Asia Pacific 150: China: After the honeymoon
17 June 2013 | By Yun Kriegler
The high point of the ‘Chinese dream’ may have passed for foreign law firms but they still see a presence as vital. Meanwhile domestic firms are developing fast
For global firms, China remains a market of crucial importance – the expansion of foreign firms in the country shows that. In the first few months of 2013 firms such as Ashurst, Berwin Leighton Paisner, Clyde & Co, Gibson Dunn & Crutcher and Stephenson Harwood have opened new offices in China while many, like Kirkland & Ellis, are waiting for the regulatory green light. Click here to access all the information on Asia Pacific firms.
A presence in mainland China has become something of a must-have for any firm that claims to be a true global player. In fact, all but two of the 50 largest international firms in the region have at least one office either in Beijing or Shanghai. More than half have offices in both cities, while Mayer Brown JSM and Stephenson Harwood are among the few that have three offices in mainland China – Beijing, Shanghai and Guangzhou.
According to China’s justice ministry, almost 200 foreign firms from 20 countries now have offices in China. Most are from the US or UK. The total number of foreign law firms’ representative offices stood at 250 in July 2012. Among the 250 offices, 11 reported a revenue of more than RMB100m (£10.4m), while more than 100 had a revenue of more than RMB10m.
Although there is no shortage of foreign firms still growing in China, the honeymoon time for expatriates was in the early 2000s, when foreign investment was flooding in and Chinese companies were tapping into overseas capital markets on a phenomenal scale. In addition, competition from domestic firms was much lower.
Today, most foreign firms are keeping a small team in mainland China as a liaison and marketing function, mainly to capture higher end cross-border transactional matters in China, and outbound work.
It is evident that practising in China is challenging for foreign firms and making a profit is even harder. Firms that have been in the country for decades are still learning, trying to find the best strategy for the market.
Jones Day is the latest firm to rejig its Greater China practice. The firm has made a decision to relocate as many as half of its eight partners in Beijing to Shanghai and Hong Kong. The Beijing office was opened in 2003 and is the firm’s fourth location in Greater China, following Hong Kong, Shanghai and Taipei. At its height, at the end of 2007, Jones Day had nearly 50 fee-earners in Beijing. Now the fee-earner headcount has come down to around 20, including eight partners.
The firm’s Beijing office managing partner John Kao tells The Lawyer the moves are for strategic reasons.
“The Greater China offices have a fluid arrangement and people frequently move between the three,” he says. “We’ve made the strategic decision to move a number of partners to reside more permanently in offices where they can better service our clients and team configuration.”
Kao also emphasises that Beijing will remain an important location for the firm and that it will grow according to its four key focus areas – antitrust, government regulatory, IP and outbound investment.
While international firms are still exploring their ways to success in China, Chinese firms are seeking a formula to catch up with their international counterparts.
Apart from the obviously globally minded King & Wood Mallesons, Beijing’s Zhong Lun is another Chinese firm increasing its exposure and market share in overseas markets. The firm has recently opened its 10th office in New York, in mid-town Manhattan, by hiring two New York-qualified partners. The New York opening came a year after the firm opened in London by hiring a nine-member team led by three partners from domestic rival Zhonglun W&D.
Managing partner Zhang Xuebing regards the New York opening as the ideal way to mark the firm’s 20th anniversary. He says he expects geographical expansion to slow in the next decade, although the firm will continue to add partners – particularly Western partners – in overseas offices.
Although the firm has no intention of taking on the global players in their home jurisdictions and plans to work with many foreign firms around the world, the move is a sign that Chinese firms are wanting to become more serious players in key global financial centres.
While the large Chinese firms are pushing ahead with international expansion, they are making equally important internal reforms.
Although the top-ranked Chinese firms are still enjoying a much faster rate of revenue growth than their Western counterparts, they are not content with their current shape and are frank about the big gap they have to close before they catch up with the standards set by international firms.
Even Jun He – widely regarded as China’s blue-blood firm, with a similar philosophy to its magic circle friend Slaughter and May in terms of client profile and strategy – is improving the way it operates.
According to Jun He’s newly elected management committee chair, Shanghai-based partner David Liu, revenue in 2012 was up by 10 per cent. It is a satisfying result but much slower than the 30 per cent growth rate Jun He enjoyed prior to 2008. In a bid to keep up its growth momentum the firm is broadening its practice areas and diversifying its client base. To achieve that, one of Liu’s priorities is to improve specialisation and cross-referrals within the firm.
As a first step Jun He asked partners to reduce their primary practice focus from two areas to one and, subsequently, has regrouped practice areas. Currently, the firm has five main departments – corporate and M&A, restructuring, litigation, capital markets, antitrust and international trade. Each department head is on the firm’s management committee.
“To be the best quality firm in China we need to become experts in specialised areas,” says Liu. “The way to achieve that is to zero in on one area. By the same token, this is the only effective way to encourage teamwork and cross-referrals between partners, teams and offices.”
Dacheng is another firm that has shifted its focus from expansion to quality control. The Beijing-headquartered firm has been one of China’s most expansive for the past five years. But compared with previous years, its expansion slowed, with only one new office.
Managing partner Wang Zhongde says Dacheng has entered its next phase of growth. Dacheng’s management are aware that the firm’s rapid expansion has attracted criticism, as many of its peers consider Dacheng a franchise or network of firms under a common name.
Wang acknowledges that some of the firm’s branch offices are not financially integrated and says they will stay that way to maintain price- and cost-competitive edges in their local markets, but he stresses that the firm has a “one-firm” approach.
He has introduced several structural changes to ensure this. In April 2012 the firm overhauled its management committee selection process to allow equity partners to enter a public election to compete for places. This is aimed at strengthening the relationship between Beijing and the branches by allowing non-Beijing partners to be part of the firm’s highest governing body.
The second key change sees the firm operating in 23 practice and industry groups. Lawyers in different offices are grouped together according to their primary practice focus and each group is guided by a leadership team. Training and business development initiatives are organised around practice groups instead of offices. By improving resource-sharing and knowledge-sharing within the same practice group, firmwide the firm expects to achieve better teamwork and more consistent quality.
A number of large national firms in their 20s are going through a generational transition. These firms have traditionally been managed by founding partners or more senior partners, but have recently moved on to adopt more democratic methods and younger leadership teams.
Zhong Yin is a good example. At the end of 2011 for the first time the firm installed a management committee of 12 partners as the governing body. The committee is now chaired by managing partner Li Ju, still in his late 30s.
The large Chinese firms know that just having a good management structure is not enough to manage their huge organisations well. State-of-the-art IT infrastructure and branding strategies are equally crucial.
Some firms have already invested heavily in bespoke IT systems. Beijing-headquartered Guantao is one. The firm, with 210 lawyers across 11 offices, has budgeted RMB3m and instructed a well-known Chinese software development company to build a customised management software system for the firm.
“As the firm grows and the nature of work becomes more complex and multi-jurisdictional the old system is less able to cope with our evolving practices,” says managing partner Cui Liguo. “To make the practices more efficient we needed a new IT system.”
One of the features of this new system is secured remote access to documents and files that enables lawyers to work more efficiently on client matters outside the office.
Chinese firms are also increasingly conscious of the importance of good branding and marketing. Most large firms now have funds whereby all partners make contributions for marketing, business development and branding initiatives.
Global Law Offices, one of China’s oldest brands, is ramping up its marketing and branding strategy. The firm has recently appointed UK design company Air Design to overhaul its logo, website and marketing brochures.
“The Chinese dream” was a commonly mentioned term by the Chinese firms during The Lawyer’s research. As The Lawyer Asia Pacific 150 shows, the country’s leading firms are pursuing their own dream in many ways. As they say, the future belongs to those who believe in the beauty of their dreams.
And if you haven’t got your copy of The Lawyer Asia Pacific 150 yet, what are you waiting for?
Key figures: China
GDP (2012) $8.4tr
GDP growth (2012) 7.8%
Number of lawyers 230,000
Number of domestic law firms 20,000
Number of representative offices of foreign firms: 250
Source: National Bureau of Statistics of China, All China Lawyers Association, Ministry of Justice