World’s third largest smartphone maker added to US military blacklist

Shares of Xiaomi, the world’s third-largest smartphone maker, were thrown into Hong Kong trading on Friday after the US Department of Defense labeled it ties to the Chinese military. Xiaomi shares surged lower once trading started, ending the day at 10.3%.

Specializing in large and medium phones, Xiaomi now sells more smartphones than Apple (AAPL). It was one of the success stories of 2020. Xiaomi’s stock tripled in value over the year as the company beat its main mainland competitor, Huawei Technologies, the primary initial target for US sanctions.

The Pentagon on Thursday named Xiaomi as one of nine new names on the “Communist Chinese Military Companies” list, which now includes 44 Chinese companies. Other notable additions include COMAC, or the Commercial Aircraft Corp. or China, which includes General Electric (GE) among its suppliers. GE makes engines for COMAC passenger jets.

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

Xiaomi released a statement on Friday that it “provides products and services for civil and commercial use”. The company “confirms that it is not owned, controlled or affiliated with the Chinese military” and should therefore not be on the list. Xiaomi says it will “take appropriate steps” to protect the company and its stakeholders.

The confusion in China is that many private companies have ties to the state. Even shareholder-owned companies have sometimes written the Communist Party into their charter as the ultimate controller. Any Chinese company would serve the central state if ordered to do so. And telecom will always be of interest to military users.

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

By listing Xiaomi and COMAC on the DoD’s list, they are now under an executive order dated Nov. 12 from outgoing President Donald Trump. The order states that American investors, both individuals and funds, can no longer purchase the shares of these companies. The order took effect on January 11 for the first list of 35 companies, including Huawei, and will apply to newly added companies such as Xiaomi 60 days after their inclusion. US investors have until November 11 to sell the shares they hold in the first batch of companies.

Huawei, which makes telecom network hardware and chipsets, as well as phones, is on a more important entity list in Washington that prevents companies around the world from supplying it if they use US parts or technology. That’s much more comprehensive than the current designation slapped on Xiaomi, which makes consumer products rather than network systems. The Entity List ban makes it extremely difficult for Huawei to find chips for its phones, so it’s important to see if Xiaomi is added to that as well.

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

Xiaomi has its primary listing in Hong Kong, where it set a record in terms of a follow-on offering in early December, selling US $ 3.9 billion worth of stock as an additional stock sale. It went public with an IPO of US $ 4.7 billion in Hong Kong in June 2018. The US pressure increases the importance of Hong Kong as a stock market for Chinese companies.

Beijing-based Xiaomi offers Apple-like phones at a low price and with an open-source system that allows users to customize how their phone works. The premium phones retail for around $ 400, but the cheapest are under $ 100. So far, it has reached its greatest turnout in Asia, particularly India, Indonesia, Hong Kong, Singapore and Taiwan. But it has recently made progress in Europe.

Xiaomi hardly sells phones in the United States. But it does rely on Qualcomm (QCOM) to provide chips for two-thirds of its phones, so an Entity List designation would be devastating and cut that delivery.

The New York Stock Exchange has made a drastic decision to drop China’s three major telephone companies from the list after being struck with the same military designation.

The NYSE flip-flopped, but after pressure from US Treasury Secretary Steve Mnuchin decided to remove China Mobile (CHL), China Telecom (CHA) and China Unicom (CHU), which have a combined market cap of US $ 157 billion. list. That has led index providers to also remove the telephone companies and other similar stocks from their indexes, as the Trump order prohibits US investors from trading in securities offered by those companies, as well as derivatives based on those securities.

The American investment banks JP Morgan (JPM), Morgan Stanley (MS) and Goldman Sachs (GS) have therefore scrapped derivatives in Hong Kong. They removed 500 callable bull / bear contracts, derivative warrants and inline warrants in Hong Kong that were based on those companies, or indices containing them, such as the Hang Seng, the most followed index in Hong Kong, and the CSI 300, the main index for tracking mainland Chinese stocks.

The action at COMAC highlights the confusion sown by some of Trump’s orders. Trump stepped in 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 there were national security concerns for US companies supplying Chinese aircraft manufacturers. “We’re not going to sacrifice our companies … by using a false term of national security. It has to be real national security. And I think people got carried away by it,” he told reporters. He also said in a Twitter post, “I want China to buy our jet engines, the best in the world.”

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

It’s state run Worldwide times The newspaper, often used to communicate China’s position on foreign policy, today writes a story quoting an academic who says the latest orders could be the Trump administration’s “final frenzy”. Some Chinese netizens joked that Xiaomi should be congratulated, because the company is successful enough to get the attention of the US Department of Defense.

Xiaomi and Huawei, as well as the teen-friendly app TikTok, are some of the most recognized Chinese brands internationally, with few Chinese companies generating much or no recognition. They are all the target of Trump orders.

The problems facing Huawei have prompted China to direct funding towards the creation of a domestic semiconductor and telecommunications industry. The Worldwide 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 fully domestic supply chain”.

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