Tesla's Model X SUV is expected to be a big hit when it arrives late next year. But at least one automaker is aiming to steal some of the Model X's market. Source: Tesla Motors.

Fans of Tesla Motors (TSLA 2.99%) tend to discount the possibility of serious competition for their beloved Model S. After all, the Model S has been on the market since 2012 and it still has no direct competitors. 

A Tesla investor with a substantial stake recently suggested to me that he sees Tesla as Amazon.com -- with the rest of the global auto industry as Barnes & Noble, circa 1998.

I don't buy it. The Model S may be a new type of car, a battery-electric luxury sports sedan. But if there's one thing that all of the major global automakers are good at, it's jumping into a new product category. And for all of the Model S's high-tech sheen, and Tesla CEO Elon Musk's vision and charisma, the big guys have some big advantages that Tesla can't hope to match.

Until now, talk about Tesla's competitors has just been talk. But this week, we learned that at least one giant automaker is gearing up to launch some serious competition for the Silicon Valley upstart.

Electric Audis are on the way
Bloomberg reported this past week that Audi, the luxury-car maker owned by Volkswagen Group (VWAGY 1.95%), is planning to introduce a battery-electric crossover SUV in 2017 -- aimed squarely at Tesla's Model S.

The electric crossover won't be the first electric Audi. A battery-electric version of Audi's R8 sports car will arrive at dealers in Europe next year. It's expected to have a range of about 280 miles, close to the 306-mile range Tesla advertises for 85-kWh versions of the Model S. 

Audi already sells a hybrid version of its Q5 crossover, shown. An all-electric Audi crossover is expected in 2017. Source: Audi.

The electric R8 is likely to be quite expensive, and sales numbers will almost certainly be small. But I expect the crossover to be a much more ambitious product, designed for high-volume production. I expect Audi to aim it squarely at Tesla's upcoming Model X, matching or beating the Tesla's feature list and range -- and quite likely, its price.

Will mass-market buyers care about Tesla's story?
How will the Audi fare? I've heard Tesla fans scoff at the idea of competition, contending that no mass-market automaker can match Tesla's vision and story. Certainly for the early adopters who have stepped up to buy a Tesla so far, the vision and story are a big part of the car's appeal.

But I think the reality of competition in the wider market could be a lot different: How well will Tesla's story compete with Audi's well-established reputation and decades of experience -- among buyers who may not be as invested in Musk's vision as Tesla's early adopters?

Before you answer, consider that Audi could have a price advantage: Audi has access to resources, economies of scale, and manufacturing expertise that go miles beyond what Tesla can draw on -- especially if, as seems likely, Audi's new electric crossover catches on in China, where Audi and the VW Group are already dominant players.

The upshot: This market is about to get a lot more interesting
Tesla says it expects to sell between 120,000 and 140,000 vehicles in 2017, a mix of Model S and Model X. Assuming that it can effectively scale up its manufacturing to that level by then, it might well get those sales -- but at the very least, a serious cost-effective competitor could put heavy pressure on Tesla's hoped-for fat profit margins.

If Tesla's profits get squeezed, how will it fund development of its long-awaited mass-market model? That's when things get interesting. Stay tuned.