Elon Musk Rebuilds xAI Again: Co-Founders Leave, Layoffs Begin and Grok Falls Behind

xAI is heading into another reset. Elon Musk's company is losing key people, cutting staff and admitting that Grok trails the market leaders in one of the most lucrative AI segments: programming.

What is happening at xAI

In March 2023, Musk launched xAI with a bold goal: to build the "most powerful AI in the world." Three years later, the picture looks different. Most of the founding team has left the company, layoffs are under way, and managers from Tesla and SpaceX are reviewing teams and looking for weak spots, according to US media.

The latest wave of departures hit senior engineers and researchers, including Zihang Dai, Guodong Zhang and Jimmy Ba. Amid burnout and a harsh management style, team morale has dropped noticeably.

Musk himself has publicly admitted that he is not satisfied with xAI's current setup. By his account, this is not the first time the company has had to be rebuilt, and again it is being rebuilt almost from the foundation. For an AI lab that is supposed to ship models and tools quickly, that admission is blunt: this is not routine process optimization but a signal that the old approach to management, hiring and development failed to deliver at a critical point in the race.

"Everything was built wrong the first time, so now xAI is being

rebuilt from the ground up."

Why Grok is stalling

The immediate trigger for the new reset was Grok's weak showing at writing code. Musk himself said the model is currently losing in programming, and that is a painful spot in the AI market: developer tools turn into revenue and user retention faster than anything else.

Inside xAI, insiders say, the gap with competitors is especially irritating: engineers came to work at the cutting edge, yet now have to catch up with OpenAI and Anthropic, which have more data, more money and more stable teams.

• Grok trails Claude Code and Codex in programming benchmarks
• xAI sees development tools for programmers as one of its main growth areas
• The company is already hiring specialists from Cursor
• But a talent transfer alone does not solve cultural and structural problems

This matters because it is not about a flashy demo feature but about a basic maturity test for an AI lab in 2026. If a model writes code poorly, it is harder for the company to sell it to businesses as a working tool rather than an experiment. So Grok's lag hits strategy, hiring and reputation at once: strong researchers find it easier to join a lab whose model already sets the pace than one that announces a new turnaround every quarter.

Money and reputation

xAI's problems look especially acute against the backdrop of Musk's large business bets. Less than a month and a half before the new restructuring statement, a deal merging xAI and SpaceX at a valuation of $1.25 trillion was completed. The idea was clear: give the AI company more capital, compute and engineering discipline. Separately, Tesla invested another $2 billion in xAI this year.

But investors and partners now have to look not at a neat synergy story but at a company that admits it is behind while losing people at the same time.

There is also external pressure. Grok has already drawn regulatory attention for generating intimate images without consent, with weak safeguards in place. xAI later fixed some of the problems, but the reputational damage was done. For corporate customers this is an important signal: if a product both trails rivals in quality and carries elevated safety and brand risks, choosing it as an alternative to OpenAI or Anthropic becomes noticeably harder. For xAI, this means the reset is needed not only for the model but for the whole story of trust around it.

What it means

The xAI story shows that a loud founder, big checks and star engineer hires are no longer enough in the AI industry. The market moves too fast: while a company fixes its structure, competitors improve their models, products and distribution. If Musk does not stabilize the team and bring Grok up to speed in programming, a second big reset could cement xAI's role as the eternal catch-up player.