Third largest smartphone maker in the world added to US military blacklist

Shares in Xiaomi, the world’s third-largest smartphone maker, were rammed in Hong Kong’s trade on Friday after the U.S. Department of Defense labeled it as having ties to China’s military. Xiaomi’s shares plummeted as soon as negotiations started, and ended the day with a 10.3% drop.

Xiaomi, which specializes in mass and mid-range phones, now sells more smartphones than Apple (AAPL). It is one of the 2020 success stories. Xiaomi’s stock value has tripled over the year, as it has won business from its main competitor on the continent, Huawei Technologies, the main initial target of US sanctions.

The Pentagon on Thursday named Xiaomi as one of nine new names on its list of “Chinese communist military companies”, which now contains 44 Chinese corporations. Other notable additions include COMAC, or Commercial Aircraft Corp. of China, which has General Electric (GE) among its suppliers. GE manufactures engines for COMAC’s passenger jets.

Xiaomi moved ahead of Apple in the third quarter of 2020 to become the third largest smartphone seller in the world, with 13% of the market in the third quarter of 2020, according to Counterpoint Research, against 11% of Apple. Only Samsung, with 22% of the market with 80.4 million phones, and Huawei, with 14% of the market, sell more phones in the world. Xiaomi’s market share increased by five percentage points in one year, while Huawei’s share fell.

Xiaomi issued a statement on Friday that “provides products and services for civil and commercial use”. The company “confirms that it does not belong, is not controlled or affiliated with the Chinese Armed Forces” and therefore should not be on the list. Xiaomi says it will “take appropriate measures” to protect the company and its shareholders.

The confusion in China is that many private companies have links to the state. Even companies owned by shareholders have sometimes included the Communist Party in its status as the ultimate controller. Any Chinese company would serve the central state if ordered to do so. And telecommunications will always be of interest to military users.

The US Department of Defense said it “is determined to highlight and thwart” the strategy of developing China’s civil-military fusion, which supports the modernization of the People’s Liberation Army “, ensuring its access to advanced technologies and acquired knowledge and developed even by those in the PRC companies, universities and research programs that appear to be civilian entities. “

Putting Xiaomi and COMAC on the DoD list means that they are now covered by an executive order of November 12 from outgoing President Donald Trump. The order states that American investors, whether individuals or companies, can no longer buy the shares of these companies. The order came into effect on January 11 for the initial list of 35 companies, which included Huawei, and will apply to any newly added companies, such as Xiaomi, 60 days after its inclusion. American investors have until November 11 to sell the shares they hold in the first set of companies.

Huawei, which makes telecommunications network hardware and chipsets, as well as phones, is on a more significant list of entities established in Washington, which prevents companies around the world from providing it if they use U.S. parts or technology. This is much broader than the current designation applied to Xiaomi, which manufactures consumer products instead of network systems. The ban on the Entity List is making it extremely difficult for Huawei to supply chips for its phones, so it is important to note whether Xiaomi is also added to this.

Xiaomi has ADR shares listed in the United States under the symbol (XIACF), and US investors own about 15% of its shares. BlackRock (BLK), Vanguard and State Street (STT) have large blocks of shares for their funds.

Xiaomi has its primary listing in Hong Kong, where, in early December, it set a record in terms of the subsequent offering, selling $ 3.9 billion in shares as a complementary sale of shares. It went public with a $ 4.7 billion IPO in Hong Kong in June 2018. Pressure from the U.S. is expanding Hong Kong’s importance as a stock market for Chinese companies.

Xiaomi, based in Beijing, offers phones similar to Apple’s at an affordable price and with an open source system that allows users to customize the operation of their phones. Its top-of-the-line phones cost about $ 400, but the cheapest are under $ 100. So far, it has made its biggest inroads in Asia, especially in India, Indonesia, Hong Kong, Singapore and Taiwan. But more recently, it is making progress in Europe.

Xiaomi hardly sells phones in the United States. But it depends on Qualcomm (QCOM) to supply chips for two-thirds of its phones, so an Entity List designation would be devastating, disrupting that supply.

The New York Stock Exchange made the drastic decision to remove China’s top three telephone companies from the list after they received the same military designation.

The NYSE failed, but decided after pressure from U.S. Treasury Secretary Steve Mnuchin to remove the list from China Mobile (CHL), China Telecom (CHA) and China Unicom (CHU), which have a combined market capitalization of $ 157 billion. This caused index providers to also withdraw telephone companies and other similar stocks from their indexes, as the Trump order prohibits American investors from trading any securities offered by those companies, as well as derivatives based on those securities.

As a result, North American investment banks JP Morgan (JPM), Morgan Stanley (MS) and Goldman Sachs (GS) canceled derivative quotes in Hong Kong. They removed 500 redeemable bull / bear contracts, derivative warrants and Hong Kong online warrants that were based on these companies, or indexes that contained them, such as Hang Seng, the most followed index in Hong Kong, and the CSI 300, the main index to follow the shares of mainland China.

The action at COMAC demonstrates the confusion sown by some of Trump’s orders. Trump intervened last February to prevent the U.S. Department of Commerce from denying a license to allow GE to sell jet engines to COMAC.

At the time, Trump denied that there was any concern for the national security of American companies that supplied Chinese aircraft manufacturers. “We are not going to sacrifice our companies … using a fake national security term. It has to be real national security. And I think people were getting carried away by it,” he told reporters. He also said in a post on Twitter that “I want China to buy our jet engines, the best in the world”.

GE also has a joint venture with Chinese aircraft maker AVIC, Aviation Industry Corp., which is also on the DoD list of Chinese military companies.

The state Global Times The newspaper, often used to communicate China’s foreign policy stance, published a story today citing an academic saying the latest orders could be the Trump administration’s “final frenzy”. Some Chinese netizens joked that Xiaomi should be to be congratulated, because the company is successful enough to get the attention of the United States Department of Defense.

Xiaomi and Huawei, as well as the TikTok teen app, are some of the most internationally recognized Chinese brands, where few Chinese companies have generated much or no recognition. All were targeted by Trump’s orders.

The problems facing Huawei have encouraged China to channel funds towards the creation of a domestic semiconductor and telecommunications industry. O Global Times quotes an unnamed “telecommunications analyst” as saying it is time for ZTE (ZTCOF), Huawei and Xiaomi to work together to “reshape the industry chain in China and create a completely domestic supply chain.”

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