Tesla's Terafab Dream
Tesla had their earnings yesterday, but given the company trades at ~226x NTM EV/EBIT multiple, it is bit of a waste of time to spend time dissecting their existing business. Ultimately, Tesla has become a moonshot bet on several projects that currently do not contribute materially to their numbers. Full Self Driving or FSD, Robotaxi, Optimus, and more recently, Terafab are some of their key moonshot projects. It’s not often that I come across companies in public markets which are generously valued purely based on optional value attached to ongoing projects with high degree of uncertainty attached to it, so it speaks volume of the level of confidence investors have shown on Elon Musk’s ability to unlock value even from what it may appear to be pretty improbable scenarios.
Even by Tesla’s standard, Terafab project is perhaps the epitome of Musk’s eternal desire to swing for the fences. So, what exactly is this project about?
Terafab is a planned ~$25 billion semiconductor fab that Elon Musk announced last month as a joint venture between Tesla, SpaceX, and xAI. The name comes from its headline target: 1 terawatt of annual compute output, which Musk mentioned to be ~50x what all existing global fabs produce today combined. It will target 2nm process technology and an initial capacity of 100,000 wafer starts per month. Almost every aspect of this project screams of quixotic dream, so I was curious to hear more about Terafab project in yesterday’s call. When asked about Terafab, Elon Musk said the following:
“we’re still working out the details of the Terafab deployment. In the near term, Tesla will be building the research fab on our Giga Texas campus. This is something we expect to be probably a $3 billion-ish initiative and capable of maybe a few thousand wafers per month, but it’s really intended to try out ideas. The research fab, it was in terms of maybe -- we have some ideas for improving the fundamental technology of how chips are made and some new physics we’d like to test out, but we also want to test out the ability to -- to see if something is working in production. So you need kind of like a few thousand wafer starts a month to make sure that a production process is sound.
And then SpaceX is going to take care of like the initial phase of the scaled up Terafab. And that’s what we figured out thus far.
I think this will be unique in the world, or at least I’m not aware of any a place where you have the lithography mask creation, and then logic, memory and packaging in under one roof in one building. That’s about the fastest I could possibly imagine doing [ recourse ] of research and development and being able to try out some pretty radical ideas, some of which have -- it’s kind of long-shot stuff, but if some of these long shots pan out, it would be radical improvements in the way [indiscernible] work.”
Indeed, that does sound like a pretty long shot! A conventional leading-edge fab actually handles only wafer fabrication and ASML provides the lithography tools. Design happens at fabless customers, memory is made at separate fabs (Micron, Samsung, SK Hynix), and advanced packaging and test are typically done at OSAT facilities or dedicated packaging sites. Terafab's claim is that design, lithography, fabrication, memory production, advanced packaging, and testing all happen at a single site. My guess is that anyone other than Elon Musk would not dare propose something like this. But once you've figured out how to catch a returning rocket booster with a pair of mechanical arms, the word "impossible" probably stops meaning what it means to the rest of us. If anything, such consensus of incredulity may have only propelled him to give this a shot. We don’t need to believe this project has any credible path when Musk himself acknowledges the long shot nature of the bet, but admittedly I’m glad that he’s giving this a go without accepting the “fate” that the semi value chain has reached almost the end state.
To be clear, Musk isn’t doing this because he’s annoyed by the ever burgeoning profit pool of the players in the semi value chain, but because he thinks the compute need is going to be so great that it would be pretty much impossible to meet demand with existing ecosystem. From the call yesterday:
Terafab is not some sort of mechanism to generate leverage over our chip suppliers. It's just literally, we don't see a path to having enough efficient quantity of AI chips down the road. As we scale production to high levels, just the rate at which the industry is growing in logic, but even more so in memory, it's just doesn't -- we just anticipate hitting a wall if we don't make chips ourselves.
As a reminder, TSMC was also asked about Tesla’s Terafab project during their earnings call. They didn’t sound concerned. From the call (emphasis mine):
“…both Intel and Tesla, they are TSMC’s customers. But again, they are our competitors, and we view Intel as our formidable competitor and do not underestimate them. But having said that, there are no shortcuts. The fundamental rules of the foundry game never change. They need the technology leadership, manufacturing excellence and customer trust, and most of all, the service, which has been mentioned by Jensen; thank you for his wording.
Again, let me say that it takes 2 to 3 years to build a new fab, no shortcuts. And it takes another 1 to 2 years to ramp it up. Again, that’s the fundamental of foundry industry. And whether we try to win them back, actually, they are still our customer. And we are very confident in our technology position, and we work very hard to capture every piece of business possible.
I will continue to listen to Tesla’s earnings calls to stay updated on their moonshot projects, especially Terafab.
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