Dusseldorf Klaus-Dieter Frers gives everything to save his life’s work. The automotive supplier Paragon, which he founded 34 years ago in Delbrück, has its back to the wall financially. At 115 million euros, the debt is almost as high as the turnover. In 2021 it was 146.5 million euros. The equity ratio is in single digits. The stock price has slipped more than 40 percent in the past 30 days.
Things were looking better for the company with its 860 employees. Paragon is just one example of many. While the major suppliers Bosch, Continental and ZF are struggling to cope with the transformation of the automotive industry towards electromobility, electronics and software, it is an existential challenge for many small and medium-sized owner-managed suppliers.
The transformation is devastating the old business models. Despite some innovative products, many small suppliers are heavily indebted, also due to management errors. Either the companies reacted too late to electromobility or backed the wrong deals. According to the credit insurer Euler Hermes, no industry in Germany is at such a high risk of insolvency in the next four years.
Figures from the Federal Statistical Office and the Association of the Automotive Industry (VDA) show how big the problem is in Germany. Over 300,000 people work for the supplier industry. It consists of more than 75 percent small and medium-sized companies. Expressed in absolute numbers: Of the more than 1,250 suppliers in Germany, almost 1,200 fall into this category.
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The traces the transformation is leaving behind in the companies can be seen in Paragon’s share price. By 2017, Frers’ sensors for the climate sector and air quality and acoustic systems had sold well, with the share rising to almost 100 euros. With the transformation, Paragon went off track. Since 2018, the stock has been steadily declining in value. Last stand: less than four euros.
But the 64-year-old entrepreneur Frers relies on a liberation. A major order, the largest in the company’s history, for its own voice assistant is intended to bring about a turning point. Order volume: 40 million euros. “We see our language assistant as an important future source of revenue,” says Frers.
The company founder did not lack the will to transform. As early as 2014, Frers focused on electromobility with the spin-off of Voltabox. Voltabox has developed battery systems for commercial vehicles, including forklifts.
“With Voltabox, we wanted to establish a foothold in electromobility early on, but looking back, you have to say that we got involved too early and backed the wrong products,” says Frers. Voltabox turned into a financial disaster.
In the meantime, the German Financial Reporting Enforcement Panel has even complained about accounting errors at Paragon. Frers had no choice but to part with the Voltabox shares. At the end of last year he was able to sell the spin-off – albeit at a high loss.
Hopeful language assistant
Frers is nevertheless relieved. “The financial market has always evaluated us together with Voltabox and has not seen the automotive supplier Paragon, which is actually well positioned operationally,” he says. The issue is now resolved.
It is not the first restructuring for Frers. In 2009, he made a mistake with acquisitions and start-ups. At that time, Paragon slipped into bankruptcy. Frers restructured the company on his own and realigned the business.
2021 was already better than expected. Despite the shortage of semiconductors, sales increased by more than 15 percent. Semvox, Paragon’s voice assistant, is now Frers’ newest hope.
Semvox is a spin-off of the German Research Center for Artificial Intelligence, whose majority Paragon acquired in 2018 for 16.4 million euros. From 2024, a leading global automotive group will use the voice assistant, Paragon announced. According to company sources, Volkswagen is already using the assistant.
Frers is well aware that it sounds presumptuous that a voice assistant from a small supplier could compete with the assistants of the US tech giants. Paragon therefore relies on the niche. “In contrast to the language assistants from Google or Amazon, we guarantee the car manufacturers that the data will stay with them,” says Frers. The advantage: The car manufacturers can allow the assistants access to the vehicle functions without running the risk of this sensitive data ending up on any US servers, says the Paragon boss.
Maturing Bonds
In contrast to the existence-threatening excursion into electromobility, it should now be aimed at entering the automotive software world. Only this time, Frers cannot afford to make a mistake like with Voltabox. Because this year alone, Paragon has to repay two bonds. The repayment pressure is immense. Almost 60 million euros are due in 2022.
The first partial repayment of a Swiss bond in the amount of 8.25 million Swiss francs is scheduled for April 23. This is already secured. At the beginning of July, Paragon then has to service a German bond – and that’s tough.
Paragon has to pay back around 50 million here. This repayment accounts for more than a third of the annual turnover of 2021. It is still unclear how this is to be achieved. Frers: “We have explained to the capital market the steps in which we want to repay the German bond in the interests of the investors and the company. We will also communicate in detail about this.”
For Frers and Paragon, 2022 should therefore be a decisive year, with an uncertain outcome. Only one thing is clear for Frers, and that is that he will remain Paragon boss. There have always been offers for Paragon in recent years. “But obviously they weren’t good enough,” says Frers.
More: Change to e-mobility: the supply industry is becoming a two-class society