TEL AVIV, Israel — Israel risks the collapse of its communications satellite manufacturing capability — a considerable erosion of strategic self-sufficiency — if state-owned Israel Aerospace Industries Ltd. (IAI) fails to clinch an upcoming contract to build the newest satellite for the nation’s sole telecom fleet operator.

Government and industry sources here characterize Spacecom’s pending Amos-6 satellite procurement as a make-or-break deal for IAI, which lost to Russia’s Information Satellite Services-Reshetnev company in a 2008 competition to build Amos-5, scheduled for launch next year aboard a Russian Proton rocket. Spacecom of Ramat Gan, Israel, intends to award the Amos-6 contract this year, and launch the spacecraft soon after the scheduled early 2012 launch of Amos-4, under construction at IAI.

Spacecom’s award of the $157 million Amos-5 contract to Reshetnev was a stunning upset for IAI, a founding investor in the satellite operator. IAI of Lod had built all of Spacecom’s previous satellites.

IAI executives admit the Russian package bid to build, launch and insure Amos-5 was almost 50 percent lower than their best offer. As a final inducement, Reshetnev threw in a prearranged orbital slot at 17 degrees east that opened up a new market in Africa. The 2008 contract commits Reshetnev to in-orbit delivery of Amos-5, which will carry a payload built by Thales Alenia Space of France and Italy.

“The Russians came with a package price we couldn’t possibly compete with. They took upon themselves launch and insurance costs, which essentially took us out of the game,” said Yair Shamir, IAI chairman.

With an empty backlog and no other communications satellite contracts within reach, IAI wants help from Israel’s Ministry of Defense (MoD) to outbid the Russian competition and win back Spacecom business. Without state funding for its bid, the firm risks yet another defeat that could shut down its communications satellite assembly line by 2012, after Amos-4 is completed,  sources here say.

The $365 million Amos-4 is a much larger and more capable spacecraft than the three previous IAI-built satellites in the Amos series. The dual-use Amos-4 will service Spacecom’s commercial customers and security needs of the Israeli government, which secured exclusive rights to nearly two-thirds of satellite capacity in a prelaunch deal that covers the life of the program.

In interviews here, defense officials said IAI’s loss of the Amos-5 competition could prove a blessing in disguise if it forces the firm to become more competitive in future bids. But Amos-6 is a must-win program, they say, with long-term industrial base and national security implications that warrant some measure of government funds.

Amos-6 is expected to be the largest and most sophisticated of the Amos series of spacecraft. It will be located at Spacecom’s home slot at 4 degrees west longitude, joining Amos-3 and eventually replacing Amos-2, launched in 2003.

“A Russian Amos-5 is one thing. It was never part of our plan. But Amos-6 is a different story. There’s a national interest in preserving this capability within IAI,” said one senior MoD official.

Beyond the blow to national pride, the potential collapse of the domestic communications satellite manufacturing base would force an over-reliance on foreign sources for satellites and a variety of classified ground-based technical means used to support secure communications requirements, defense sources here said.

With so much riding on the program, IAI is pressing MoD to commit to an Amos-6 cost-sharing plan. The existential threat to the satellite base impacts IAI and MoD in equal measure, executives here say, and the company cannot permit itself to compete at a loss for Amos-6 business.

“This has nothing to do with national pride,” said Shamir. “If this program is so important, then a decision must be taken on a national level.”

He added, “At the end of the day, I wonder if MoD is willing to base its secure satcom on a Russian platform.”

The IAI chairman said that unlike what Reshetnev did on Amos-5, his firm will not assume responsibility for Amos-6 launch and insurance costs, which can add nearly 50 percent to the price of its bid.

“We’re willing to compete on satellite price and performance capabilities and we’re prepared to offer some things that the Russians can’t offer,” Shamir said in a Jan. 13 interview. “But the other half [of the bid] has nothing to do with us, and we can’t allow ourselves to subsidize it.”

Since IAI published its first full financial prospectus in 2006, it has adopted a new management culture based on accountability, discipline and bottom-line results. Dealings with Spacecom, where IAI continues to hold some 15 percent equity interest, will be guided by economic rather than sentimental considerations, Shamir said.

The IAI chairman said he did not fault Spacecom for rejecting IAI’s Amos-5 bid in favor of the Russian option. “Amos-5 caught our government by surprise. They assumed IAI would not permit such a thing to happen. Am I happy with the outcome? The answer is no. But Spacecom took the right decision.”

A senior MoD official said Jan. 20 the ministry will support IAI’s Spacecom bid if the company can reduce development and production costs by some 20 percent to 30 percent. “If they can bring down costs to a reasonable level, we’re willing to participate from our multiyear budget,” he said.

Ideally, the MoD would like an agreement covering Amos-6 and Amos-7, the official said, but he acknowledged that such a package would have to be initiated by Spacecom.

In a written statement, Spacecom Chief Executive David Pollack said:  “Spacecom is a publicly-traded company and is obliged by law to act in the best interest of its shareholders. The future of the local space industry should be dear to IAI top management and the government … and definitely to all patriotic Israeli citizens, including the fine team at Spacecom.”

Pollack declined further comment.

Meanwhile, Spacecom and Space Exploration Technologies (SpaceX), the Hawthorne, Calif.-based developer of the Falcon 9 launcher, signed an agreement in late January that could ease pressure on IAI in its pending Amos-6 bid. The Jan. 25 agreement provides Spacecom the option of using Falcon 9 to launch Amos-4 and possibly Amos-6 at a preagreed price.

Christophe Bauer, SpaceX sales director, declined to disclose the price for the Falcon 9 launch option. In a Jan. 28 address to an international space conference here, Bauer said Falcon 9 is a readily available, reliable, and cost-effective option for launching IAI-built Amos satellites.

Initial IAI and Reshetnev bids on Amos-6 await Spacecom’s selection of a payload provider, with a round of best and final offers likely by March, sources here said. In a request for information released late last year, competing payload providers were asked to submit bids based on both IAI- and Reshetnev-built platforms. Their offers, due in February, will be transmitted to IAI and Reshetnev, with a decision on prime contractor expected by midyear.