JAKARTA, Indonesia — 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 centres.

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 US 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 neighbourhood. 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 km southeast of Jakarta, in the suburb of Cimanggis. There’s a warehouse storing bulk goods like toaster ovens and fridges. Adjacent is a sorting centre filled with smaller items such as shampoo bottles and smartphones. Deliveries are handled across the road by J-Express, technically a separate company but run by the same shareholders.

Three shifts work around the clock to fulfil orders. After an 8:30 am pep talk, pickers, sorters and boxers dressed in T-shirts and jeans head to their stations. Two staff on laptops group products together for the pickers, who move through aisles of household goods using handheld scanners. These get placed in baskets where a row of workers with deft hands and tape guns turn red cardboard into boxes.

A small army of workers stacks goods from the warehouse into the back of a container truck. Once full, it drives 74 paces down the road before the load is unpacked into the delivery centre. It’s a far cry from the high-tech robots and conveyor belts that sort JD’s deliveries in China, where it has 236.5 million active accounts.

Local Flavours

Watching over the operations is a brick-red banner bearing the JD mascot. Normally a white-haired dog with a black nose, it’s been transformed into a horse for Indonesia because canines are considered impure in Islamic culture.

One by one, JD is winning over customers like Putri Ningsih, whose daily ritual involves a trip to the local market. But earlier this year, she found a head scarf she liked online and bought it. “It was so much easier because I didn’t have to go out and bargain.”

Indonesia’s notoriously out-of-date network of airports, highways and seaports are another complication. Sending a two-ton truck laden with goods within the island of Java costs 5.1 million rupiah, according to Deliveree, an app that helps companies book freight transport. But book the same truck to Sulawesi island, and the price more than triples.

“In the US, Amazon talks about next day shipping,” says PT Kudo Teknologi Indonesia co-founder Albert Lucius, whose company facilitates e-commerce in rural areas and was bought by Grab, a ride-hailing company. “But here in Indonesia we’re talking about one to two week’s shipping and even sending things within Jakarta could be three to four days.”

E-Commerce Battleground

Still, that hasn’t stopped JD’s rivals from pushing into Indonesian e-commerce. Florian Holm, Lazada Indonesia’s co-chief executive, is also betting that superior service will attract more customers. Lazada was founded in 2012 by Germany’s Rocket Internet SE, which made its name in Europe by rapidly iterating copycat versions of successful US web businesses for local markets, often before the original company moved in. Now, it’s owned and controlled by Alibaba.

“Lazada very much believes that we can really crack this market and drive penetration of e-commerce much further with better logistics solutions,” Holm said. “You need a local strategy with local execution for every single country.”

For Li, JD’s chief in Indonesia, Lazada is also a customer, because J-Express also handles packages for Lazada. He’s betting that offering delivery services to rivals will give the company the scale it needs to justify infrastructure costs.

Growth Potential

JD.ID’s gross merchandise volume grew more than nine-fold last year, according to Li, who didn’t provide a base figure. “From December until the end of this year, we’ll be looking at four to five times growth.”

JD is also said to be in talks to make a large investment in PT Tokopedia, a major online marketplace. The company won’t comment, but Li said he remains open to growing through local acquisitions.

The JD web store already delivers to all of Java and will include the island of Sumatra by the end of the year, supplying the majority of Indonesia’s population. Within 12 months, JD will build warehouses across every key city. It says the cost will be lower than many expect thanks to cheap labor.

To figure out where to expand, JD teamed up with Tower Bersama Group director Winato Kartono. A former Citigroup banker, he uses cell-tower construction data to predict which cities will soon see better mobile coverage. Smartphones have been the catalyst for explosive growth for China’s internet companies and the same trend is taking off across Indonesia; eMarketer predicts smartphone usage will hit 92 million by 2019.

Kartono’s real-estate experience has also helped JD secure better property deals; the Jakarta headquarters were rented at a steal when he learned the existing tenant had to leave its furniture behind. Kartono’s field offices also double as package-drop points to save costs on last-mile deliveries, with roughly 100 now spread across the country.

“Indonesia makes a lot of sense because of its size,” Li said. “Yes, there’s a big problem with the infrastructure here. So what’s the solution? You build it.”

By David Ramli; editors: Robert Fenner and Reed Stevenson.