The biggest driver of module cost reduction is the positive closed loop of demand growth and shipment growth. The evolution of the cost of the IoT communication module is based on the demand-side increase in the demand for the Internet of Things, driving operators and equipment vendors to meet their needs. As shipments and technology iterations are updated, the overall cost of the industry is declining. To the demand side, the formation of a positive closed-loop development of the industrial chain. With reference to China Telecom's measurement data, the price reduction path of the NB-IoT module is: NB-IoT module is listed at the beginning of the market, the mass production price is expected to be around 90-110 yuan; when the cumulative shipment volume reaches one million, the price is expected to drop 15- 20 yuan to 70-90 yuan; when the shipment reaches 5 million level, the price can be reduced to 50 yuan; when the shipment reaches 10 million levels, the module price will be less than 30 yuan.
Operator subsidies can effectively boost demand and accelerate the decline in module prices. In fact, in the early stages of the development of new technologies and new industries, it is relatively slow to rely on the natural development process of the industry to achieve cost reduction. Taking the 2G module as an example, the cost of the early 2G modules was several hundred yuan. After more than ten years of commercial time and hundreds of millions of terminal shipments, the current low price of 20 yuan was formed. In order to accelerate the development of the industry, operators have launched the special subsidy incentive plan for the Internet of Things, directly reducing the price of the NB module to a reasonable range and speeding up the demand. In 2017, China Telecom collected 500,000 NB modules and took out a subsidy of 200 million yuan to make the subsidized price reach 36 yuan, basically reaching the psychological range of 5-10 dollars in the industrial chain. China Mobile announced that it plans to provide 2 billion IoT special subsidies in 2018, of which 1 billion is NB-IoT special subsidy, and the subsidy rate is 60%-80%. China Unicom announced that it will collect 3 million NB modules and limit the price to 35 yuan/piece. It is not clear whether subsidies will be provided. If this is the pre-subsidy price, we believe that this means that the module manufacturers themselves have reached a reasonable range. The industrial chain has entered a mature stage.
2018 is the year of the explosive connection of the Internet of Things. With the nationwide coverage of the three major operators' NB networks this year, and the gradual maturity of the chip and module industry, as well as the improvement of pilot applications such as meter reading, smoke detection and animal monitoring, we believe that 2018 is the intelligent connection of the Internet of Things. In the year of the outbreak, the NB chip and module procurement continued to be large, and the industrial chain entered a stage of rapid growth. According to the plans of the three major operators, the number of IoT connections is expected to double in 2018. It is expected to increase from approximately 350 million in 2017 to nearly 700 million. A considerable proportion of the incremental connections are NB-IoT connections.