The U.S. electric car maker is set to open a factory just outside Berlin which will make Model Y cars as well as batteries, battery packs and powertrains for use in other Tesla vehicles. The forest site is being sealed off to ramblers as authorities start groundworks and check for unexploded World War II explosives.
Tesla's foray in the home of the German auto giants is expected to be up and running in 2021.
Speaking at the World Economic Forum in Davos on Thursday, Diess said he welcomed the challenge. "I think it's great to have good competition. We think that Tesla plays a very important role in the transition because they are paving the way," he said.
"They showed that electric cars are working, that a fully electric car is the right solution. So, we appreciate that," he added.
Following a 2015 scandal which saw VW Group caught out for cheating during diesel emissions tests, the company has accelerated its electric car program. VW, which vies with Toyota as the world's biggest seller of automobiles, has pledged to launch eight new electric and hybrid cars in 2020.
Diess said that both traditional engine and electric cars are becoming "the most relevant and precious units in the internet." The CEO argued that data streams in and out of the car will be much higher than smartphones, pushing the car of the future into a new role in the internet ecosystem.
Despite shrinking global auto markets, VW Group grew its worldwide deliveries by 1.3% to 10,974,600 vehicles in 2019. Its biggest market, Europe, accounted for more than 4.5 million auto sales across the year. Shares in the firm are up almost 25% over the last 12 months and more than 6% higher than the low of the 2015 "Dieselgate" crisis.
Volkswagen Group is the umbrella organization for a range of brands that, among others, include Porsche, Audi, Seat, Lamborghini and Ducati.
One of the architects of VW Group's recovery is Luca de Meo, who quit as head of Volkswagen's Seat brand earlier this month. Although still officially with VW, the Italian is currently the favorite to take the role of the now vacant position as CEO of Renault.
Diess told CNBC that de Meo had confirmed to VW that he was in talks with Renault, adding that it was sad to see him leaving VW.