Xiaomi-Facebook Deal Falls Through, Hindering Expansion Hopes For Both Companies

Xiaomi's fears caused an investment deal with Facebook to fall through. Reuters

Xiaomi may be the world’s most valuable startup, but the Chinese smartphone manufacturer was unable to nab U.S. social media giant Facebook as an investor. The companies were in talks in October when Facebook CEO Mark Zuckerberg and Xiaomi Inc. CEO Lei Jun met for dinner during Zuckerberg’s visit to Beijing, according to Reuters.

Though Facebook hoped to increase its presence in China, Lei was concerned that a deal with the social media company could cause political unrest. Facebook has been banned in China since 2009; citizens use domestic social media platforms like Sina Weibo instead. Additionally, Xiaomi does not want to hinder its relationship with Google, which develops the Android operating system on which its smartphones are based. Google also is banned in China; however, Xiaomi skirts this issue by using a heavily modified version of Android that does not run Google Play Services and other Google-based applications.

The investment that was discussed was "not huge," but it could have given both companies clout in areas where they fall short. Facebook would have gotten a new market for its apps and could have made headway in getting unbanned in China. Xiaomi would have received access to Facebook’s user data, which would have helped the company expand internationally. Xiaomi has succeeded as a software and services company by catering to the needs of Chinese consumers, but it does not have much experience outside East Asia, the U.S. in particular.

"Facebook wants to get into China, and Xiaomi is keen to expand outside, so they both recognize the importance of working together," an unnamed source told Reuters.

In December, Xiaomi was named the world’s most valuable startup, with a valuation of $45 billion. In the coming year, Xiaomi plans to invest $1 billion in online video content to complement its Mi TV software and Mi Box streaming device. The company also plans to expand its smartphone business into markets such as India and Indonesia this year, and later to Brazil, Russia, Thailand, Mexico and Turkey.

Facebook recently acquired the speech-to-text startup Wit.ai, which markets software that works like Apple Inc.’s Siri and Google Now.