In my last blog entry I talked about the relatively recent and quite modest origins of the modern Chinese legal profession. The leading group of Chinese law firms has certainly come a long way in a short time, and even more remarkably, for a country and market the size and scale of China, the market appears to be shaking out more along the lines of the UK legal market rather than the US legal market in many key respects in that there is a small break-away group of top Chinese law firms that appears set to dominate the local legal market for the coming years or even decades.
To understand how Chinese law firms have been able to arrive at the point where King & Wood (K&W) is able to undertake a merger with Mallesons, and where my firm Zhong Lun (ZL) is opening an office in London, we first should assess current market conditions and the key players and positioning, and then retrace our steps to see how the leading Chinese firms accelerated their development over the past 10-plus years. Again, I want to emphasise that these observations and comments reflect only my own personal views and do not necessarily represent the views of the partners of ZL individually or collectively.
The recent Chambers Asia list of award nominations for Chinese domestic firms provides an instructive snapshot of the Chinese legal services market. K&W leads the way with 15 nominations, followed by Jun He and my firm Zhong Lun with 12 nominations each. These three firms form the break-away group of top-tier, full-service national law firms in China. Other directories also follow suit and consistently put the Big Three in their leading group of 3-4 top firms in China. Next on the Chambers list comes Fangda with eight nominations. After Fangda there is a significant drop-off: Haiwen and Grandall each garnered four nominations, while Global, Jingtian Gongcheng, Fenxun and Hylands garnered three nominations apiece, while old mainline corporate/banking firms Commerce & Finance and Llinks each had only two nominations. This presents a rough outline of the leading domestic law firms in China, but I think most lawyers in the market would move Grandall and Hylands down the list well outside the top 10 because their areas of strength tend to be diluted by their greater number of areas of more modest capability or even outright weakness.
So that leaves us with a Big Three (K&WM, JH and ZL), chased by Fangda and Haiwen, with Global, Jingtian Gongcheng, Commerce & Finance, Llinks and Fenxun closing out the list based on the Chambers Asia rankings as adjusted. However, one further adjustment is probably merited – we can probably move AllBright up into the top 10 to replace Fenxun. AllBright only garnered one nomination from Chambers Asia this round, but it does receive more love from PLC Which Lawyer?, which puts it just outside its top 10 list of domestic law firms. It is also the largest of the Shanghai firms, while Fenxun is more of a corporate/structured finance boutique. Of course, there are other excellent lawyers at a number of other strong firms outside of this list, and other directories may rank some other firms in the top 10, but that is a fairly representative grouping that should not be overly controversial, at least for our purposes.
There are some interesting observations to be drawn from this listing. First, the Chinese legal profession is dominated by the Beijing firms. In our top 10, all but Fangda, Llinks and AllBright are Beijing-based firms. Fangda is the only Shanghai-based firm that has a competitive presence in Beijing, while the Big Three and several of the other Beijing-based top-10 firms are also very strong not only in Beijing but also Shanghai and Shenzhen, which are both home to stock exchanges in addition to being important commercial centres in their own rights,. When you drop down below the top 10 to the next tier, the dominance of the Beijing firms in the rankings is even more pronounced.
One can quibble about nominations and rankings, but in this case, the rankings do not lie – Beijing dominates the Chinese legal profession, and Shanghai firms lag seriously behind overall in terms of national presence. There is a historical reason for the dominant position of the Beijing firms, namely that in the early days the practice of law was only a regulatory practice, and the most important regulators were all in Beijing. The Beijing firms thus got an early head start and never looked back, moving from (relative) strength to strength. With the exception of Fangda, the Shanghai firms tend to be local or regional players only, and find it just as difficult to crack the Beijing market as non-New York firms find breaking into the New York market.
There are some other useful observations to be noted. First, of the top 10 firms listed, only the Big Three are truly national in scale, with multiple offices around China. The other Beijing-based firms on the list tend to be strongest in Beijing with smaller presences in Shanghai and perhaps Shenzhen. By comparison, the Big Three firms not only have very strong offices in both Shanghai and Shenzhen but these offices are competitive at the top end of those markets, with Beijing firms actually taking a dominant position in the Shenzhen market ahead of indigenous Shenzhen firms. In addition, the Big Three have a growing presence in other cities across China, creating a true national network covering the major economic centres. As a result, the Big Three also have a substantial advantage in terms of numbers over the other top 10 firms. K&W (leaving aside Mallesons for the moment) has approximately 1,000 lawyers, while Jun He and Zhong Lun have around 500 and 600, respectively.
On the other hand, size and scale are not alone indicative of quality in the China market. For example, two of the larger domestic law firms in China are Dacheng and Yingke. Both have pursued a ’growth for growth’s sake’ strategy. Dacheng claims more than 2,500 lawyers in 35 offices in China and seven offices outside China. Yingke, a more recent upstart, similarly has 1,600 lawyers in 14 offices in China and five offices outside of China, including a recently opened office in London, with two more planned in Poland and Turkey. There is something deeply rooted in the Chinese psyche that tends to a worship of scale as a virtue in and of itself – ’bigger is better’ and ’size matters’ writ large. There is some rational basis for this worldview given that China is so large and has so many people and so many important regional economic centres across the country – size in fact is important in China.
But size clearly does not equal quality, even in China. In fact in the Chinese legal profession there is, or should be, a rebuttable presumption that there is an inverse correlation between the size and quality of a firm. In the case of Dacheng and Yingke, this is borne out by the fact that Dacheng garnered only one nomination for the Chambers Asia awards, while Yingke received none. Other directories have come to similar conclusions about these firms that pursue a ’growth at all costs’ model.
Similarly, revenues per partner (RPP) in the various firms also tend to reinforce this conclusion. A couple of years back I did a back of the envelope calculation of RPP of the various firms based on available (but not necessarily entirely reliable) information. (RPP is generally as or more reliable a measure than PPP since most leading Chinese law firms tend to achieve pre-tax profits in the similar, and astonishing, range of 70 per cent of gross revenues.) Based on my informal calculations of available 2008 figures, the leading group of firms, comprising half or more of the top 10 Chinese listed above, achieved RPP of RMB 6-7.5 million. Dacheng and other similarly situated firms achieved RPP of only RMB 1.5-2.5 million. These calculations may not be precise, but they do provide a ballpark reference point, which underscores the direct correlation between quality rankings and RPP. This correlation makes sense since both are different but related measures of market acceptance and affirmation. At the same time, growth for growth’s sake necessarily involves a dilution of quality standards for incoming partners. If one’s model worships scale for its own sake, then the focus is on the number rather than the quality of the partners. Overall, weaker partners generate fewer accolades and lower revenues, even if there are a smaller number of strong individual practitioners in each of these firms.
In the early days, K&W also suffered from the perception in the market that its sole strategy was to achieve size and scale as it expanded very rapidly in the last half of the 1990s. I was with Nortel in Beijing at the time, and while I had a much smaller team, I was in the market to hire quality local lawyers, and was all too aware of how thin the market was for well-trained bilingual lawyers. Under those conditions, rapid expansion could only involve casting the net broadly and taking aboard all warm bodies with law degrees regardless of talent. During K&W’s first decade, I think very few foreign lawyers in the international firms felt much concern that K&W, or any other domestic law firm for that matter, would pose much of a competitive threat to the market dominance of the foreign firms given the thin talent pool from which K&W and the others were drawing from. Part of this also had to do with the fact that the Chinese legal profession was starting up again from scratch, after four decades of complete dormancy, so the first generation of new Chinese lawyers in the 1990s had no mentors to guide and develop them as practicing professionals. At that early stage, that was a significant impediment to the development of the Chinese law firms, but in retrospect it only makes what they have achieved in such a short time frame all the more remarkable.
I had a direct personal connection with the K&W hiring strategies in that time period. While still at Nortel in Beijing, I hired a very presentable and charming bilingual Chinese lawyer who was returning after working for a top-five Australian firm in their Melbourne office for five years. Based on my intake assessment, I gave him credit for two years’ actual work experience as it appeared that he had spent most of his time pouring tea for visiting Chinese clients and delegations. After six months on the job, I came to the conclusion that I had been too generous in my initial assessment of his core legal skills – it turned out he couldn’t draft his way out of a paper bag – so I placed him in one of our JVs in southern China where I thought he could in time be a reliable if uninspiring support for our sales team there working more as a paralegal with template contracts. When even that did not work out, we arranged a managed exit, and wished him well. A couple of months later he turned up as a senior partner in K&W’s Guangzhou office. Given the then prevailing market conditions and K&W’s all-out growth strategy, this was neither shocking nor surprising.
Jun He, on the other hand, had different origins and a different strategy. While the original core group of K&W partners came from government departments or the Great Wall Law Firm, one of the old-line state-owned firms, the main group of Jun He’s founding partners were returnees from the US. Their focus from the very beginning was on foreign clients, and they quickly emerged as a top local firm that worked effectively with foreign firms in China on a side-by-side basis. Jun He’s growth strategy was more cautious, and for many years they were, and remain, much smaller in scale than K&W. This tended to reinforce a reputation for quality which continues to this day.
This distinction in reputation for quality is illustrated by a common market observation of K&W, which is that one-third of the K&W partners are outstanding (driving much of their profitability and rankings), while another one-third are generally competent, and the bottom third, the legacy of the early period of overly rapid expansion, are actually sub-par in terms of quality, at least by international standards but in many cases even by lower local standards. This same observation could be made of many of the leading large-scale Chinese firms, so it is not my intention to single out K&W for negative comment. In fact, several senior K&W partners have shared similar assessments with me in private conversations, and one has gone so far as to speculate that they might spin off the bottom third at some point, which would be a neat trick. Moreover, this does not take away from what K&W has accomplished at the top end of its practice capability, which is reflected in its topping the list in the Chambers Asia nominations. However, by way of comparison, because of the way that Jun He built its foundation and managed its growth, the general view is that the spilt of partners within Jun He is perhaps more along the lines of 40-50-10, making Jun He overall consistently stronger in terms of quality from top to bottom. This has also put Jun He at the top of the RPP list by most accounts.
But even Jun He is a work in progress. A few years back when I was still at Lovells working with a top multi-national corporation on a cross-border, in-bound M&A deal, Jun He was our co-counsel, responsible for the Chinese securities law aspects of the deal. The in-house M&A lawyer leading the deal was a tough New York-trained corporate lawyer, who was tough as nails, and very demanding. In the initial stages, the client managed us on a side-by-side basis, but as we came closer to closing, we at Lovells were asked to take the lead of all aspects of the deal, including supervising Jun He’s work on a prime-sub basis in order to manage the overall work product in a manner that satisfied this very demanding client. So there is still a gap to be closed by the top Chinese law firms at the very top end of the quality of service scale, but the important thing to note is that the gap is narrowing all the time. I relate this with full respect for Jun He as a firm and for the Jun He team working on the deal, recognising that at my current firm and other leading Chinese law firms, we would (and do) face similar challenges in satisfying the most demanding clients in many cases, but the fact that cannot be ignored is that the top Chinese firms are in the frame now for leading roles in even the top China-related deals, and the trend of ascendancy of the top Chinese firms is undeniable.
Rounding out the Big Three, my firm ZL is more of a late bloomer. Like the other firms, it has a history of close to 20 years, but for the first 10 years ZL was primarily a real estate and construction practice with a strong complement of Japanese- and Korean-speaking practitioners working for top Japanese and Korean corporates, which have historically had a strong preference to work with local Chinese lawyers. ZL rode the real estate boom to develop itself into a full-service law firm over time. Many of the original areas of expanded expertise were built off of the real estate practice, such as our leading securitisation, capital markets, finance, bankruptcy, corporate M&A, PE/financial institutions, funds development, competition law and litigation practices, and then have expanded to other industry sectors beyond those early property origins. Over time, other areas, such as international trade, tax, TMT, employment, compliance, were developed to complete the full-service offering of the firm.
All of the Big Three firms, as well as the other top 20 or so Chinese law firms, have benefited from the continuing exodus of local Chinese senior associates from the China and Hong Kong offices of the major foreign firms into the top local firms. This trend started in the year 2000 time frame and has accelerated in the period from 2005 onwards. This reflects other related market trends: the growth in the number and size of the China offices of the foreign law firms, which created training grounds for an ever increasing number of bilingual Chinese lawyers, but also the glass ceiling for partnership for Chinese lawyers in many of these international firms. The traditional ’up or out’ system in major foreign law firms has resulted in perhaps the most successful outsourced training program in the history of the global legal profession. While the absence of domestic mentors for the first generation of Chinese lawyers created significant challenges and impediments, the second and third generations of Chinese lawyers have stood on the shoulders of their foreign law firm mentors, and now they are mature enough in many cases to be the mentors for the next generations of Chinese lawyers.
While all of the top Chinese law firms have benefited from this trend, ZL in particular has caught this wave of refugees from the foreign firms, in part because it was the late bloomer of the Big Three. This means that a higher percentage of our ZL partners have more years of big foreign law firm work experience, and the average age of our senior partners is still in the mid-40s, creating a very aggressive core team of partners who still have the fires of professional ambition burning bright. This is also a function of coming up from behind to catch up to our top-level peer firms – we still feel the need to continue to push and improve. It is one of the positive aspects of a growing and competitive market – we use each other as a benchmark to measure ourselves and our progress.
The other leading group in the top 10 domestic firms is comprised principally of the top Beijing firms, most of which made their mark on capital markets deals starting in the mid-1990s. Firms such as Haiwen, Commerce & Finance and Jingtian Gongcheng fall into this category. Global Law Office trades off of an exceptionally strong banking finance practice, along with related corporate capability. Llinks has a similar foundation in Shanghai. Fangda is more in the model of Jun He – cautious growth but based on a more narrowly focused set of core corporate and related practices, with a heavier emphasis on foreign funds and financial institution clients in addition to corporates. All have multiple areas of strength and are considered to be very competitive at the top end of the legal market. Some have remained smaller in scale than the Big Three by choice and others because they have yet to work out the necessary improvements to their internal management structures to accommodate faster rates of growth. In fact, the reason for K&W’s ascendancy, and the ascendancy of Jun He, ZL and even Fangda, can be attributed in large measure to the progress each has made in respect of improved law firm management structures and systems. That is the only way to achieve scale and quality at the same time. Others in the top 10 will catch up with the leading pack only as they adopt comprehensive management reforms. (This issue of management systems in Chinese law firms will be an interesting point that I hope to explore further in a future blog.)
This brings us to our concluding observations for this blog entry. In our first blog in this series we noted that the Chinese legal profession is still young. In this blog, the central observation is that the leading group of domestic Chinese law firms is comprised of a fairly small number of firms, barely filling out a complete top 10 list. And even that can be divided into a Big Three and a following group of five or six, at least in terms of profitable, high-standard full-service offerings and more comprehensive geographical coverage.
So what does that mean in terms of whether other leading Chinese law firms will follow the lead of K&W and Mallesons? Will there be, as Jerome Cohen, the dean of the first generation of foreign lawyers in China, is quoted as saying, a mad scramble for other foreign law firms to hook up with leading Chinese law firms? Looking at the history and dynamics of the market, with only a small number of truly top Chinese law firms, a growing domestic legal market that is still under-served in many respects, the intense level of attention that the Chinese market has from businesses from all countries across the globe, the outward push of major Chinese companies, and the numerous highly remunerative bilateral relationships that each of the top Chinese law firms have with top foreign law firms around the world, mergers such as the K&W-Mallesons tie-up cannot be seen as the only or perhaps even the preferred path to continued sustainable growth for all or even most of the other leading Chinese law firms.
But there is no doubt that we, along with all of the other leading domestic law firms and also the top foreign law firms that are active in China, are watching and paying attention to the rise of the new K&W Mallesons firm. The one thing that can be guaranteed about the legal market in China is that it is not static, and all players in the market, both foreign and domestic, will need to adjust to new market realities as they develop. To that end, in the next blog entry in this series, we will consider recent and continuing trends and developments in the demand side of the market, in terms of in-bound, domestic and out-bound practices. In the end, client demand shapes the market and law firms follow as a lagging indicator of market changes, so that is what we will look at next.
Robert Lewis is international managing partner at Zhong Lun, based in Beijing