Microchip Supply Chain Crisis: Expert Analysis

Sokhibkhon Salikhov, MBA, a supply chain professional with a background at Volkswagen, Peugeot Citroën, Schneider Electric, and a foreign trade company, shared his expert insights on the latest trends in supply chain and microchip management.

Microchip Supply Chain Vulnerabilities Exposed by COVID-19 in the Automotive Sector:

"The COVID-19 pandemic has brought to light the fragile nature of microchip supply chains, emphasizing the need for strategic diversification and resilience."

According to Sokhibkhon Salikhov, the automotive industry has highlighted the crucial importance of supply chain management, particularly during the microchip shortages, where supply chain professionals faced significant pressure to manage and resolve these challenges. He noted that the COVID-19 pandemic has brought to light the fragile nature of microchip supply chains, emphasizing the need for strategic diversification and resilience.

He noted that the intricate dynamics of microchip supply chain management faced heightened scrutiny and challenges during the unprecedented period of the COVID-19 pandemic. The global disruptions caused by the pandemic exposed vulnerabilities in supply chains, impacting various industries, including the semiconductor sector. The sudden surge in demand for certain electronic devices, coupled with disruptions in manufacturing and transportation, highlighted the need for resilient and adaptable microchip supply networks.

These aspects were especially evident to Sokhibkhon during his direct involvement in COVID-19 resilience efforts with Volkswagen in 2020. He personally managed supply chain resilience amid car shortages caused by a lack of microchips, utilizing advanced analytics, IoT technologies, and digital collaboration with suppliers, which helped the company become more flexible.

"The shortages of microchips in the automobile industry highlight the traditional formation of supply chain and procurement in this sector."

According to Sokhibkhon, the microchip shortages in the automobile industry underscore traditional supply chain and procurement practices in this sector. He explained that when the pandemic struck, conventional approaches led planners to reduce projections and contractual volumes for microchips. However, a mid-year surge in automobile sales, after suppliers had already committed volumes to other sectors with rising demands, such as electronics manufacturers, created a chaotic situation in the automotive industry.

“According to open-source data from sources like AlixPartners (2021), the microchip disruption led to the automotive industry facing a combined loss of $210 billion.”

He also noted that unanticipated external factors have intensified challenges in the microchip industry. In particular, he cited examples such as the fire incident at chipmaker Renesas Electronics, the COVID-related shutdown in China, and the increased demand for microchip capacity driven by the growth of 5G electronics. The challenges have been heightened by the Russia-Ukraine conflict, with a significant impact on the microchip production process. Ukrainian companies, Ingas and Cryoin, crucial suppliers of half of the world's neon gas needed for laser-based chip manufacturing, experienced disruptions. Simultaneously, Russia, a key supplier of palladium and platinum-like metals vital for chip production, has added another layer of complexity to the situation.

Main Sources of Microchips Worldwide:

“It is crucial for major economies like North America and Europe to establish their own semiconductor manufacturing facilities. These initiatives are already being discussed at the political level, with bills being introduced and processes started to support the development of local production capabilities."

Sokhibkhon Salikhov noted that the primary producers of microchips globally are Taiwan and South Korea, led by major companies such as TSMC (Taiwan) and Samsung (South Korea). Other significant players include UMC (Taiwan) and SMIC (China). He concluded that this geographical concentration has been a critical issue, leading to supply chain troubles and domino effects across industries such as automotive, defense, and consumer electronics.

COVID-19, Uzbekistan, Volkswagen and Microchip Challenges:

“The microchip shortages and the resulting lack of automobiles created significant challenges in the medical field. The urgent need for ambulances could not be met due to the shortage.”

He noted that the COVID-19 pandemic significantly impacted the Volkswagen project in Uzbekistan. The project involved procuring Semi Knocked Down (SKD) and Fully Built Unit (FBU) cars. However, the scarcity of semiconductors, with each vehicle requiring between 1,000 and 3,000 components, quickly emerged as a major challenge.

During his tenure at Volkswagen Uzbekistan, Sokhibkhon managed supply chain resilience and introduced numerous innovations to tackle challenges from the COVID-19 pandemic and microchip shortages. By utilizing advanced analytics for demand forecasting, IoT technologies for real-time tracking, and enhanced collaboration with suppliers and retailers through digital platforms, he ensured a steady supply of automobiles.
For example, in the Volkswagen ambulance project, Sokhibkhon played a crucial role in ensuring an adequate supply of vehicles for Uzbekistan. He implemented multiple sourcing strategies, collaborated with the Uzbek government, established new standards, and developed risk mitigation plans. These efforts enabled the company to meet the post-pandemic demand for emergency transportation. As a result, they successfully introduced Volkswagen A-type ambulances into the Uzbek market for the Ministry of Health, overcoming all supply chain obstacles.

Future Industry Trends in Supply Chain Management for Microchips: 

“An unexpected development in 2023 was the decrease in lead time for all microchip components, as highlighted by the S&P Global Mobility Index (2023).”

He noted that the reduced lead time is fostering a positive outlook for the future. Additionally, he observed that both sales and production volumes are rebounding, with car sales steadily nearing pre-COVID levels. Market forecasts suggest that sales will likely return to similar levels by the end of the decade.

Nevertheless, Sokhibkhon noted that emerging factors will need consideration, including structural changes like the increased production of autonomous and electric vehicles (EVs) that require higher-capacity microchips. Additionally, increasingly complex customer preferences will significantly boost the demand for microchips, continuously challenging supply chain professionals.

“Blockchain, AI, Digital Twins, and traditional supply chain techniques are potential solutions to address future microchip supply disruptions."

Sokhibkhon Salikhov believes that the future of supply chain management in the microchip industry will be transformed by several innovative trends. He envisions this transformation and remarks the following insight:

Firstly, as demand for microchips continues to rise, the risk of fraud and counterfeiting also increases, complicating the supply chain. Blockchain technology, through tools like Doctrace, will enhance transparency and tackle counterfeiting by ensuring secure and verifiable data exchange, thereby maintaining the integrity of the supply chain.

Artificial Intelligence (AI) will play a critical role in developing better supply chain mapping and visibility across different tiers. This is especially relevant in the automotive industry, which traditionally operates with multiple tiers of suppliers and struggled to track issues during the pandemic. Large Language Models (LLMs) will gather and analyze publicly and privately available information to predict and mitigate risks. Additionally, AI will streamline daily operations, from creating Bills of Lading and invoices to communicating with various suppliers.

The creation of digital twins in the microchip supply chain represents another significant and innovative trend. By crafting digital replicas of the entire supply chain, encompassing suppliers, production processes, and distribution networks, manufacturers can achieve unprecedented visibility. This technology facilitates real-time monitoring of supply chain performance, enabling early identification of vulnerabilities and potential disruptions.

In addition to these cutting-edge approaches, he thinks traditional methods will remain crucial for maintaining supply chain resilience in the microchip industry. These include strategic stockpiling, Just-In-Time (JIT) inventory systems, scenario planning, and academic partnerships. These strategies provide a robust foundation for handling supply chain challenges and ensuring continuity in the face of disruptions.

By integrating these innovative and traditional approaches, Sokhibkhon envisions the microchip supply chain becoming more secure, transparent, and efficient, and better equipped to meet the growing demands and challenges of the future.

Background on Sokhibkhon Salikhov

Sokhibkhon Salikhov, born and raised in Tashkent, Uzbekistan, holds a bachelor's degree from the University of Wales, a master's degree from Westminster International University, and an MBA from the University of Wisconsin-Madison.

He began his career in supply chain management with a foreign trade company in 2015, where he supported local entrepreneurs in establishing resilient supply chain channels for secure product exportation and business expansion.

He later played a key role in significant investment projects, including the integration of Peugeot Citroën and Volkswagen into the Uzbek market. During the COVID-19 period, he successfully developed and maintained robust supply chain networks for Volkswagen in Uzbekistan. His contributions were pivotal in advancing Uzbekistan's economy, particularly with the increasing liberalization of the country's automotive industry. Moreover, he provides independent consulting services and expertise in the supply chain sector.