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On Thursday, the U.S. Department of Defense (DOD) blacklisted Chinese smartphone maker Xiaomi for its alleged ties to the Chinese military, leading to a stock selloff in Hong Kong that drove Xiaomi’s share price down 10%.
The Defense Department said that Xiaomi, along with eight other firms it added to its blacklist, was working to support China’s People’s Liberation Army by giving it access to its technology.
In a statement, the Defense Department accused Xiaomi of being part of an orchestrated campaign to support the “modernization goals of the People’s Liberation Army by ensuring its access to advanced technology and expertise.”
In response, Xiaomi’s founder and CEO, Lei Jun, issued a statement denying any connection between Xiaomi and China’s military, and said that Xiaomi complies with the “relevant laws and regulations” where it conducts business.
Xiaomi “is not owned, controlled or affiliated with the Chinese military,” Jun said. Jun also said that the company is reviewing potential consequences of the order and actions the company can take on behalf of its investors.
Xiaomi was founded in 2010. Early on, it was known as the Apple of China for its similarities to the American phonemaker, but it made a name for itself by launching innovative, online marketing campaigns and expanding into markets like India. In addition to selling budget smartphones, the company also offers a range of goods including smart TVs, wearable tech, and smart homeware appliances. In the third quarter of 2020, the company briefly surpassed Apple in global smartphone shipments.
But the DOD’s order on Thursday sent investors scurrying.
Xiaomi shares’ 10% drop on Friday translated to a $17 billion loss in market capitalization. Jun lost an estimated $3.6 billion of his personal $31.1 billion fortune; he owns 25% of the company’s stock.
The stock selloff was driven, in part, by investors’ assumption that they’ll be barred from investing in Xiaomi now that it’s on the blacklist. The Trump administration issued an executive order in 2019 that said Americans would be prohibited from investing in companies flagged by the Defense Department.
Trump’s 2019 divestment order is set to come into effect in November 2021, so U.S. President-elect Joe Biden’s administration will soon be tasked with deciding whether or not to enforce it. If the order sticks, it would ban not only individual investors from Xiaomi; American venture capital firms like Qualcomm Ventures would also be forced to divest.
Landing on the blacklist will not change Xioami’s day-to-day operations. Unlike fellow Chinese smartphone maker Huawei, Xiaomi has not been added to the U.S. Department of Commerce’s entity list, which bars companies from accessing critical U.S. Technology like semiconductor chips.
“From an operational, working point of view, the order won’t have much impact,” says Navkender Singh, a tech analyst in India for the International Data Corporation. “For now, there will no impact on the supply chain or [Xiaomi’s] partners.”
Still, Xiaomi’s stock slide in Hong Kong is evidence that the company has taken a hit.
Before the order, markets and investors were not concerned about Xiaomi’s potential ties to the Chinese government, says Singh. “The global markets perceived [Xiaomi] as a pure, consumer company, giving hardware and some other services to consumers,” says Singh.
But after being blacklisted by the Defense Department, investors may no longer view Xiaomi as a safe, apolitical bet.