Will Elon Musk's New SpaceX and Tesla Joint Venture Disrupt This AI Semiconductor Giant?

Elon Musk appears to be on a path to combine all of his companies into a single entity. After a series of mergers, SpaceX, which launches rockets into space, is the parent company of X, the social media company formerly known as Twitter. It also includes the other operations of xAI, Musk's generative artificial intelligence (AI) lab.

The latest effort to bring his companies closer together is a joint venture between SpaceX and Tesla (NASDAQ: TSLA). Last month, Musk announced Terafab, a project that would dramatically expand global semiconductor supply if it reaches the scale Musk envisions. That could be bad news for the world's leading chip manufacturer, Taiwan Semiconductor Manufacturing (NYSE: TSM).

Image source: Getty Images.

What exactly is Musk building?

Terafab is envisioned as a chip fab capable of handling every step of semiconductor production: design, lithography, fabrication, packaging, and testing. It'll also include memory chip production, which has become an essential piece of AI accelerators and GPUs. For reference, not even Taiwan Semiconductor (TSMC) does all of that under one roof. What's more, Musk plans for the Terafab to produce 2nm chips (the most advanced logic chips) at scale right out of the gate.

Building the capabilities to produce the world's most advanced chips from scratch is a massive undertaking that will require significant engineering expertise and substantial capital expenditures. TSMC has spent years optimizing its 2nm process to support viable production yields. The company's Arizona facilities cost it $165 billion in total for six fabs, two packaging facilities, and a research and development center. To be clear, that's still well below the capacity Musk envisions for Terafab.

The joint venture earmarked $20 billion for the first facility in Texas. Bernstein's semiconductor analysts believe that's far too little for a leading-class facility. What's more, they estimate that for Terafab to reach the scale Musk envisions, it'll have to invest $5 trillion in manufacturing capacity.

Luckily, Musk found a partner in Intel (NASDAQ: INTC). Intel has existing leading-edge facilities and is one of just two TSMC competitors capable of manufacturing chips with leading-edge technology. It's been searching for a customer for its foundry business, and it may have found one in Tesla and SpaceX. The details of its Terafab involvement aren't clear, but Intel joined the project in early April, lending its design, printing, and packaging expertise.

Can SpaceX and Tesla disrupt chip manufacturing?

Importantly for TSMC shareholders, Musk isn't looking to compete directly with TSMC. He says the leading manufacturers simply aren't expanding fast enough for his companies' demand, so he just has to do it himself.

On TSMC's earnings call, CEO C.C. Wei addressed the Terafab project. He noted it takes two to three years to build a new production facility. On top of that, it takes another year or two to ramp up production. There's only so much Musk can do to speed up that process, even with Intel as a partner. TSMC's Arizona facilities have been years in the making, and the company won't reach 2nm production capacity until 2029. And it's the best in the world at this.

So, the threat of Terafab impacting demand for TSMC's production capabilities within the next few years is unlikely, despite the fact that both Tesla and Intel are big customers. As such, TSMC's outlook for revenue growth exceeding 30% in 2026 and long-term growth around 25% remains intact. Investors should maintain high levels of confidence that the company will meet those goals. Furthermore, management said it now expects capital expenditures for the year to come in near the high end of its guidance for $52 billion to $56 billion, indicating greater confidence in sustained demand for its services.

Investors should also consider Musk's track record of overpromising on massive production and technology goals. While he might envision a chip manufacturing facility in Texas capable of producing a terawatt worth of chips every year, actually building it might prove more difficult. TSMC's massive technology lead, its excellent visibility into real-world demand, and its ability to spend the capital necessary to expand at a prudent clip ensure that it will remain the leading chip manufacturer in the world, which will very likely continue to count Tesla as a customer for years to come, despite Musk's efforts to do it himself.

Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Intel, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.