The U.S. Department of Defense under the outgoing Trump administration has named nine Chinese firms to an investment blacklist, including Chinese phone maker Xiaomi. The list that Xiaomi and eight other firms have been added to is a list of companies that are alleged to be “Communist Chinese military companies” that are operating either directly or indirectly within the United States. This is in accordance with the statutory requirement of Section 1237 of the National Defense Authorization Act for Fiscal Year 1999.
The Department of Defense announced its latest list earlier today. Under Section 1237 of the NDAA for FY 1999, the U.S. defines “Communist Chinese military companies” as “any person identified in the Defense Intelligence Agency publication numbered VP-1920-271-90, dated September 1990, or PC-1921-57-95, dated October 1995, and any update of those publications for the purposes of this section” as well as “any other person that–(i) is owned or controlled by the People’s Liberation Army; and (ii) is engaged in providing commercial services, manufacturing, producing, or exporting.” It’s unclear how Xiaomi fits this bill, as the company has mostly stuck to making consumer products.
As reported by Reuters, American investors will need to divest their holdings in each of the blacklisted firms by November 11, 2021. That’s because of an executive order signed by President Trump in November of 2020, barring Americans from investing in any companies added to the DOD’s list. Companies previously placed on this blacklist include Huawei and SMIC. What this means for the future of Xiaomi is not immediately clear, as while it’s not an outright ban on all trade, it’s possible that the company receives a large amount of investment from U.S.-based companies. For example, Qualcomm Ventures has publicly invested in Xiaomi, so by November 21st, Qualcomm may need to divest its holdings. That would affect Xiaomi’s stock price, but fortunately for the company, it won’t affect their supply chain.
If Xiaomi were to be placed on the U.S. Commerce Department’s Entity List (à la Huawei and DJI), the company would be barred from conducting any business with U.S.-based companies. Furthermore, any company using hardware or software developed primarily in the U.S., which includes many chip foundries and chip design firms, would also be subject to a trade ban with Xiaomi. Huawei’s placement on the Entity List crippled its ability to sell Android-based smartphones internationally, owing to its lack of a GMS license. The placement also crippled Huawei subsidiary HiSilicon’s ability to design new ARM-based chips.
Fortunately for Xiaomi, they have had time to prepare for the worst, which has yet to happen. “In any case, if in the future something happens, we have a plan B. Among other things, we are investing heavily in various semiconductor manufacturers in China, but we believe that our business strategy should not be conditioned by decisions made by politicians. Until now, we have opted for integrating the best components into our products, and we will continue to do so in the future”, Abi Go, Xiaomi’s global product manager, told Xataka early last year. It’s also possible that the forthcoming Biden administration may remove Xiaomi from this blacklist, though that reversal is not guaranteed. Whatever the case may be, this is a major developing story and the impact may not be felt for some time.
Update 1: Xiaomi releases statement; Qualcomm had already exited long back
Xiaomi has released a statement on Twitter disputing the allegations that it is a company tied to the Chinese military. Xiaomi says that the company is not owned, controlled, or affiliated with the Chinese military.
— Xiaomi (@Xiaomi) January 15, 2021
As well, it turns out that Qualcomm has already divested its holdings in the company at an unknown date. The venture capital arm of Qualcomm, Qualcomm Ventures, lists Xiaomi as “exited”. While no date has been confirmed for this exit, I was able to verify that the company has been marked as “exited” since at least August 6th, 2020.
Update 2: Xiaomi files legal complaint
On its official blog, Xiaomi has announced that it has filed a legal complaint in the U.S. District Court for the District of Columbia. The complaint is addressed to the Department of Defense and the Department of the Treasury, which are undergoing changes in leadership with the transition from President Trump to President Biden. Xiaomi claims the DoD’s decision was factually incorrect and deprived the company of due process. The investment restrictions are set to go into effect on March 15, 2021, unless Xiaomi is removed from the list.
Update 3: Partial Reason Behind Ban
In a legal filing spotted by the WSJ, the U.S. Department of Defense has revealed part of the reason why it added Xiaomi to the list of “Communist Chinese military companies.”
According to the legal filing, the U.S. is citing an award given to Xiaomi founder Lei Jun as part of the reason why the U.S. DoD is blacklisting the company. Mr. Jun received the “Outstanding Builder of Socialism with Chinese Characteristics” award in 2019 from the Chinese Government’s Ministry of Industry and Information Technology (MIIT). The MIIT officially oversees China’s tech and industrial policies, but the U.S. DoD has accused the Chinese agency of aiding China’s civil-military fusion. The award from the MIIT, according to the WSJ, was given out to 100 Chinese executives in 2019 and is given out once every five years to the top private-sector entrepreneurs.
Another reason cited behind the ban was Xiaomi’s “ambitious investment plans in advanced technologies such as 5G and artificial intelligence”, according to the WSJ. As the publication points out, Xiaomi plans to invest ¥50 billion (~$7.7 billion) over 5 years into 5G and AI. These plans were laid out by the company’s founder in January 2020.
These rationales were disclosed in a court filing last week after Xiaomi filed a legal complaint over a month ago. A spokeswoman for Xiaomi didn’t comment on the filing when reached by the WSJ, but the company has previously denied any affiliation with the Chinese military.
Update 4: Xiaomi wins court ruling
In a major win for Xiaomi, U.S. District Judge Rudolph Contreras has put in place a temporary halt on the ban in order to prevent Xiaomi from suffering “irreparable harm.” As reported by Bloomberg, Contreras has also said that it is likely Xiaomi will win a full reversal of the ban as the litigation unfolds. Xiaomi intends on requesting the court declare any linking of it to the Chinese military unlawful and to permanently remove its designation on the “Communist Chinese military companies” list. Contreras went even further, saying that “The court is somewhat skeptical that weighty national security interests are actually implicated here.”
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