Elon Musk restructures xAI again: co-founder departures, layoffs, and Grok falling behind

xAI is going through another rebuild. Elon Musk's company is losing key people, cutting staff, and admitting that Grok is noticeably falling behind market leaders in one of the most lucrative AI segments — coding.

What's Happening at xAI

In March 2023, Musk launched xAI with a bold goal — to create "the most powerful AI in the world." Three years later, the picture is different: much of the founding team has left the company, there are internal layoffs, and managers from Tesla and SpaceX are checking teams and looking for weak spots, according to American media. The latest wave of departures included senior engineers and researchers, including Zihang Dai, Guodong Zhang, and Jimmy Ba.

Against a backdrop of burnout and harsh management style, team morale has noticeably dropped. Musk himself has publicly acknowledged that the current structure of xAI does not satisfy him. According to him, the company needs to be rebuilt again, and once again almost from the ground up.

For an AI lab that should be rapidly releasing models and tools, such an admission sounds harsh: this is not ordinary process optimization, but a signal that the previous management, hiring, and development scheme did not deliver the required results at a critical moment in the race.

"It was all built wrong from the start, so now xAI is being rebuilt

from the very foundation."

Why Grok Is Struggling

The immediate trigger for the new rebuild was Grok's weak performance in coding tasks. Musk himself said the model is currently losing in programming, and for the AI market this is a sore spot: developer tools fastest turn into revenue and user retention. Inside xAI, insiders report, the gap with competitors is especially frustrating: engineers came to work on the cutting edge, but ended up having to catch up with OpenAI and Anthropic, which have more data, more money, and more stable teams.

• Grok lags behind Claude Code and Codex in programming benchmarks
• xAI considers developer tools one of its main growth areas
• The company is already hiring specialists from Cursor
• But staff transfers alone do not solve cultural and structural problems

This point is important also because it is not about a pretty demo feature, but about a basic test of an AI lab's maturity in 2026. If a model is weak at writing code, it is harder for the company to sell it to business as a working tool, not as an experiment. Therefore, Grok's lag hits strategy, hiring, and reputation simultaneously: strong researchers find it easier to go where the model already shows leadership pace, not where every quarter brings a new pivot announcement.

Money and Reputation

xAI's problems look especially acute against the backdrop of high stakes around Musk's business. Less than a month and a half before the new restructuring announcement, the deal combining xAI and SpaceX was completed with a valuation of $1.25 trillion. The idea was clear: give the AI company more capital, computational resources, and engineering discipline. Separately, Tesla invested another $2 billion in xAI this year. But now investors and partners have to look not at a pretty synergy story, but at a company that admits it is falling behind and at the same time losing people.

There is also external pressure. Grok has already faced regulatory attention for generating intimate images without consent with weak protective safeguards. xAI later closed some of these problems, but the reputational hit has already happened. For corporate clients, this is an important signal: if a product is simultaneously inferior to competitors in quality and carries elevated risks in security and brand, choosing it as an alternative to OpenAI or Anthropic becomes noticeably harder. For xAI, this means the rebuild is needed not just for the model, but for the entire trust story around it.

What This Means

The xAI story shows that in the AI industry, a famous founder, big checks, and hiring star engineers are no longer enough. The market is moving too fast: while a company fixes its structure, competitors manage to improve their models, products, and distribution. If Musk does not stabilize the team and improve Grok's coding capabilities, a second major rebuild could cement xAI's role as a perpetual catch-up player.