xAI, Robots & Energy: Is Tesla Giving Up on EVs?

While Tesla grapples with declining quarterly finances and shrinking annual revenue of US$94.8bn, CEO Elon Musk is steering the company towards what he describes as an "epic future".

This shift towards AI and robotics could change Tesla from an EV business to a broader technology company.

Even after profits fell 61% in the fourth quarter of 2025, Musk announced substantial capital expenditure targeting AI infrastructure and humanoid robot development.

During a Q&A call with investors on 28 January, he revealed plans to halt production of the Model S and Model X at Tesla's California facility, making space for manufacturing humanoid robots.

Musk's AI venture, xAI, is also set to receive US$2bn in investment.

"We're making big investments for an epic future," he told investors on the call, saying the company will begin to "produce Optimus robots at scale". 

This comes just weeks after Chinese EV company BYD overtook Tesla as the world's top EV seller in 2025. 

The US carmaker expects its margins to be further impacted by its transition to a fully subscription-based model for Full Self-Driving (FSD), according to Vaibhav Tanjea, CFO at Tesla.

Powering AI

Central to Tesla's AI ambitions is a massive expansion in energy infrastructure.

Musk says the "solar opportunity is underestimated" and outlined plans to develop 100 gigawatts annually of solar cell production capacity.

He told investors: “We think the best way to add significant capability to the grid – lets say it is powering AI data centres – is solar and batteries on earth and solar in space.

“That's why we are going to work towards getting 100 gigawatts a year of solar cell production integrating across the entire supply chain from raw materials all the way to finished solar panels.”

As part of this green initiative, Musk said Tesla aims to be a “significant manufacturer of solar cells” as it makes “massive investments in AI”. This, he added, would lead to increased investment in “batteries as well as the entire supply chain of batteries”.

Even after the company achieved 26.6% year-on-year growth in the energy sector, with Megapack 3 and Megablock awaiting launch, Vaibhav said the company expects “margin compression from the increased low cost competition, impacts to market from policy uncertainty and the cost of tariffs". 

Tesla's Optimus

The Optimus 3 humanoid robot  is set to be revealed in the first half of 2026. 

Musk said Optimus would be "surprising to people" and "an incredibly capable robot”.

"Optimus really will be a general purpose robot that can learn by observing human behaviour," he says.

"So, you can demonstrate a task or literally verbally describe a task or even show it a video and it will be able to do that task."

Infrastructure and supply chain concerns

Supporting this transformation requires unprecedented capital expenditure.

Vaibhav said that CapEx for 2026 is expected to exceed US$20bn.

"We will be paying for six factories, namely the refinery, LFP factory, cybercab, Semi, a new mega factory and the Optimus factory," he says.

Additional spending would cover AI compute infrastructure, existing factory expansion and deployment of robotaxi and Optimus fleets.

Musk says that chip production is a potential constraint on growth over the next three to four years.

"Completing the AI5 chip design and having it be a great chip is arguably the number-one most critical thing to get done, which is why I'm spending more time on that than currently anything else at Tesla," he says.

Looking further ahead, Musk reveals AI6 would hopefully follow less than 12 months after AI5, representing "yet another big leap beyond AI5".

Succumbing to China’s BYD in the EV market, Musk foresees Tesla’s toughest competition in the humanoid market to come from China.

“I do think that by far the biggest competition for humanoid robots will be from China,” he says. 

“China is incredibly good at scaling manufacturing. Actually, quite good at AI," adding that the models being distributed for free there “keep getting better".

Summarising, he said: "So, China's very good at AI, very good at manufacturing and will definitely be the toughest competition for Tesla.”