Meitu is best known for its selfie apps. They’re so ingrained in the company’s identity, you’d be forgiven for not knowing it also makes smartphones -- which tells you how few units they sell. So perhaps it comes as no surprise that they’re handing this part of the business to a company more well-known for selling handsets: Xiaomi.

Under the 30-year deal announced this week, Xiaomi has the right to produce Meitu-branded smartphones. Xiaomi will bear the costs of hardware and system development, production, and marketing. Meitu will contribute what it’s best at doing: Software like its image processing algorithm.

MEITU: ADAPTING TO A SHIFTING LANDSCAPE

But Meitu’s shifting strategy reflects not just a reckoning of its strengths. It also points to its struggle in an increasingly cutthroat smartphone market.

Meitu’s handsets are pretty distinctive. Unlike the plain black rectangles favored by virtually every other smartphone maker, Meitu handsets tend to be curved at the top for a pretty logical reason -- the selfie camera. Meitu smartphones have noticeably bigger cameras on the front than most other smartphone makers.

Those handsets once made up the bulk of Meitu’s profit. Before its 2016 Hong Kong IPO, its app business was actually losing money. But things have changed dramatically since then.

As smartphone sales in China plunged in the last year or so, Meitu, like other smaller players, found themselves grappling with a new reality. In the first half of this year, Meitu sold 37% fewer smartphones year-on-year. It’s a downward trend that Meitu doesn’t believe it could buck on its own.

“Given the intensity of competition of the smartphone market has further accelerated in the second half of 2018, it appears that our smartphone business is no longer profitable,” wrote Meitu in its latest announcement.

Meitu’s Hello Kitty-themed T9 smartphone. (Picture: Meitu)

The number of smartphones that Meitu sold was never substantial to begin with. In the first six months this year, it sold a paltry sum of around 533,000 units. In the last five years, it sold a total of 3.5 million. IDC figures show that it ranked 16th in China’s smartphone market in the past quarter, with less than 1% share -- a position it’s been hovering around since last year.

It doesn’t help that Meitu is finding it increasingly difficult to differentiate from rivals.

“Many of our competitors have launched smartphone products that are focused on selfies, a positioning that is similar to the Meitu smartphones,” it wrote in its financial report earlier this year.

Two models at a Meitu smartphone launch event in Beijing in April 2015. (Picture: South China Morning Post)

But while the smartphone game isn’t working out for Meitu, something else appears to be taking off. And that’s its internet business, which includes apps, ads, and its now-dead ecommerce platform. In this area, gross profit margin rose to over 40% in the first half of this year from around 16% a year ago.

“[The Chinese smartphone] market is mature enough that there will be pressure for consolidation in the upcoming year,” said IDC vice president Bryan Ma. “In this case, it lets Meitu focus on its core software, all while leveraging the scale and competencies of Xiaomi’s hardware business.”

Meitu CFO Gary Ngan told Chinese news site 36Kr that the company hopes that Meitu could use Xiaomi’s clout to acquire millions of new users, bringing them into Meitu’s app universe. That’s especially urgent, given that in the first half of this year, the company lost 20% monthly active users in China year-on-year.

XIAOMI: REACHING A WIDER USER BASE

We know why Meitu wants in, but what’s in this for Xiaomi? For one, it could bring in a new user base that’s been inaccessible to Xiaomi so far, namely women who are willing to splurge.

At present, women make up less than 28% of Xiaomi smartphone owners. (In comparison, Vivo and Oppo both have a more or less even split.) It stands in stark contrast to Meitu’s user base, which is overwhelmingly female.

For the small group of people who actually buy Meitu smartphones, they certainly don’t mind paying a premium for the eye-catching design and airbrushing software. The average selling price of a Meitu phone was around US$400 in the first half of this year, versus US$140 for Xiaomi in the second quarter -- though admittedly, Xiaomi’s larger volume has an impact on these figures.

Meitu’s Sailor Moon edition T9 smartphone, complete with a selfie stick (left) and a fill light (right). (Picture: Meitu)

Meitu’s selfie algorithms could give Xiaomi a perceived edge, according to IDC’s Ma.

“Xiaomi gets multiple benefits from this deal, including access to Meitu’s imaging technologies, which is pertinent given how much competitors like Huawei and Oppo are talking up their photography abilities these days,” he said.

THE FIRST MEITU-XIAOMI SMARTPHONE?

So when are we going to see the first fruits of this partnership?

Ngan said the first Meitu smartphone produced by Xiaomi is expected to arrive in the second half of next year. And we’re already getting a glimpse of what it might look like.

Three selfie cameras? Only from a company obsessed with selfies. (Picture: TENAA)

Photos from Meitu’s recent filings with Chinese regulators show a new model that’s taking selfie-snapping to the next level: A handset with three front-facing cameras.