The firm will initially invest 10 billion yuan ($1.52 billion) in the wholly-owned subsidiary, with a total investment goal of $10 billion over the next ten years.
Xiaomi CEO Lei Jun will also serve as CEO of the smart electric vehicle unit, the company added.
The company’s move into the EV industry follows similar steps by other tech giants, both in China and overseas.
In February, Reuters reported that beleaguered Chinese smartphone giant Huawei Technologies Co Ltd is currently in talks with state-owned automaker Changan Automobile and other companies to manufacture EVs.
Apple Inc has also long been planning an entry into the EV market, according to reports.
Last week Reuters reported exclusively that Xiaomi was in talks to partner with Chinese automaker Great Wall Motor Co for help in manufacturing EVs.
Xiaomi declined to comment on the report, while Great Wall said in an exchange filing that it had not discussed such a partnership with Xiaomi.