China Watch – A Foreign Lawyer’s View from the Inside
23 December 2013
18 December 2013
30 September 2013
9 April 2014
9 June 2014
14 November 2013
Beijing and Shanghai are not the only places where China’s legal market is thriving.
When we talk about the China legal services market most people tend to focus only on Beijing and Shanghai, but there are many more Chinese lawyers who work in other regional cities. Most foreign lawyers have limited or no visibility to these regional firms and lawyers, so some of the natural questions which may arise are
1) who are these lawyers?
2) what work can/do they do? and (perhaps more interestingly)
3) what are they thinking about in terms of the development of the China legal market?
A few months back I had an opportunity to meet with more than 100 leading regional lawyers from across China. The All China Lawyers Association (ACLA) has identified and selected approximately 350 top lawyers across the country with strong English skills and foreign legal education and/or work experience who work on cross-border matters. This group of 100+ were corporate/commercial lawyers involved in inbound and outbound investment matters. The Ministry of Justice (MOJ) has allocated funds for special training for this group on cross-border matters. So this is not a self-identified group, but is a select group chosen through an objective evaluation process. That makes it unique in China.
The ACLA organised a two-week training programme for this group of 100+ corporate/commercial lawyers on international M&A. I was able to help arrange and/or present four+ days of training for this group. It was a very enlightening experience, and the lawyers in this group were quite impressive. The standard of spoken English was quite high, and they interacted fluidly in English with the foreign lawyer presenters. Their questions were on point and reflected a higher level of sophistication than one might have expected from lawyers practicing in the hinterlands of China.
Even so, local lawyers in even second- or third-tier cities tend not to be involved in a substantive role in more sophisticated inbound or outbound transactions. These deals flow through either the Beijing or Shanghai offices of international law firms or the top domestic law firms. The local lawyers in the region tend to focus more on resolving on-the-ground problems in their local jurisdictions using their superior local “guanxi” with the responsible government departments, while the top shelf work is done by lawyers who parachute in from outside.
At the end of my series of presentations, we allotted about an hour for some free-flowing Q&A. I was very interested to note that no one asked M&A deal-related questions. They all wanted to talk about the prospects for development of the China legal services market generally and for their regional-based practices specifically. Here is a sampling of the questions they posed:
- How can local firms compete more effectively with foreign firms?
- Will the MOJ open the market further for the foreign firms?
- Will there be more cross-border law firm mergers like KWM?
- How can regional firms compete with national firms in China?
- How can specialist firms compete with full service firms?
- How do we identify and develop more business opportunities?
- How do we develop know-how management?
- How do we avoid getting burned out as lawyers?
- How can we as regional lawyers develop outbound M&A business for our regional clients?
- How can we develop more work for MNCs in our local regional market?
I have to admit, I was a little surprised by the concern expressed about competition from the foreign law firms in China for a couple of reasons: 1) the regional domestic firms and the foreign law firms in China occupy very different segments of the market, and 2) with only very rare exceptions, the foreign firms are not going to open up offices outside of Beijing and Shanghai anytime soon, probably not ever. So even if the MOJ were to further open the market to the foreign firms (which is not yet on the horizon, although there is some early chatter to the effect that the top domestic firms in Beijing and Shanghai would not necessarily object), this would not directly impact the regional firms.
Ditto for future cross-border law firm mergers – it might happen (although I happen to think that there will not be another top-tier Chinese firm which will adopt the King & Wood Mallesons merger model for the balance of the decade), but the impact in the regions would be negligible at most. Even the top Chinese national firms (excluding Dacheng, Yingke and other franchise operations) will only ever have a handful of regional branch offices because the differences in charge-out rates and profitability between the tier-one cities and the second- and third-tier cities, not to mention the fourth- and fifth-tier cities also represented in this group, is too great. There is just no economic case to be made for extending a top-tier national law firm practice beyond the key three to four regional cities.
Consequently, the vast majority of these top regional lawyers should not face direct competition from either the international firms or the leading national domestic firms for local regional work. The challenge for the top regional firms and lawyers is that they are boxed out of the more sophisticated (and more profitable) inbound and outbound deals and even key categories of top-shelf domestic work. They do not have the experience base to lead the larger inbound M&A deals or even the bigger FDI projects in their home regions, the capital markets work is focused on Beijing (approvals), Shanghai and Shenzhen (homes to the two stock exchanges), while the more complex regulatory advisory work is done principally out of Beijing, where the central government departments are located.
The story for outbound work is similar. These regional lawyers have strong ties with the leading Chinese companies in their regions but have near zero credibility with these clients when it comes to outbound investment projects. In the typical case, their top regional clients will only consider working with a top Beijing-based firm or with an international firm on these outbound projects. The local firms/lawyers won’t even be put on the list for consideration. That may change, and this MOJ/ACLA sponsored training may help effect a change in this regard, but these regional lawyers will need to get a few notches on their belts by tagging along with the lead counsel from a top national or international firm on some outbound projects in a minor supporting role for a few years before they can hope to start to work their way up the value chain. It can be done, but they will need to catch a few early breaks, and even then they will need to team up with more experienced lawyers on outbound deals that require more than simple coordination and hand-holding on the part of Chinese legal counsel.
In the meantime, these regional firms/lawyers need to make the most of their natural competitive advantages. Because they are so deeply integrated into the local government and commercial infrastructure in their home markets, they can get some things done much more effectively than anyone from outside, whether from a top domestic national firm or an international firm. If an MNC has a labour arbitration matter, white collar criminal case, competition law complaint action, or a commercial litigation matter or any other local regulatory compliance issue in a regional city, then these bilingual local lawyers have an indispensable role to play, perhaps in conjunction with a top expert from Beijing or Shanghai to coordinate with the national-level issues and to coordinate from a commercial structuring perspective. There are certain other categories of work that lend themselves to direct participation by local counsel on the ground in the target region, such as entity dissolution, establishment and maintenance of branches and subsidiaries of foreign-invested enterprises, and even due diligence on inbound M&A matters. In short, for anything that involves interaction with local government departments, these local lawyers have clear advantages, even if it is in conjunction with other China-based lead counsel on the matter.
The more fundamental challenge for these regional lawyers is that their firms are not true integrated partnerships, but are more in the nature of a shared-cost platform for a collection of sole practitioners operating under a common brand (in other words, an even more balkanised variation on a Swiss verein structure). This is the principal impediment for their practice development as there is no shared know-how and little or no cross-selling in the firm. They all know this is the core problem, but they feel impotent to effect change. The regional law firms are not alone in this regard – conventional wisdom holds that there are really only four to five domestic law firms in China with more advanced integrated management structures and systems. Not surprisingly, there is a perfect correlation between the Chinese firms with more well developed management and the firms at the top of the rankings, and until other Chinese firms achieve a break-through in this regard, the position of the leading firms at the top of the tables will remain unchallenged.
So for the time being, when doing work in the regions across China, you will need to select the lawyer and not the firm. This is true everywhere to some extent, but it is even more the case in the hinterlands of China. But based on my interaction with this select group at this MOJ/ACLA training, the prospects for finding a good lawyer in second- and third-tier cities across China are looking better all the time.
Robert Lewis, international managing partner, Zhong Lun Law Firm, Beijing