On Wednesday, Tesla reported a “resurgence” in global demand, including a “slight growth in the United States,” and its highest first-quarter order backlog in two years, despite the brutal blow the Trump administration dealt the American EV industry with the loss of the tax credit.
What partially helped inch those numbers up, according to Tesla CFO Vaibhav Taneja, was soaring gas prices following the war between Iran and the United States.
Shortly after the U.S. struck Iran on February 28th, Iran closed most traffic through the critical oil chokepoint of the Strait of Hormuz. The action debilitated the oil trade and sent gas prices soaring throughout the world. The resulting turmoil has been called “the largest energy crisis we have ever faced” by energy experts.
While gas prices have been hitting most industries pretty hard, some early evidence claimed that the troubled American EV industry could stand to benefit from it, as the rising gas prices underline the vulnerability of gas-powered vehicles in times of geopolitical uncertainty.
As of this writing, gas prices are still high and are likely to stay that way at least for a while. Trump announced an indefinite ceasefire in Iran this week, but the decision has not opened up traffic through the Strait. Experts predict that it will take months for oil prices to normalize even after the Strait is fully reopened.
But even with gas prices on its side, things are still not all peachy for Tesla. Because while demand is looking up, accompanying it is an unbelievably large capital expenditure commitment. Tesla is expecting to shell out more than $25 billion this year. For comparison, the company spent roughly $8.5 billion last year, and only a quarter ago was expecting to spend $20 billion in 2026.
“With 2026, we’re going to be substantially increasing our investments in the future, so should expect to see a very significant increase in capital expenditures,” Tesla CEO Elon Musk said. “And, obviously, Tesla is not alone in this. I think you’ve seen at most, if not all, certainly the major technology companies substantially increasing their capital investments.”
Indeed, the last round of tech earnings saw an eye-popping increase in capex across the board. The results have freaked investors out more than excited, with the AI-loving market finally seeming to contend with the possibility that this gigantic amount of AI spending with no clear sight of sufficient demand in the short term might prove to be dangerous for the economy.
Some of Tesla’s huge financial commitment is bound to go towards Musk’s unbelievably ambitious plans that he highlighted in the call.
The first of those hefty commitments is the Terafab, the giant chip factory that two Musk-led companies, Tesla and SpaceX, will be helming in a joint effort in Texas. Musk had announced the initiative last month, laying out plans to build chips for both land and space purposes despite having none of the deep expertise required for chip-building. On Wednesday, Musk said that Tesla will be the one building out the research fab, not SpaceX, in what he currently thinks will cost “$3 billion-ish”.
Musk has positioned the Terafab as a response to a lack of the number of chips his own companies need, but on Wednesday made promises that seem to aim for more than that.
“We just anticipate hitting the wall if we don’t make chips ourselves, so that’s the reason for the Terafab,” Musk said in the call, before adding: “I think that we do have some ideas for how to make, maybe, radically better AI chips. These are kind of research ideas, which means long shot, but if long shot pays off, it’s maybe a giant improvement.”
The second unbelievably ambitious commitment has to do with full self-driving.
Musk has promised unsupervised full self-driving for Tesla owners for years, claiming that it was just around the corner. But the company has undoubtedly failed to deliver on those promises, and customers around the world are pissed, with some even taking legal action.
Musk and his CFO had made conflicting remarks in the past over whether the vehicles would reach unsupervised full self-driving. Now, Musk finally admitted that Teslas currently fitted with the hardware 3 computer won’t actually be able to reach unsupervised full self-driving at all.
“Hardware 3 simply does not have the capability to achieve unsupervised FSD,” Musk said. “We did think at one point it would have that, but relative to hardware 4, it has only 1/8 of the memory bandwidth.”
Instead, Musk suggested that Teslas with hardware 3 would be offered a “discounted trade-in” and a computer upgrade.
“To do this efficiently, we’re going to have to set up, like, kind of micro factories, or small factories in major metropolitan areas,” Musk claimed. “If it’s done just at the service center, it’s extremely slow to do so and inefficient, so we basically need, like, many production lines to make the change.”
As seen many times before, Musk is very prone to making grand commitments and biting off more than he can chew. Time will tell if the $3 billion-ish Terafab and the Tesla retrofitting microfactories will join that long list.
