WSJ: Chrysler Seeks Price Cuts From Suppliers By April 1

Chrysler LLC has sent a letter to at least some of its parts makers saying "all production suppliers" will have to cut their prices by April 1.

Cutting parts costs is one of the requirements Chrysler must fulfill to meet the terms of the bailout loans it has received from the U.S. government. So far Chrysler has gotten $4 billion and hopes to borrow $3 billion more by the end of March.

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Chrysler and General Motors Corp. (GM), which has been given $9.4 billion in federal loans, also are required to negotiate with their banks and bondholders to reduce their debt, limit executive pay, cut labor costs and present restructuring plans by Feb. 17 that show they can become "viable."

Chrysler informed suppliers of the price cuts in a Jan. 26 letter from its head of purchasing. The existence of the letter was first reported by Automotive News.

The letter also said Chrysler is freezing what the company will pay for raw materials this year, even if costs rise. A 5% price reduction enacted last year will be continued through 2009, the letter said.

Some suppliers said they had not yet received the letter. A person familiar with the matter at a major supplier said the price cuts will hurt many parts makers that are already ailing. Automotive suppliers are already seeking up to $10 billion from Washington themselves.

"It's obviously a financial hardship at the worst possible time," the person said. "We are operating in a very, very challenging environment already. We're not making money, and essentially what they're asking is for us to take greater losses."

To ease the burden, Chrysler will allow its suppliers to keep 90% of the benefit from any new cost-saving measures they implement. In the past, Chrysler has required half of any cost-savings a supplier achieved toward lower prices.

Chrysler's agreement with the government, "requires that all stakeholders, including owners, executives, employees, dealers, lenders and suppliers contribute in a substantial way," the company said in a statement. Chrysler said it recognized that the auto industry's financial crisis has "brought hardship to Chrysler" and "created similar challenges" for its suppliers.

-By Alex P. Kellogg, The Wall Street Journal; [e-mail]

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