Elon Musk Gambles Billions in Memphis to Catch Up on AI

xAI aims to win tech arms race with ‘Colossus’ data centers, thrown up at lightning speed; city divided over massive power and water demands

MEMPHIS—For Elon Musk , ground zero of the artificial intelligence arms race is a 114-acre tract of grass and swamp on the state line of Tennessee and Mississippi.

This once-sleepy plot of land, filled with groves of water-rooted tupelo trees at its western edge, is now part of a growing empire Musk is accumulating in the Deep South, just a few miles from Elvis Presley’s homestead at Graceland.

Labor crews hired by Musk’s xAI were excavating power equipment on the site—a defunct energy plant just over the state line in Mississippi—and preparing to build a new plant capable of generating over a gigawatt of electricity, enough to power around 800,000 homes. Engineering permits show that Musk plans to route transmission lines that will connect the new power plant to a million-square-foot data center that is also under development just north of the border, in Tennessee.

Memphis is the front line of Musk’s costly foray into the AI wars. His artificial intelligence company, xAI, has already built one massive data center here in the Bluff City that it calls the world’s largest supercomputer. That facility, called “Colossus,” houses over 200,000 Nvidia chips and powers the technology behind the AI chatbot Grok. Now, Musk is close to finishing the second facility, which will be even bigger. He calls it Colossus 2.

The AI arms race is shaping up as the most expensive corporate battle of the 21st century, with the belief that the first to the finish line will dominate the market, making speed crucial. Money also makes the difference: The more cutting-edge chips companies have, the smarter their models are. But at this stage it’s unclear if or when the enormous investments will pay off.

Technology companies that are splashing out to hire AI talent are writing even bigger checks to build the infrastructure needed to power cutting-edge AI models. Morgan Stanley estimates companies will spend over $3 trillion on AI infrastructure through 2028.

Musk, who has been at the forefront of innovation in electric vehicles, rockets and brain-computer interfaces, is in the unusual position of playing catch-up to rivals like Sam Altman’s OpenAI . Finishing Colossus 2 will cost tens of billions of dollars, some AI and data center experts say. The Nvidia chips alone cost a fortune: Musk will need to spend at least $18 billion for the roughly 300,000 more chips he needs to complete the Memphis project, a person familiar with the project’s financials said. Musk said in July that Colossus 2 will have a total of 550,000 chips and has separately signaled it could eventually have a million processing units.

Musk is burning cash at a breakneck clip. Earlier this year, xAI raised $10 billion through a combination of debt and equity. The company was slated to run through about $13 billion in cash in 2025, according to projections shared with creditors a few months ago, The Wall Street Journal previously reported .

Musk turned to his privately held SpaceX to chip in $2 billion , an unusual move for a company that rarely makes outside investments. Some executives have left xAI after clashing with Musk’s advisers over concerns about the startup’s management and financial health.

“In typical xAI and Elon fashion, the company’s future is highly unpredictable,” said Dylan Patel, CEO of SemiAnalysis, an independent research company focused on the semiconductor and artificial intelligence industries. “Elon will do everything he can to not lose to Sam Altman .”

Musk’s gamble is playing out in real time in Memphis. Among the locals, his arrival has kindled hopes of an economic renaissance, but it has also stoked controversy. Musk’s data centers will probably bring in only a few hundred jobs to Memphis while consuming millions of gallons of water a day and more electricity than is needed to power all the city’s homes. Natural-gas turbines powering the data centers have brought pollution and controversy over their use—xAI has argued that many of the structures are temporary and don’t require a permit. Some residents question plans for the utility to issue rebates to xAI for building the new power structures it needs.

Musk’s pitch to Memphis is that he is building infrastructure that will benefit the city. The company has promised to construct a giant wastewater recycling facility, to be used in its cooling system, that would help reduce demand on the Memphis aquifer. The company has also donated funds to Memphis schools and other organizations and hired workers to go around the city and pick up trash.

“In one year, xAI has become the second largest taxpayer in the city and county after FedEx ,” said Bill Dunavant III, a Memphis businessman who sits on the board of directors of the city’s chamber of commerce.

Critics say the project is a big risk and could leave residents with pollution caused by the natural-gas turbines and higher electricity bills stemming from the extreme demand on power.

“Memphis is desperate,” said Batsell Booker, a 65 year-old retired firefighter who lives in the neighborhood next to Colossus. “And this is not the first time that they have been so desperate for companies. They come in and promise them the world.”

xAI declined to comment.

A spokesman for the Greater Memphis Chamber of Commerce, which has acted as a representative for xAI’s activities in Memphis, said xAI has demonstrated “substantial economic commitment to our region, without any tax incentives.”

Memphis city officials didn’t respond to a request for comment. Southaven, Miss., the town across the border that is the location of the power plant for Colossus 2, has called the deal with xAI “a great partnership.”

Courting Musk

Even though Musk has called AI humanity’s “biggest existential threat,” he was a co-founder of OpenAI alongside Altman in 2015. He left after the two had a falling-out after Musk demanded that he should become its CEO or have it merge with Tesla , the electric-vehicle maker controlled by Musk.

He set out to build his own artificial intelligence and got a boost from his acquisition of Twitter in 2022. The never-ending flow of posts on the platform provided a stream of information that, combined with publicly available internet data, could make it a powerful base for training a large language model.

In 2023, Musk incorporated xAI and soon launched Grok. By that point, OpenAI had already vaulted far ahead in the AI race with the launch of ChatGPT. Musk moved to raise $1 billion from investors and contacted existing data center providers, hoping to find a facility that could house 100,000 Nvidia chips and become a hub for AI training. Nothing was available.

“We got time frames from 18 to 24 months. That means losing was a certainty,” Musk said about that time during the launch of Grok 3 in February. “The only option was to do it ourselves.”

Musk and his team looked at eight locations across the U.S. where they could build a data center before turning to Memphis, people familiar with the matter said. Eventually, they zeroed in on the city because of an abandoned factory there that was previously home to Electrolux, a Swedish appliance manufacturer that had closed the facility and laid off around 500 hundred workers a few years earlier.

Musk’s company signed a lease on the building in March 2024. Musk and his staff told the chamber of commerce that xAI had three main concerns when setting up shop in Memphis: power, water and speed.

From the start, local officials were eager to court Musk. Memphis, the seat of Shelby County, was once a prosperous city when it was at the heart of the American cotton industry up through the mid-20th century. But globalization took a toll on the industry, and while some logistics companies such as FedEx have thrived, the region’s economy has struggled. “xAI is going to be a $40 billion or $50 billion investment for our city,” said Dunavant, the businessman on the chamber of commerce’s board.

During one conversation in early 2024, the head of the chamber, local businessman Ted Townsend , teamed up with the head of Memphis’s local utility provider to convince Musk that he would have all the power he needed in the city, people familiar with the call said.

Memphis Light, Gas and Water, the utility, denied xAI was assured they would have all the power they needed. “They were informed that a system impact study would be conducted to determine what would be required to serve the load without adversely impacting existing customers or the bulk electric system,” said a spokeswoman for the utility. If any impacts are identified, xAI would be required to pay for upgrades, she said.

Artificial intelligence requires massive amounts of power. “Each unit is doing a very simple calculation, but there are so many such small units, and overall, the power consumption is really huge,” said Shaolei Ren, professor of computer science at the University of California, Riverside. “A server with 16 chips, smaller than a piece of checked baggage, needs the same power as five to 10 households.”

xAI representatives said they would be willing to build a lot of the infrastructure that xAI would need, including power substations around the former Electrolux factory, and they promised to turn over the works to the city for public use in exchange for rebates on the company’s utility bills.

Representatives from MLGW, the utility, agreed to the rebate programs, which have drawn some criticism from local environmental groups because they believe it is effectively a subsidy for xAI, while the high demand on the power grid and cost of new infrastructure will result in higher bills for consumers.

The utility said that xAI’s construction of a substation wouldn’t impact residential rates, which are set by the utility’s board of commissioners and approved by the city council.

“xAI agreed to build substations to MLGW specifications at xAI’s expense for a reduction in their electric bill for a period of time. It’s not unusual for companies to do this—we’ve made this same agreement with other large load customers,” the spokeswoman said. “It also puts downward pressure on rates because we are not using ratepayer dollars to build infrastructure.”

Colossus erected

While city officials were in the loop, state officials were in the dark as Musk began work on the facility in May. The board of directors of the Tennessee Valley Authority, which generates most of the electricity used in the state, wasn’t notified about xAI’s intent to open the data center until the Greater Memphis Chamber of Commerce announced it publicly in June, people familiar with the matter said. (Musk has since started to work more closely with the governor as one of his other companies, the Boring Company, works on a tunnel connecting Nashville’s downtown to its airport.)

A spokesman for TVA said it believes in the importance of using “American energy dominance to win the AI race” and is working with MLGW and xAI on any additional requests for load.

A spokeswoman for the Tennessee governor didn’t respond to a request for comment.

Musk went to Memphis himself in the summer of 2024, actually helping to build out cabling to ensure the chips being installed by his team were able to simultaneously process huge amounts of information.

In order to get electricity from the local utility, xAI had to first refurbish nearby power substations that could handle the large electric load Colossus would require. The work on the first substation would take nearly a year.

Musk couldn’t wait, so he set up 14 natural-gas turbines as a temporary power source for the data center. To help cool down the processing chips, Musk said he rented about a quarter of the country’s mobile cooling capacity, while the company worked with SuperMicro to procure liquid-cooled server racks for longer-term use. Musk also had a farm of Tesla batteries installed and reprogrammed to help ensure that the power supply to the building was smooth.

By September 2024, after bottlenecks and false starts, the team was ready to put the Memphis supercomputer to work training Grok, using some 42,000 Nvidia chips that had been installed. It had taken 122 days to make that breakthrough. “There is only one person in the world who could do that,” Nvidia CEO Jensen Huang said of Musk in an interview with the BG2 podcast.

Musk decided to name the data center Colossus—a reference to a popular trilogy of sci-fi novels from the 1960s by D.F. Jones, in which scientists built a supercomputer named Colossus that gained autonomy and plunged the world into war and chaos.

As more chips came online, Colossus needed even more power. At its peak, Musk had around 35 natural-gas turbines at the Colossus site, capable of producing 420 megawatts of power, enough to power the roughly 250,000 homes in the Memphis city limits.

The turbines were very large and emitted enough nitrogen oxides and other pollutants to require a permit from local authorities, according to an August 2024 letter from the Southern Environmental Law Center to the Shelby County Health Department reviewed by the Journal. But xAI wasn’t required to obtain a permit for them because the setup was supposed to be temporary, health officials said in July this year to the legal nonprofit.

In the poor, mostly Black neighborhoods of South Memphis near the data center, residents said they smelled the pollutants not long after xAI started operations.

Booker, the retired firefighter, said he started smelling gas in the air when he would go out to garden in his backyard. “It had everyone terrified,” he said, saying the neighborhood over the years has had a high concentration of people who have died from cancer and respiratory illnesses. Some public health experts attribute the increased rates to environmental pollutants from nearby industrial sites.

In August 2024, the Southern Environmental Law Center wrote to Memphis city officials to question how xAI was able to get a permitting exception that it said was meant for much smaller turbines. “This was essentially an unpermitted power plant,” said Amanda Garcia , a senior attorney for the legal nonprofit.

Gregg Fortunato, a public health official in the Shelby County Health Department, warned xAI’s power consultants in an October 2024 email that “political pressures” were mounting over the use of the turbines.

In January, after Colossus had been operating for about six months, xAI applied for a permit for 15 of the natural-gas turbines at Colossus. They moved 13 turbines elsewhere, with some going to a storage facility in Mississippi. The permit requires that xAI measure the turbines’ emissions and keep them below a certain threshold.

At Colossus 2, however, around seven turbines—physically located across the state line in Mississippi—are now operating without a permit.

Mississippi approved the use of the turbines in Southaven but “implored” xAI to minimize the emission of nitrogen oxides and other pollutants, according to a July 29 letter to the company from Jaricus Whitlock, the air division chief of the Mississippi Department of Environmental Quality, reviewed by the Journal.

The Mississippi Department of Environmental Quality said regulations specifically provide for the temporary operation of mobile source turbines, and the agency has ensured compliance with the regulations. Mayor Darren Musselwhite of Southaven said that MDEQ has approved temporary operations, and therefore xAI is currently in compliance with MDEQ standard requirements.

xAI plans to install a total of 18 temporary turbines at the site, according to correspondence between xAI and Mississippi environmental officials reviewed by the Journal. In August, xAI filed an application for a permit to eventually have 41 permanent natural-gas turbines in Southaven that could generate over a gigawatt of power, according to the correspondence.

Transmission lines feed power to the data center on the Tennessee side of the border.

In Memphis, city officials are trying to show citizens they aren’t letting xAI take advantage of its poorest neighborhoods. In June, the city said an air quality test near the data centers found pollutants were “too low to detect or well below established safety protocols.” In August, the Memphis City Council voted to designate 25% of xAI’s Memphis tax revenues for communities near the facilities.

After the first Colossus went online last year, Musk quickly put Grok on the map, impressing AI experts with some of the model’s capabilities. This year, it outperformed models from OpenAI and Google in several advanced tests, including one that asks Ph.D.-level questions about topics ranging from ancient linguistics to gravitational physics. Its popularity also jumped when xAI rolled out a range of avatars that users could speak with directly, including one named Ani, a scantily clad female stylized like an anime character.

But xAI’s chatbot also drew criticism this summer when it started to post violent and antisemitic comments directed at users on X. xAI had to temporarily disable the chatbot on social media and issue a public apology for “the horrific behavior that many experienced.”

In July, Musk said the Colossus 2 facility was getting ready to start training Grok. He also said he is importing a prefabricated power plant from abroad to power the whole operation.

On the financing front, Musk is exploring a way to stock up on $12 billion worth of chips without buying them outright, instead leasing them through a complex financing arrangement with an outside partner, the Journal previously reported. He continues to look elsewhere in his empire for potential financial support: Tesla shareholders will vote in November on a proposal for the EV maker to invest an unspecified amount in xAI, following in SpaceX’s steps.

Musk has said he doesn’t see any limits in the AI race. “I think we’ll see artificial intelligence continue to scale up to where most of the power of the sun is harnessed” for the technology, and “ultimately most of the power of the galaxy,” he said at the All-In Summit last month.

Write to Alexander Saeedy at alexander.saeedy@wsj.com