Could Indonesia be the next China in the world of e-commerce? In conversations with consumers across the country, we discovered an online revolution in the making that has huge growth potential for investors.

Indonesia is experiencing explosive Internet growth. The number of Indonesians online is expected to more than double from 92 million in 2015 to 215 million by 2020.

Indonesia

With an expanding middle class and growing smartphone penetration among its roughly 255 million residents, Indonesia could well become a major e-commerce market in the coming years. But challenges exist, and it may take time to assess the most promising investments.

It’s easy to make comparisons to China, where e-commerce penetration is higher than in many developed markets. For example, both countries have huge markets and populations with increasing disposable income, which feeds demand for new products and services.

But there are major differences. To begin with, Indonesia is a vast archipelago with some 6,000 inhabited islands. Because its infrastructure is less developed than China’s, delivery logistics can pose problems.

On a recent grassroots research trip, we spoke with consumers from urban Jakarta to rural Sidoarjo. We saw how key improvements in logistics, road infrastructure and online payments are paving the way for an online revolution.

Beating the Crowded Streets

On Jakarta’s congested streets, we saw countless motorcyclists fighting their way through the capital city’s interminable traffic jams, sporting green jackets and helmets with GO-JEK logos. Since GO-JEK’s award-winning mobile app launched in 2015, it’s been at the forefront of logistics innovation. The GO-JEK app takes delivery of goods and services to a new level. Consumers can stay home and, at a finger’s touch, have any online purchase—medicine, groceries, movie tickets and more—delivered the same day.

In Surabaya, Indonesia’s second-largest city, an agent owner for local courier JNE said that e-commerce made up half her revenues, and didn’t exist just a few years ago.

Payment systems are surprisingly well established. There are 21 e-wallet licenses in Indonesia and many providers partner with retail banks that have a countrywide presence. Cash on delivery is popular among sellers who want to develop a relationship with their customers.

For example, Firmansyah, a 30-year-old teacher in Surabaya, also has an online business selling used auto parts from Singapore. With mostly local buyers, he prefers cash on delivery so he can interact with fellow car enthusiasts.

Overcoming Hurdles to Growth

There are still big challenges to growth. Many consumers still have low-end smartphones with low storage capacity that limits running apps. As a result, social media have become the vehicle for online shopping for everything from clothing to used auto parts. It’s an “online bazaar,” with low overheads and local communities of followers to sell to that can become a gateway to e-commerce for larger, more established companies in the long term.

In Jakarta, Dewi, 31, told us how she created an online store selling bikinis on Instagram and Facebook. Now she’s selling 30 bikinis per week to her followers.

Other obstacles to growth include mobile network infrastructure and fraud. Outside Jakarta, many people can only access the Internet with slow 3G service, which limits what rural consumers can do on their mobile devices.

And we heard many stories about people who’d been burned by an online purchase. So, many Indonesians are careful not to spend more than 300,000 rupiah––roughly US$22––just to be safe.

Over time, increasing investment in mobile infrastructure and growing awareness of fraud protection will help resolve these problems. Sellers will likely work to enhance their reputations and build trust through reviews and return/exchange capabilities. Already, companies like Tokopedia post reviews of sellers and are beginning to educate online users.

Fragmented Market = More Opportunities

Much more work needs to be done before Indonesia can become a major e-commerce market. And it’s still unclear who the market leaders will be. But we believe they’ll build on price competitiveness, a wide selection of merchandise and, above all, trust. Unlike China, where Alibaba dominates e-commerce, Indonesia’s market could be more fragmented.

For now, the big winners from the e-commerce boom are consumers, while there are limited ways for investors to play the development of online culture in Indonesia. As the market expands, investors should look out for telecom companies that stand to gain from increased data traffic, and banks, which will profit from more online banking and e-wallet transactions. Big opportunities will surface in the coming years, as companies step up to capture the largest share of e-wallets and ride the wave of e-commerce as it spreads across Indonesia.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Article by Liliana Castillo Dearth, Denise Boynton – Alliance Bernstein