• Southeast Asian nation of 261 million is latest battleground
  • Cash culture, infrastructure remain major challenges

To foretell where JD.com Inc. is going to expand in Indonesia, follow the cell phone towers.

Wider mobile coverage means more consumers starting to shop online, so the Chinese e-commerce company tracks their construction to decide where to market its web store and set up delivery centers.

JD has four warehouses in the archipelago, with plans to build another three by the end of the year. Staffing has almost tripled to about 400 people in the past 12 months. Within five years, the Beijing-based company plans to have refrigerated trucks delivering fresh food and frozen goods to homes.

“E-commerce is a no-brainer and it’s going to happen,” said Zhang Li, head of JD’s operations in Indonesia.

He’s going up against Lazada, which is seeking to build its own web-shopping empire across Southeast Asia and is controlled by Alibaba Group Holding Ltd., JD’s main rival in China. And all eyes are on Amazon.com Inc.’s regional ambitions, as it looks for new growth outside of Japan and India, its two main markets in the hemisphere.

JD and Alibaba are betting that they can combine know-how and delivery skills learned during rapid growth in China. At stake is the future of e-commerce in a country of 261 million and a rapidly expanding middle class.

Building out a delivery network in a country with more than 13,000 islands isn’t going to be cheap, but the opportunity is huge: just 1 percent of retail sales in Indonesia were online as of late 2016, according to McKinsey, compared with 17 percent in China last May and 8.5 percent in the U.S. recently.

“Everyone is looking here,” said Christian Winata, an analyst at East Ventures. “Indonesia is about five years behind China, so the next three to five years will be very key for us because we’ll see all the infrastructure built in the past year or two start to work.”

Cash Culture

One of the main challenges is that most Indonesians pay in cash. Only 36 percent of adults have a bank account, compared with 69 percent in the Pacific and East Asian regions, according to the World Bank’s Global Findex. Most online orders tend to have small values, cutting into the profitability of each delivery.

“It’s a big point of friction,” said Donald Wihardjia, a partner at Convergence Ventures. “It hurts the conversion rate; from my experience you get 40 to 60 percent conversion losses from someone saying ‘I will buy’ to completing the purchase.”

Cash-based payments also make it harder to handle large transactions, increasing the risk of theft for delivery drivers such as Imanudin Yusuf. A single load of Samsung Galaxy S8 smartphones costs 57 million rupiah ($4,260), or 28 times the average 2015 monthly wage.

“I do get worried sometimes about carrying all the money,” Yusuf said, as he recently delivered a package on his scooter to a middle-class Jakarta neighborhood. He snaps a photo of the buyer’s husband, Najib, holding the box, a common way to verify deliveries and prevent disputes.

Warehouse Choreography

The parcel began its journey at an industrial park 23 kilometers (14…