Dong Mingzhu, president of Gree Electric Appliances Inc, who is known as an outspoken female entrepreneur in China, became furious after learning that Xiaomi bought shares in Gree's major competitor Midea last week.
"Two swindlers working together makes into a fraud group," Dong told Chinese media on Monday.
"But I am not worried. If one day you [Midea and Xiaomi] own more patents than me, or the qualities of your products are better than mine, I will feel anxious and try to make changes to myself," she said.
Chinese smartphone maker Xiaomi on Sunday announced a 1.26 billion yuan ($204 million) share purchase in Midea, a deal aimed at boosting its presence in the market for internet-connected home electronics.
Midea, a Guangdong-based manufacturer that produces a range of home appliances, including air conditioners, fridges, and kitchen appliances, which highly coincide with Gree's product lines, is one of the major competitors to Gree in the Chinese market.
Dong accused the two leading Chinese manufacturers of being "swindlers" on the ground that several of Midea's air conditioners have illegally utilised Gree's patents, and Midea was ordered by a Chinese court to compensate Gree as much as 2 million yuan ($323,000) for the infringement.
India's ban on Xiaomi's budget phone sales in the country due to an intellectual property concern with Swedish telecommunications firm Ericsson also backed Dong's accusation, according to the Chinese report.
"Of course, I hope Xiaomi, a Chinese company, is able to expand its business outside China. But unfortunately, it was blacklisted immediately, as it steals others' patents. How come a swindler calls himself [his firm] a 'great company'? I wouldn't even go that far," Dong said.
Responding to Dong's criticism, Xiaomi's founder Lei Jun said Dong has thrown in the towel in a 1 billion yuan bet ($162 million) between the two firms.
In December 2013, Gree's Dong made an oral bet with Xiaomi's Lei, wagering that the latter is unable to catch up with her firm in turnover for the following five years. The losing party will render 1 billion yuan to the other, according to the agreement.
Another Chinese reports revealed that the Xiaomi's turnover is about 30 billion yuan in 2013, a quarter of Gree's 120 billion yuan for the same year. But this year, Xiaomi is expected to make 80 billion yuan in sales, compared to a projected 140 billion yuan from Gree this year.
"In this case, Xiaomi is likely to surpass Gree in terms of turnover in just one or two years," said the report.