"We will electrify the second-largest car producer in Europe (Spain) with a new giga-factory of batteries and the production of electric cars in two plants," Diess said.
The plan was to create "a full ecosystem of suppliers from lithium extraction to the assembly of batteries," Diess said at event in Sagunto on Thursday.
Diess was visiting the site where the factory will be built with Spanish Prime Minister Pedro Sanchez.
VW aims to begin series production at the 40 gigawatt-hour plant by 2026.
VW plans to have six battery cell production plants in Europe by 2030 with a joint capacity of 240 gigawatt hours (GWh), in an attempt to control as much of the supply chain as possible. The plan is key step in VW's bid to outdo Tesla and become the world's top seller of electric vehicles.