China’s online retailer JD is going global, first stop is Southeast Asia

China’s online retail and logistics giant JD is now eyeing up the Indonesian market. It seems the country of 250 million provides the right environment for JD’s next round of international expansion. If all goes to plan, local consumers will see fresh food delivered to their homes by JD’s refrigerated lorries within five years.

The online retailer currently has four storehouses in Indonesia, and plans to build three more by the end of this year. In the past 12 months, JD’s local work force tripled to 400 people. JD has said it will benefit from cheap local labour, which will reduce the expansion cost. Logistics centers are being set up in areas close to cell phone towers, in order to catch the most mobile users and potential customers possible.

JD isn’t alone in its ambition – competitor Alibaba has also been pushing hard for Southeast Asian expansion, but with a different approach. Recently, Alibaba announced that it will pump another 1 billion US dollars into the region’s biggest e-commerce company, Lazada, around a year after the initial 1 billion, increasing its share from 51% to 83%

Chinese companies have led the way in Southeast Asia with confidence, even in the shadow of Amazon’s much-anticipated entry, however challenges await.

Indonesia is made up of around 13 thousand small islands, and connecting them with a logistics network is no small feat. Not only this, but according to McKinsey estimates, only 1% of retail sales in the country were made online as of late 2016, compared with 17% in China.

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

Another obstacle for Chinese e-commerce companies to expand business in Indonesia is locals’ deep-rooted habit of paying with cash. According to the World Bank, only 36% Indonesian adults have bank accounts. The cash-heavy system makes larger orders difficult, and introduces safety concerns for delivery drivers who would be transporting the money. In China, margins are much higher as JD is most popular among consumers who purchase high-value electronic products. In Indonesia where online purchases are usually for lower value goods, the added cost of delivery will be a significant challenge in the early days.

Regardless, JD is making good progress. According to Zhang Li, who is heading up JD’s Indonesia business, the company supplied 8 times more goods in Indonesia in 2016 than in the previous year. JD’s Zhang has also said he is open to the idea of using tactical investment in local companies to help market entry and growth, and reports say local e-commerce rival Tokopedia could be a target.