U.S. Blacklisted China’s Xiaomi Because of Founder’s Award

The award—coupled with Xiaomi’s ambitious investment plans in advanced technologies such as 5G and artificial intelligence—was enough for the Defense Department in January to add Xiaomi to a list of companies that support China’s military, according to the filing. The designation prohibits Americans from investing in the company, the world’s third-largest smartphone seller.

The U.S. rationale for adding Xiaomi to its list was laid out in a court filing by the Defense Department in response to a lawsuit in U.S. District Court in Washington, D.C., by the Chinese company seeking to overturn the military designation. The filing, which appeared last week but hasn’t previously been reported, for the first time shed light on the department’s reasoning in adding a company to the list.

A Xiaomi spokeswoman didn’t immediately comment on the filing. The company has previously denied any affiliations with the Chinese military and says it sells products and services solely for civilian and commercial use.

Xiaomi was added to the Defense Department’s list during the waning days of the Trump administration on Jan. 14, alongside eight other Chinese companies, including aerospace and chip firms. In total the department has added 44 companies to its list, including telecom giant Huawei Technologies Corp. and computing chip maker Semiconductor Manufacturing International Corp. , both of which have also denied any military links.

Shares of Xiaomi, which more than tripled in Hong Kong last year, have fallen 25% since its Jan. 14 close.

Xiaomi’s designation caught many analysts by surprise given its main focus on consumer electronics. In addition to smartphones, the company makes internet-connected gadgets like air purifiers, scooters, body-weight scales and fitness bands. Unlike Huawei, its main Chinese rival in handsets, it doesn’t sell communications infrastructure or other equipment typically viewed as sensitive.

Xiaomi’s fortunes in the cutthroat smartphone market have boomed in the past year as it gobbled up market share from Huawei. Globally, its handset shipments soared by nearly one-third in the fourth quarter, making it the No. 3 vendor behind Apple Inc. and Samsung Electronics Co. , according to International Data Corp.

In its lawsuit, Xiaomi complained that the department offered no explanation for its decision, nor did it give the company a chance to respond.

Mr. Lei’s award was from China’s MIIT, the government agency that oversees Chinese tech and industrial policy and which the Defense Department said helps manage China’s policy of civil-military fusion, in which Beijing leans on private enterprise to help develop military technology.

The award is given once every five years to top private-sector entrepreneurs. The last award, in 2019, was given to 100 people. Other notable CEOs who also made the cut include Ding Lei of internet and videogame company NetEase Inc., Wang Gaofei of social media firm Weibo Corp. , Wang Chuanfu of auto maker BYD Co.

A second reason cited by the Defense Department was Xiaomi’s plans to invest 50 billion yuan (about $7.7 billion) over five years into 5G technology and artificial intelligence. Mr. Lei outlined the investment plans in a New Year’s message to staff in January 2020. In its filing the Defense Department said: “Both of these technologies are of key interest to the PRC, and are a focus of the Military-Civil Fusion strategy,” calling China by its full name, the People’s Republic of China.

On Thursday, Luokung Technology Corp. , a Chinese big-data company added to the Defense Department list alongside Xiaomi in January, also filed a lawsuit in the U.S. seeking its removal.

—Jing Yang contributed to this article.

Write to Dan Strumpf at [email protected]