Tesla’s $5 Billion Investment in Elon Musk’s AI Startup xAI Sparks Conflict of Interest Concerns

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Elon Musk, CEO of Tesla, revealed on Thursday that he and Tesla’s board are considering a substantial $5 billion investment in his artificial intelligence venture, xAI. This proposal has ignited concerns about a potential conflict of interest, given Musk’s dual role as the head of both Tesla and xAI.

Musk, who recently topped the list of the world’s wealthiest individuals, launched xAI last year with the aim of challenging Microsoft-backed OpenAI. This move has raised fears that resources from Tesla could be diverted to support xAI, potentially impacting shareholders.

On Tuesday, Musk conducted a poll on social media platform X, asking followers whether Tesla should invest $5 billion in xAI. The poll garnered nearly 1 million responses, with more than two-thirds in favor. However, it remains unclear how many respondents are actual Tesla investors.

The poll’s timing coincided with Tesla’s recent earnings report, which revealed that the company’s second-quarter automotive gross margin and profit fell short of Wall Street expectations. The shortfall was attributed to Tesla’s decision to cut prices and offer incentives in an effort to stimulate sales.

“Looks like the public is in favor. Will discuss with Tesla board,” Musk tweeted on Thursday.

During Tesla’s earnings call earlier this week, Musk suggested that investing in xAI could enhance Tesla’s self-driving technology and support the development of a new Tesla data center. He also mentioned the potential integration of xAI’s chatbot, Grok, with Tesla’s software systems.

Despite substantial investments in the AI sector, many companies, including xAI, are still grappling with developing sustainable business models while investing heavily in technology.

Brent Goldfarb, a professor at the University of Maryland’s business school, expressed skepticism about the investment, stating, “It’s challenging to argue that this move is in the best interest of Tesla shareholders. It appears to be a transfer of Tesla’s wealth. AI currently resembles a bubble with uncertain financial returns.”

In 2018, Musk left OpenAI, which he co-founded, to avoid potential conflicts with Tesla’s AI initiatives for self-driving vehicles. Musk has indicated that xAI is hiring engineers from Tesla to counteract recruitment efforts by competitors like OpenAI.

xAI recently raised $6 billion in a Series B funding round, achieving a post-money valuation of $24 billion. Investors in xAI include Andreessen Horowitz and Sequoia Capital. Musk has also stated that he intends for a quarter of xAI’s ownership to be held by investors in X, which he acquired for $44 billion. However, the value of X has significantly declined since the purchase.

Musk has faced previous scrutiny over potential conflicts of interest, notably regarding Tesla’s $2.6 billion acquisition of SolarCity in 2016. The acquisition, founded by Musk and his cousins, was criticized as a bailout for the struggling rooftop solar company. However, the Delaware Supreme Court ruled last year that Musk did not pressure Tesla into overpaying for SolarCity.