By Dan Strumpf 

HONG KONG -- U.S. officials blacklisted Chinese smartphone giant Xiaomi Corp. as a company with military ties partly due to an award given to the company's founder for his service to the state, the U.S. Department of Defense said in a legal filing.

Lei Jun, the chief executive officer and founder of Xiaomi, received the award of "Outstanding Builder of Socialism with Chinese Characteristics" in 2019 from the Ministry of Industry and Information Technology. Xiaomi touts the award -- given to 100 Chinese executives that year -- on Mr. Lei's biography page on the company's website and in its annual report.

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 said 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.

The second reason cited by the Defense Department was Xiaomi's plans to invest 50 billion yuan, equivalent to $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. The company also elaborated on the strategy in its 2019 annual report, saying the company aims "to ensure our absolute dominance over the new smart living era" by developing technologies that combine 5G, A.I. and the so-called internet of things, which includes connected devices.

The technologies are a priority for the Chinese military, according to the Defense Department, calling 5G and A.I. "of key interest to the PRC, and are a focus of the Military-Civil Fusion strategy."

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 daniel.strumpf@wsj.com

(END) Dow Jones Newswires

March 05, 2021 13:04 ET (18:04 GMT)