Xiaomi is a company on the rise. It was the third biggest seller of smartphones in the third quarter of 2014 globally and has usurped Samsung as the biggest smartphone brand in China - one of the world's most important and fastest growing markets.

While smartphones are its main business the company also sells other products including TVs, tablets, headphones, and set-top boxes. Now, widespread rumours in China suggest the company is in the process of entering an entirely new market - cars.

The reports claim Xiaomi is developing a small car codenamed the Mistla which will reportedly go on sale for 39,999 yuan (£4,100). The car is said to be an A0-type car or "super mini", similar in size to cars like the Renault Twingo, Toyota Aygo, and Fiat 500.

Reports suggest Xiaomi is working with Chinese car manufacturer BYD Auto to bring the new car to market.

Xiaomi developed its own software called MIUI, which is a fork of the Android operating system, and it is likely that any Xiaomi car would feature the software as part of its infotainment system.

A budget Tesla?

The other strand to the rumours circulating on Chinese news websites is that Xiaomi is potentially looking to work with Tesla on the new car. These rumours seem to originate from two sources.

The first is that Xiaomi founder and majority shareholder Lei Jun met with Tesla's founder Elon Musk last year at the Global Mobile Internet Conference, writing about his experience on the Xiaomi website.

Jun said he was more interested in Tesla over any of Musk's other companies, such as SpaceX. He also spoke about how Tesla disrupted the US car market and took on giants in the luxury sector like Mercedes-Benz, BMW and Audi - something which could indicate he was planning a similar move in China.

The second source of the Tesla link appears to be a little more tenuous. It is based on a Tesla car being seen parked outside the Xiaomi headquarters in Beijing, but considering that Tesla cars are on sale in the country, this is hardly a strong indication of a partnership between the companies.

Xiaomi has long been criticised for designing smartphones which seem to copy the look and feel of other phones, particularly Apple. Some have suggested that Xiaomi could be set to replicate this model with Tesla, using its ideas to build a much more affordable version of an electric car.

Xiaomi has built its success on being able to keep costs low by eschewing traditional advertising spend, selling everything online, and using word-of-mouth to build its brand. It is unclear if a similar tactic would work in the automotive industry.

Attempts to contact Xiaomi for a comment on this speculation have been unsuccessful so far.