2018: Chinese globalisation in full flight
2 September 2013 | By Yun Kriegler
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Also in: 2018: A window into the future
Prediction: Within 10 years two large Chinese firms will have combined with foreign firms or become part of a global network
When Chinese firm King & Wood combined with Australia’s Mallesons Stephen Jaques in 2012 it turned a few heads. But it was when SJ Berwin decided to join the Sino-Australian club that the global legal community really sat up and took notice.
The Swiss Verein model set out by King & Wood Mallesons will inspire and drive its close domestic rivals to take similar steps. However, it is unlikely anyone will immediately follow suit. The next major Sino-foreign tie-up will come in five to 10 years’ time. King & Wood Mallesons’ first-tier domestic rivals, Jun He, Zhong Lun and Fangda & Partners, which all have a focus on high-end clients and cross-border transactions, are our top suspects.
Most likely international suitors would be mid-tier players from Germany, France and the UK, or pan-European firms with a wide network such as CMS, rather than top-tier UK and US firms.
Prediction: There will be one China-headquartered global firm with more than 40 offices overseas and a turnover of RMB10bn (£1bn)
In addition to an international merger, one or possibly two Chinese firms will focus on building up their global reach by opening small offices overseas and acquiring local capability by hiring local lawyers or forming a joint venture with a small firm in that jurisdiction.
Two of China’s largest firms by lawyer numbers, Yingke and Dacheng, are pioneers in this respect. Yingke currently has more than 10 offices abroad while Dacheng has eight, and the firms are showing no signs of slowing their global expansion strategies.
Xu Yongqian, Dacheng’s deputy chairman, predicts that Chinese companies will invest $500bn outside the country in the next five years. In addition, Chinese banks and financial institutions will provide financing to a significantly wider range of countries, transactions and parties.
“The two trends combined will create tremendous opportunities for Chinese firms with extensive global reach,” says Xu.
Prediction: Several foreign firms will have more than five offices across China and the capability to provide a range of local law advice as the country opens up its legal services market
Currently, there are nearly 250
foreign firms from more than 20 countries and regions with a presence in China. They are only
allowed to opened representative offices and are barred from advising local law.
However, as China becomes a more important and integrated member of the global economy the need for international legal advice will grow exponentially. It is inevitable that China will further liberalise its legal services industry, giving foreign firms greater scope with regard to practices.
We predict that China will follow in the footsteps of Singapore to permit joint ventures between domestic and foreign firms, and allow qualified foreign firms to employ Chinese-qualified lawyers (without suspending their practising licences) and provide advice on certain areas of Chinese corporate and commercial law. Therefore, we will see a large number of new foreign firms set up shop in China and several established UK and US firms expand their Beijing and Shanghai presence to other key commercial centres of China, most likely in Chengdu, Chongqing, Guangzhou, Shenzhen and Wuhan.
Prediction: At least two to three national giants will be formed in the next wave of industry consolidation
In the past two decades foreign investment and capital markets work have largely fuelled the growth of the traditional market-leaders, some of which expanded through mergers around 10 years ago.
We predict there will be a new wave of domestic consolidation among Chinese firms and two or three new national giants will emerge from that. As the government has outlined that its economy will be driven by domestic consumption and the urbanisation of third- and fourth-tier cities, a key feature of these new outlets will be to have offices in a vast number of the smaller and developing cities.
One of the new national giants may be formed via the merger between a significant number of smaller firms across the country. In addition, the explosive growth of China’s emerging middle class means private client-related practices will present great opportunities for the next-generation firms.
Prediction: There will be a pre-eminent Chinese online legal services company that services hundreds of thousands of private businesses
and clients across China, listed on Nasdaq and with a turnover of $500m
Providing cost-effective, fixed-fee legal services, advice and documents online is part of the future of global legal businesses. Many internet-based legal services providers will emerge and thrive in China in the next decade. Given that China has the world’s largest internet population and is expected to overtake the US as the world’s largest online shopping market by 2020, it will hardly be surprising that the global leading online legal services companies come from China.
Stuart Fuller, global managing partner, King & Wood Mallesons
Consolidation will continue. In global terms the market will be dominated by around 20 firms with depth and expertise across a broad range of practices and with physical presences in the major world economic hubs. These will have revenues of close to $4bn each.
Only a small number of these firms will be based in Asia Pacific, but on a longer term basis that number will increase.
In domestic terms there is scope in some markets for consolidation among mid-tier firms. There are also ‘independent’ firms still looking to merge or combine with overseas ones. We will continue to see niche firms and boutiques – on a local or global basis – become more sophisticated in targeting particular segments of a market. The fly-in, fly-out approach to key markets is the way of the past.
The Asian legal market will be the second largest in the world by 2017. For a firm to be global it will need depth and capability in regional markets and their major economies, particularly China. More than 80 international firms now operate in the region. A number will retreat or reduce their scale to a faceplate operation and enter into associations or networks with regional firms. This will be driven by the tension between the need for local connections and global capability, along with the pressure on the business model in home markets.
The business model of law firms will remain under pressure. This is a structural challenge, driven by the mismatch of demand and supply and the need for increased value and efficiency. Pricing pressure will remain strong. This is the new reality and lower rates will be a constant, so the challenge for firms will move from revenue to profitability, but in a way that is understood by clients. The secret will be to deliver more value and efficiency than rivals. The first firm that turns the ship into the storm and combines the benefit of a premium brand with an integrated client experience – that is, integration of the legal and client model – will gain a valuable first-mover advantage in the new world of ‘global law’.
On a detail point, the average cost of a top-performing lawyer will increase, but firms will increasingly use non-lawyers or introduce greater flexibility in the way lawyers work and are paid, so the average cost per employee will fall in relative terms. Basically, what is changing is the definition of ‘top-performing’ – a combination of IQ and EQ across technical, business and people skills – that represents a new capability required for success, and how that flows into the assessment and remuneration of partners and lawyers.
Western firms are still struggling with diversity. This is a business and talent issue. The successful firms will have at least 40 per cent female partners in the next five or 10 years, but they will also need to have a stronger mix of overall diversity – cultural as well as gender.
Will Lawes, senior partner, Freshfields Bruckhaus Deringer
Einstein once claimed that he never thought about the future because it came quick enough. Those who run businesses don’t always have that luxury, but he was right in the sense that the key factors that will influence how the world will look in five years usually already exist. The challenge is to identify them and to seize the opportunities they create.
This is especially true for the UK legal market. For firms focused on private clients, fundamental changes to legal aid and personal accident claim rules, together with new technology solutions and services, will reshape large swathes of their market. Firms serving business will face increased market volatility, excess capacity, ever-more sophisticated purchasers of services and a wider range of market entrants. Against this background, what will we see?
Business models will adapt and there will need to be more differentiation to stand out.
Over the next five years:
A small number of ‘bet-the -bank’ work firms will thrive;
Specialist firms that offer focused expertise will do well;
firms providing technology- driven options in commoditised products will have a chance to grab market share;
Truly integrated international law firms will offer business a solution to the challenges of increased globalisation.
Geographic expansion will continue. Law firms are relatively new entrants in the global race and remain quite parochial. This will change as firms internationalise, consolidating in the process. This will not just be the UK- and US-based firms. Firms from other places will also expand, for example: Chinese firms globally; Spanish firms into Latin America; and Japanese firms into Asia.
Professionalisation of law firm management will increase as new types of business enter the market. This will need a shift in culture so non‑lawyers are valued more highly.
Keeping balance sheets strong will be important. With a drop‑off in growth rates, firms cannot count on increasing cashflow (or borrowings) to fund investment. More capital will be needed.
Charging structures will evolve. UK firms will respond to client demand for different charging models, taking more pricing risk themselves.
The traditional path to becoming a qualified lawyer will change as clients become less willing to pay for lawyers learning on the job.
Project management skills will be in greater demand. More sophistication will be required in the way UK firms handle matters, involving more non‑lawyer project managers to ensure process efficiency.
Firms will have to spend more time and money on their own risk management systems and controls, not least to meet increasing client demand in this area.
The use of technology will increase. Firms will have to invest more in technological solutions, from day-to-day systems improvements
through to the much more exciting, if more frightening, next-generation technology that starts to replicate the human mind and thought process.
And over the next 10 years:
London will still be the place where every law firm with global ambitions will need to have a presence.
One existing Swiss Verein structure merger will have collapsed.
One Top 50 UK law firm will sell itself for cash or do an IPO.
David Liu, managing partner, Jun He
China’s legal industry will be fully opened in the next decade. Domestic law firms will employ more foreign lawyers and foreign firms will be allowed to employ Chinese lawyers freely.
Foreigners will be able to become Chinese-qualified. Foreign firms will be able to enter into joint ventures and the regulatory framework will move closer to that of Hong Kong.
The changes will be driven by demands within the country as it is transformed. The legal reform process will be a world of challenges, but it can and must progress gradually.
After a wave of domestic consolidation there will be only three top-tier Chinese firms dominating the top of the market. However, there will be a wider range of firms with different specialisations, focuses, sizes and geographical coverage fulfilling the tremendous need at the
middle and lower end of the market.
Many of China’s top 20 firms will expand globally via various routes. Global financial centres and emerging markets will be the focus for office openings, but it is unlikely we will see Chinese firms setting up a presence in Africa. Some will choose to enter into close associations with foreign firms. As investment and business activity increases significantly between Asian countries, some associations will be between Chinese and other Asian firms.
In terms of Western jurisdictions, Chinese firms are more likely to set up associations or tie-ups with European firms, particularly leading German or French firms, than US ones.