Türkiye’s automotive production fell 8% year-over-year in the first seven months of 2026, while exports by volume declined 14%, as weaker passenger car output and fewer working days weighed on the sector, data showed Monday.

But industry officials said the decline partly reflects preparations by automakers to introduce new models and expand capacity, with the impact of those investments expected to become more visible in the final quarter and particularly in 2027.

Automotive Industry Association (OSD) Chair Cengiz Eroldu said some of their members were preparing their production lines for new models and capacity investments.

“When a new product is introduced to a production line, the existing production pace has to be reduced for a certain period. We consider the production loss to be a normal consequence of the transition to new investments,” Eroldu said.

Hyundai, Opel and Peugeot just recently announced new investments and launches of production of new models in Türkiye.

Hyundai on Friday started mass production of its new all-electric IONIQ 3 model at a factory in Türkiye’s northwestern Kocaeli province.

Earlier this month, Opel said it was moving production of its light commercial vehicle model Combo to Türkiye from the third quarter of this year.

In late July, Peugeot announced it would begin producing its Rifter light commercial vehicle in Türkiye beginning in the third quarter.

Production falls as passenger car output weakens

Eroldu, meanwhile, said the sector also lost around five to six working days in the first seven months compared with the same period last year because of public holidays and administrative leave.

Total automotive production reached 767,216 vehicles in January-July, down 8% from a year earlier, the OSD data showed. Passenger car production declined 19% to 424,667 units.

Commercial vehicle production, however, remained more resilient, rising 9%. Within the segment, production increased 16% for midibuses, 15% for light trucks, 8% for buses and 1% for trucks, while minibus production fell 9%.

The industry’s overall capacity utilization rate stood at 62%, with utilization at 63% for light vehicles, 69% for buses and midibuses, 57% for trucks and just 28% for tractors.

Eroldu said the differing performance across vehicle categories was significant.

“Production declines were concentrated mainly on the passenger car side, while we are seeing a more positive trend in light commercial and heavy commercial vehicles,” he said, adding that the sharp decline in tractor production and the more than 50% contraction in the domestic tractor market warranted attention.

New investments expected to lift local production

Despite the production decline, Eroldu said new investments were already beginning to support the share of locally produced vehicles in the domestic market.

The share of domestically produced vehicles in the passenger car market rose to 35% from 29% a year earlier. Locally produced passenger car sales increased 4%, while imported sales fell 19%.

In the light commercial vehicle market, locally produced vehicle sales rose 13%, lifting their share to 23%, while imported sales fell 9%.

Eroldu said the increase in the domestic share was an early indication of the impact of new investments and that the contribution should become more pronounced as production of new models ramps up.

“The positive impact of new models entering production and export programs will become apparent in the final quarter of the year and, more significantly, in 2027,” he said.

Export volumes decline, but revenue remains resilient

Automotive exports fell 14% by volume to 542,401 vehicles during the first seven months, according to the OSD data. About 71% of total production was exported.

Passenger car exports dropped 29% to 255,679 units, while commercial vehicle exports increased 8%. Tractor exports rose 20% to 7,792 units.

Despite the decline in unit exports, export revenue continued to increase. According to Türkiye Exporters Assembly (TIM) data, total automotive exports rose by around 2%-2.6% in dollar terms to approximately $24 billion.

Uludağ Automotive Industry Exporters’ Association data showed passenger car export revenue fell 9% to $6.3 billion, while exports by main manufacturers increased 0.1% and those by suppliers rose 4.5%.

Automotive remained Türkiye’s leading export sector, accounting for 17% of total exports.

Domestic market contracts, but local share increases

The total automotive market shrank 11% year-over-year to 661,249 vehicles in January-July. Passenger-car sales fell 12% to 502,712, while the commercial vehicle market contracted 5%.

Heavy commercial vehicle sales declined 8%, but bus sales rose 23% and midibus sales increased 14%.

Eroldu noted that despite the market contraction, the sector remained significantly above its long-term averages. Compared with the previous 10-year average, the total market was 31% higher, the passenger car market 32% higher, the light commercial market 30% higher and the heavy commercial market 22% higher.

Europe remains key to industry’s outlook

Eroldu said the performance of the domestic market, demand and competitive conditions in Europe, and the implementation of new models would be critical for the remainder of the year.

He expects full-year production and exports to remain somewhat below 2025 levels but relatively close to last year’s performance.

Looking ahead to 2027, the sector will focus on domestic demand, global vehicle demand, China’s competitive pressure, cost pressures, excess capacity and the European Union’s proposed Industrial Acceleration Act (IAA).

Europe accounts for around 70% of Türkiye’s automotive exports, making the outcome of the IAA negotiations particularly important for Turkish manufacturers and suppliers.

“We expect the negotiation process to extend into 2027,” Eroldu said, stressing that Türkiye’s automotive industry is deeply integrated with Europe’s manufacturing, investment and supply chains.

He said the industry wants Türkiye to be treated within the EU framework as a customs union partner and an integral part of the European automotive value chain, covering both vehicle manufacturers and suppliers.

Eroldu also said that reducing cost pressures caused by the gap between exchange rates and inflation, improving exporters’ access to finance and maintaining predictability in the investment environment would be crucial to the industry’s competitiveness in 2027.

Japan’s economy lost momentum in the second quarter and fell short of market forecasts, as subdued household and business spending highlighted the fragility of the recovery as the war in the Middle East darkens the outlook.

However, ⁠long-term bond yields hit a three-decade high as investors brushed aside the soft reading as reflecting one-off factors, and focused more on mounting inflationary risks that could prod the Bank of Japan (BOJ) to raise interest rates next month.

Gross domestic product (GDP) rose 1.1% in annualized terms, government data showed on ⁠Monday, missing a median market estimate of 2% and below an upwardly revised 1.9% expansion in the previous quarter.

While the data revealed some temporary soft patches in demand, analysts say robust underlying momentum and persistent price pressures are likely to keep the case for imminent interest rate hikes intact.

“Today’s GDP data was a bit weak but the economy is likely to continue recovering moderately,” said Naoki Hattori, chief Japan economist at Mizuho Research Institute. “Given risks of underlying inflation overshooting its target, the BOJ is likely to proceed with a rate hike next month.”

The BOJ is expected to raise rates as soon as September and is said to be considering hiking more aggressively thereafter to avoid being behind the curve on inflation.

The benchmark 10-year Japanese government bond (JGB) yield rose for a sixth straight session on Monday to hit a 30-year high of 2.925%, as investors continued to price in BOJ rate hikes sooner and faster than earlier expected.

Private consumption was the biggest disappointment in the GDP data, falling 0.02% versus market expectations for a 0.5% increase, the first drop in eight quarters.

Analysts ⁠said ⁠the weakness was due in part to lower school fees households paid thanks to subsidies, which pushed down headline private consumption but lifted government spending.

Capital spending, a key driver of private demand, fell 1.2% in the second quarter, confounding market forecasts for a 0.4% increase. However, capital expenditure, as well as overall preliminary GDP, tend to be revised higher with updated figures.

Exports remained resilient thanks to solid U.S. demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence that supported shipments of semiconductor-related equipment and components.

Net external demand, or exports minus imports, added 0.5 percentage point to growth, largely because imports fell sharply after temporary disruptions to crude oil shipments through the Strait of Hormuz.

“I don’t think the BOJ would be too worried about today’s GDP data as the economy is showing remarkable resilience to headwinds from the Iran war,” ⁠said Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute.

The government maintained its sanguine view on the economy.

“The economy remains on a moderate recovery path, with export-driven growth offsetting weakness in domestic demand,” Economy Minister Minoru Kiuchi said in a statement.

Outlook murky

Looking ahead, analysts cautioned that rising import costs and mounting upstream price pressures could eventually feed through ​to consumers, posing a risk to spending later this year.

Aside from rising fuel costs from the Middle East conflict, a weak yen has ​lifted import prices and broader cost-of-living for households, posing a headache for policymakers.

Such price pressures have led to a flurry of hawkish comments from BOJ policymakers that bolstered the case for an early rate hike.

The government has sought to cushion the blow to households from ⁠rising living costs with ‌subsidies, though ‌rising bond yields may prevent it from ramping up fiscal spending any further, some analysts say.

That spells trouble ⁠for consumption, which is mostly holding up so far as a tight job market ‌prods firms to offer higher pay.

“Government subsidies have helped contain consumer inflation so far, but a weaker yen and higher crude oil import costs raise the likelihood of broader price hikes ​from the autumn onward,” said Takeshi Minami, chief economist ⁠at Norinchukin Research Institute.

A survey this month by the Japan Center for Economic Research showed 37 economists forecast ⁠annualized GDP growth to slow to an average 0.05% in the July-September quarter.

“The boost to consumption from policy measures is already fading, and inflation ⁠will increase in H2 as firms ​will pass on increased costs, deteriorating consumers’ purchasing power,” Oxford Economics wrote in a research note.

“Although AI-related goods exports will continue to stay robust in the near term, sluggish non-AI related global economic activities will limit overall export gains.”

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German companies’ investments in the U.S. have dropped to a three-year low in the first ​half of 2026, as Trump administration policies continue to raise uncertainty and pose risk for trade between the key trans-Atlantic partners, data shows.

First-half ⁠direct investments plunged by ⁠nearly two-thirds year-over-year to 4.3 billion euros ($5 billion), the lowest level since 2023, according to calculations by the German Economic Institute (IW), seen by Reuters.

Compared with ​the ⁠same period in 2024, that represents a drop of nearly 80%, said the report, which is based on data from Germany’s central bank.

“This continues the downward trend that has been evident since the start of Donald Trump’s second term in January 2025,” IW researcher Samina Sultan told Reuters.

Since returning to office, Trump has threatened most of the United States’ international trading partners with import tariffs in an ⁠attempt ⁠to secure concessions favourable to Washington.

In a bid to avoid heavy duties on its exports to the U.S., for example, the European Union agreed a deal last year that included a $600 billion investment pledge.

In the five years before the COVID-19 pandemic, first-half investments by German companies in the U.S. averaged 15.8 billion euros, the data showed, almost four times ⁠the 2026 level.

That said, the 2020 to 2023 period was shaped by the “exceptional circumstance” of the pandemic, Sultan said, with some years ​marked by net investment outflows.

The researchers also examined the composition ​of investment flows over 2025 and found that both direct-investment loans and reinvested earnings were exceptionally high, while ⁠equity capital ‌in ‌the narrower sense – the balance of new ⁠investments and liquidations – remained below average.

“Companies ‌that are already active in the United States are therefore continuing to ​reinvest the profits they ⁠earn there in the country,” Sultan said.

“This ⁠suggests that the U.S. remains an attractive market overall.”

However, companies ⁠were hesitant to ​commit new capital, she said.

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For more than a century, cafes in ​the Italian northern city of Padua have grown accustomed in welcoming customers for an early evening drink, or aperitivo, encouraging them to sit outside and socialize just at the time before dinner.

As Europe bakes under its fifth heat wave of ⁠the year, the traditional 6 p.m. to 7 p.m. slot has all but ⁠disappeared as people seek air-conditioning indoors, cutting sales for many hospitality businesses.

Adding to the pressure, extreme heat often falls outside traditional business interruption insurance, exposing a growing protection gap for companies across Europe.

Moody’s has published estimates that last summer’s European heat waves ​cost 43 billion euros ($50 billion) in lost economic output while generating only about 500 million euros of insured payouts.

In ​Padua, ⁠aperitivo often now starts later, “which means that the outdoor seating areas, the terraces, the spaces outside … are left unused and empty,” said Federica Luni, president of hospitality association APPE Padova.

According to a survey of about 600 hospitality businesses in the city and its province, more than 80% reported turnover declines of around 20% during the recent heatwave.

“A 20% decline wipes out your margin,” Luni said.

Toll on economy

Heat waves are increasingly taking a toll on Europe’s economy, reducing productivity, curbing consumer spending and raising operating costs.

For insurers, such losses can be difficult to cover because they often stem from indirect operational disruption rather than property damage.

“Heat in itself is not a traditionally insured risk,” said Swenja Surminski, managing director for climate and sustainability at Marsh.

“Extreme heat rarely causes catastrophic physical damage the way a flood or a storm does, but the financial operational disruption that it triggers can be just as severe.”

A 2023 survey of 9,000 small ⁠and ⁠medium-sized firms for Europe’s insurance regulator found 28% held business interruption cover as part of their property insurance, while 17% had non-damage business interruption protection covering events such as strike action.

The protection gap is widening as the economic costs of extreme heat mount. Trains are delayed, agricultural yields fall and factory cooling costs rise, while workers often struggle to maintain productivity during prolonged spells of extreme temperatures.

Companies that flagged a hit from hot weather or warned about its potential future impact when reporting second-quarter earnings included Swedish shop-fitting provider ITAB Group, Italian cement producer Buzzi and French payments firm Worldline.

Compound risk

Heat often acts as a compound risk, interacting with drought, wildfire and water shortages rather than triggering a single identifiable loss event. That makes it harder to model and insure than some other ⁠natural catastrophes.

The challenge is particularly acute in Europe, the fastest-warming continent. Reuters Climate Monitor showed the average temperature across Western Europe was nearly 10 degrees Celsius (18 degrees Fahrenheit) above the 1961 to 1990 average on Aug. 11.

Data compiled by environmental disclosure platform CDP showed 35% of companies it tracks identified heatwaves as a ​risk driver, led by businesses in manufacturing, services, infrastructure and food-related sectors.

While insurance may cover some physical losses linked to events such as power ​outages, businesses often say compensation does little to offset lost sales and reduced customer activity.

“The real loss is the revenue you don’t make and the business activity that never takes place because of the outage,” Luni said.

To bridge the gap, ⁠insurers are increasingly ‌exploring parametric products ‌that pay out automatically when temperatures exceed predefined thresholds. Unlike traditional indemnity-based insurance, such policies do ⁠not require a lengthy loss-adjustment process.

The European market for parametric insurance is expected ‌to reach $7.93 billion by 2031, according to a report by KBV Research, with compound annual growth of 9.5% between 2025 and 2032.

Such policies are already being used in agriculture, ​where heat can reduce crop yields or livestock ⁠productivity, and industry experts see scope for expansion into sectors including transport and workforce protection.

“Parametric insurance can ⁠really play a role,” said Aidan Kerr, head of U.K. and Ireland public sector solutions at Swiss Re.

Even so, many companies will ⁠need to focus primarily on adapting ​their operations to withstand more frequent periods of extreme heat through measures such as investing in cooling technologies, redesigning workplaces and stress-testing supply chains, Marsh’s Surminski said.

“Take action to avoid the losses rather than address them once they’ve occurred.”

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Over nearly a quarter-century, Türkiye’s defense sector has transformed from foreign-dependent licensed manufacturing into a high-capacity industry driven by high domestic content and robust global exports.

The transformation coincides with the 25-year period of the ruling Justice and Development Party (AK Party), which marked its anniversary on Friday.

Türkiye now develops a broad range of indigenous platforms and systems, invests in critical technologies and exports high-value-added products across the globe.

In 2002, Türkiye had only 56 defense firms and some 62 projects underway. Those figures today stand at more than 4,500 and 1,400, respectively.

The total project volume skyrocketed from $5.5 billion in 2002 to over $100 billion today.

Defense and aerospace exports surged from just $248 million to $10.05 billion in 2025.

Shipments hit $5.79 billion in the first seven months of 2026 and totaled $11.2 billion on an annualized basis as of July.

Türkiye is currently the world’s 11th-largest defense exporter and is close to breaking into the ranks of the top 10.

For much of the past two decades, Ankara has expressed frustration over its Western allies’ failure to provide adequate defense systems against missile threats despite Türkiye being a major NATO member.

That prompted it to invest billions of dollars to transform from a nation heavily reliant on equipment from abroad to one that is a major exporter and where homegrown systems now meet almost all of its defense industry needs.

Its research and development spending increased from $49 million in 2002 to over $3.5 billion, while the domestically produced content ratio increased from 20% to more than 85%.

Shift to domestic development

The Turkish defense sector provides direct employment to over 100,000 people, and the average age of a defense industry worker is 34.

Turkish defense was dominated by off-the-shelf purchases, licensed production and technology transfer in the early 2000s. This trend gradually shifted to promote domestic development, homegrown original design and the localization of critical subsystems.

The sector’s scope of operations expanded as project scales grew, with a broad range of products and technologies emerging, such as armored vehicles, conventional platforms, unmanned systems, warships, jet aircraft, air defense systems, radar and electronic warfare systems, smart munitions, engines, space technology and advanced electronics.

The Turkish defense and aerospace industry made around $1.1 billion in revenue in 2002, while this figure exceeded $20 billion by 2026.

Unmanned aerial vehicles

Unmanned aerial vehicles have been one of the most significant areas of transformation over the past 25 years.

Defense firm Baykar’s Bayraktar TB2 unmanned combat aerial vehicle became one of the most symbolic breakthroughs in Turkish defense.

The combat drones earned worldwide fame after proving their capabilities in several conflicts, including Syria, Libya, Karabakh and Ukraine.

Their success eventually helped Türkiye become one of the world’s top drone exporters.

Baykar’s multirole Bayraktar Akıncı platform further improved Türkiye’s drone capabilities with its high payload capacity, long range, advanced sensors and heavy munitions integration.

Baykar’s Bayraktar Kızılelma carried Türkiye’s drone expertise into the unmanned fighter jet area by combining high speed, air-to-air and air-to-ground capabilities and the ability to operate from short-runway ships.

Turkish Aerospace Industries’ Anka and Aksungur unmanned combat aerial vehicles contributed to the development of high-altitude, long-endurance and strategic reconnaissance and surveillance capabilities of Turkish drones by integrating satellite communications, homegrown electro-optical systems, munitions and engines.

Growing aviation industry

The Turkish Aerospace Industries’ under-development twin-engine stealth fighter Kaan and the Hürjet jet trainer also marked major milestones in Türkiye’s manned aviation.

The Kaan is one of the most technologically ambitious programs in Turkish aviation with its low observability, advanced avionics, mission computer, radar and system integration.

The Hürjet was developed to provide a homegrown trainer platform to advance the country’s capability to develop manned military aircraft.

The Turkish Aerospace Industries T129 Atak helicopter’s product and system integration experience translated into the homegrown T625 Gökbey helicopter, marking a giant leap in rotary-wing technologies.

State-of-the-art naval defense

Beyond aerial systems, Türkiye’s national ship project, called MILGEM, laid the foundation for domestic naval platform design, ranging from corvettes to frigates.

Advancements in combat management systems, sensors and weapon integration became key to ensuring independence and export capacity in naval defense.

The TF-2000 anti-air warfare guided-missile destroyer extended the Turkish Navy’s air defense capabilities to the high seas through its long-range air defense and advanced radar and weapon-sensor integration.

The unique naval engineering capabilities Türkiye gained through the MILGEM project enabled the development of the country’s domestic submarine project, called MILDEN, to develop underwater platforms.

The partnership between the TCG Anadolu drone carrier assault ship and the Bayraktar TB3 combat drone introduced a new sea-air operations concept to the Turkish defense industry, integrating amphibious capabilities with a UAV capable of operating from short runways.

Missile defense systems

Meanwhile, Türkiye’s air defense architecture also grew with Roketsan and Aselsan’s Hisar and Siper missile systems, which contributed to a layered air defense architecture combining integrated sensors, command-and-control systems and missile systems within a single domestic architecture against various threats at low, medium and high altitudes.

Türkiye’s multilayered air defense system, Steel Dome, has been developed by bringing together radars, electro-optical sensors, electronic warfare components, command-and-control infrastructure and air defense weapons of various ranges under a common network.

Roketsan’s Som, Atmaca and Kara Atmaca developed long-range precision strike capabilities for air, sea and land platforms, while the same firm’s Tayfun missile introduced the ability to engage long-range and precision land targets, boosting Türkiye’s strategic deterrence.

Turkish defense also evolved in surface vehicles, with the main battle tank Altay establishing a broad industrial ecosystem around critical technologies, such as armor, active protection, fire control and power packs, while also highlighting the strategic importance of reducing foreign dependence on engines and power packs.

Aselsan’s Koral electronic warfare system and other homegrown radar systems enhanced the effectiveness of air, land and sea platforms in modern warfare through radar detection, electronic jamming, early warning and sensor superiority.

Indigenous technologies

Meanwhile, the PD170, TF6000 and KTJ engine projects brought power system developments for UAV engines, turbofans, cruise missile engines and more.

These projects have been key to ensuring platform independence in defense through indigenous engine technologies.

At the same time, Turkish defense transformed its export model from direct product sales to a broader approach that includes training, maintenance and sustainment, system integration, co-production and technology cooperation.

Turkish defense products are exported to some 185 countries, and around 230 different product types are actively used worldwide.

The sector’s primary goal this year is to further independence efforts in critical technologies, establish high-volume mass production capacity and permanently expand its share in the global market.

Business partnerships should complement the strong political relations between Türkiye and Pakistan, Khawaja Khurram Naeem, the Consul General of Pakistan in Istanbul, said on Thursday, also pointing to the potential of the Pakistani economy and a push to encourage investment and growth.

“We strongly believe that government-to-government cooperation must be complemented by the robust business-to-business engagement,” Naeem said in an address to the “Global Excellence Award Ceremony,” organized by the Islamabad Chamber of Commerce and Industry (ICCI) in Istanbul.

Starting his speech, the consul general noted that the close relationship between Türkiye and Pakistan, two brotherly countries, is “based on a shared history, mutual trust, and a common vision for economic prosperity.”

He added that the business forum provided an important opportunity to further strengthen commercial and investment ties between the two nations.

Pointing to positive developments in Pakistan’s economy, Naeem said the Islamabad government has taken important steps to encourage investment and create a more business-friendly environment.

“The government’s commitment to gradually reducing the corporate tax rate to a more competitive level demonstrates the determination to encourage investment and economic growth,” he added.

He also went on to highlight the potential for regional cooperation involving Türkiye, Pakistan and Central Asia amid the changing geopolitical landscape.

Naeem said Pakistan has particularly significant potential in the textile and ready-made garment sectors, while also noting that the country has extensive production capacity and a young population.

“Sustainable economic growth can only be achieved through active cooperation between the private sectors of both countries, reciprocal visits, and the establishment of long-term partnerships,” he said.

Naeem invited business representatives to explore new opportunities, forge new connections, and develop mutually beneficial partnerships through the forum.

In his speech, Naeem also thanked all the institutions that contributed to organizing the event, particularly the Islamabad Chamber of Commerce and Industry and the Istanbul Chamber of Commerce (ITO), and other Turkish partners, and expressed hope that economic activities between Pakistan and Türkiye would continue to grow stronger.

At the event, the business leaders recalled that the current bilateral trade volume between Türkiye and Pakistan of around $1.2 billion is relatively modest and urged for more steps, including more B2B meetings and reciprocal visits, to elevate the cooperation.

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