure is his own.
Can I invest in these companies from the UAE? SpaceX trades under the ticker SPCX and TSMC trades as an American Depositary Receipt under TSM. On Nemo.money you can research and invest in eligible US-listed stocks and ETFs from $1 with zero commission, with uninvested cash earning 6% AER interest, paid daily in USD. Both are examples to research, not recommendations. Your capital is at risk.
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