This all-electric Audi SUV will go into production in less than two years. It's expected to be the first direct competition for Tesla -- and VW may be about to ensure that Audi can build a whole lot of them. Image source: Audi.

Volkswagen (OTC:VWAGY) CEO Matthias Mueller has a big problem. His company is caught in a massive, expensive environmental scandal that is racking up costs, hurting sales, and tarnishing the VW brand.

It has become clear that Mueller's solution to that problem with be to change the subject in a big way -- with an all-out effort to beat Tesla Motors (NASDAQ:TSLA) at its own game. That effort may be about to take a huge leap forward: Reports say that VW's board is set to approve plans for a massive new battery factory later this month. 

Batteries have been the missing piece of VW's ambitious EV plans

Respected German business newspaper Handelsblatt has reported that Mueller and his team have put together a plan to build a massive battery factory near VW's existing engine factory in the German town of Salsgitter. VW's supervisory board (similar to a U.S. company's board of directors) is expected to approve the plan before VW's annual meeting on June 22. 

How massive? That's not yet clear. But we have one clue: The cost of the new factory is said to be around $11 billion, according to Handelsblatt. The only direct comparison is Tesla's Gigafactory, which will be by far the largest battery factory in the world when it's done -- and which is expected to cost about $5 billion to build.

If this proposal is for real, and if VW gets aggressive with the construction schedule, this could throw a wrench into one of the key arguments supporting the investment case for Tesla.

This could complicate the investment case for Tesla Motors

As most investors know, a key part of Tesla CEO Elon Musk's "secret plan" involves the Gigafactory, the massive battery factory currently under construction in Nevada. Once complete, the Tesla Gigafactory is expected to roughly double the world's capacity to manufacture the lithium-ion battery cells used in electric cars. It'll also (according to Musk, at least) cut Tesla's battery cost by around 30%, thanks to the huge economies of scale.

Most importantly, though, it'll ensure that Tesla has enough batteries to make a whole lot of electric cars.

Tesla investors point to the Gigafactory as a tremendous competitive advantage: At least in the near term, the thinking goes, none of the big automakers will be able to buy enough batteries to build enough electric vehicles to compete head-on with Tesla. That means Tesla will be able to lead (and have considerable pricing power in) what they expect to be a fast-growing market for electric cars for at least the next several years -- enough time for Tesla to achieve the scale that it will need to be a major player in the long term.

Tesla may well achieve that scale no matter what VW does. But a VW "gigafactory" would make the rest of the company's electric-car plans a lot more credible, throwing a huge, well-funded, and determined competitor into the electric-car mix much sooner than Tesla investors have expected. That could put serious pressure on Tesla's pricing and margins. 

It's now crystal clear that VW is aiming at Tesla 

VW has already said that it's developing a new vehicle architecture exclusively for electric cars, that it will span several new VW-brand models over the next few years, and that it hopes to be selling 1 million electric cars a year in a decade. 

Porsche's battery-electric Mission E concept car included groundbreaking fast-charging technology. A production version is expected in about three years. Image source: Porsche.

Those will be mass-market offerings, but VW subsidiaries Audi (OTC:AUDVF) and Porsche (OTC:POAHY) have each shown electric models that are expected to compete directly with Tesla. Audi's battery-electric SUV will begin production in early 2018, the company says, and an electric Porsche sports sedan is expected to follow about a year or so later. 

It's a serious and seriously well-funded effort. In concept-car form, at least, the Audi and Porsche electrics look like formidable competitors for Tesla's Model X and Model S. But VW's plan has drawn considerable skepticism from electric-vehicle experts, who have been asking the big question: Where will VW get the batteries for all of these cars? 

We may soon know the answer.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.