Economic growth is cooling but China’s legal market shows no sign of slowing, with some leading firms undergoing a profound transformation
The Lawyer Asia Pacific 150 2014 research once again confirms China’s pre-eminent position among the region’s legal markets. This year, 35 Chinese firms made it into the top 100 independent firms table, with five new entries.
Together, these firms had over 18,000 lawyers at the end of 2013 – more than the total in Hong Kong and Singapore combined.
Dacheng, a mammoth firm headquartered in Beijing, takes top spot as Asia Pacific’s largest independent firm by lawyer numbers this year, with 3,257 lawyers in 50 offices globally.
While all but two of the 35 firms saw a rise in lawyer headcount in 2013 compared with the previous year, there are mixed fortunes when it comes to revenue growth.
Dacheng saw a 48 per cent hike in lawyer headcount and grew its 2013 turnover by 12.6 per cent from RMB1.58bn (£151m) in 2012 to RMB1.78bn.
Some of the large national firms such as Guantao, Jun He, King & Wood Mallesons and Zhong Lun also achieved about 10 per cent revenue growth for the past year. While there are some exceptional performers, such as Fangda, which saw revenue soar by almost 50 per cent, a number of firms have found the past year more challenging, either flatlining or seeing a dip in turnover.
A different perspective
While 10 per cent revenue growth would be great for firms in developed markets, it is a dose of reality for Chinese firms. For many, an annual growth rate north of 30 per cent was normal in the decade prior to 2012.
“There are significant changes in China’s policy and economic strategy – the market has been steady in general, but not without its challenges,” says Wang Ling, China managing partner of King & Wood Mallesons. “The slower pace of economic growth and foreign investment, as well as the long halt in the domestic IPO market, mean revenue growth is harder to come by for law firms.”
China’s A-share IPO market, the largest in the world in terms of IPO fundraising value from 2009 to 2011, was stopped for more than 18 months until January 2013 to conduct clean-up reforms. It was then closed again from February 2014, reopening at the beginning of June.
Although corporate finance and securities, one of the core areas of King & Wood Mallesons’ China practices, was affected by last year’s tough market conditions, the strong performance of its corporate, litigation and IP groups helped the firm achieve near-10 per cent revenue growth, to an estimated RMB1.95bn.
Beijing-based Global Law Offices (GLO) also reported a good increase of 25 per cent in its 2013 turnover, from RMB160m to RMB200m. However, like many of its peers it is facing unprecedented competition and difficulty in improving profit margin.
“The low level of activity in the domestic IPO market means more capital markets lawyers are competing for other corporate transactional work, such as M&A,” says Liu Jinrong, managing partner of GLO. “So the number of M&A transactions is increasing, but the fee rates for legal services are dropping.
“Chinese firms are also facing higher overheads, such as rising staff wages and inflation, as well as tax reforms concerning domestic law firms and their partners. These have affected the profitability of law firms and their partners.”
It is estimated that under the new tax regime the tax liability for firms with a turnover of more than RMB5m will increase by an average of 5 per cent.
The revenue growth slowdown of Chinese firms mirrors the trajectory of the country’s economy. President Xi Jinping has called this slowdown in economic growth the “new normal” and has urged the nation to adapt and remain “cool-minded”.
Some leading domestic firms have clearly heeded the president’s appeal and shifted their focus when it comes to future development.
Traditionally, firms have prioritised growing in size, geographical coverage and chasing fee income. Often these elements have been put ahead of quality and risk control and promoting a one-firm approach among offices and partners.
But priorities are changing. Dacheng, for example, saw an important year of transition in 2013. Following a decade of rapid scaling-up, the firm started shifting from expansion to strengthening its capability in specialist practice areas.
Although the firm is the largest by lawyer headcount its average revenue per lawyer, which stood at RMB546,515 in 2013, lags behind many domestic rivals. The Chinese giant has realised the urgent need to step up a level and improve its overall performance, revamping its top management line-up and putting specialisation at the heart of its next five-year plan.
Another major national firm, DeHeng, has been undergoing many internal changes. Chief executive partner Gavin Sun says the 1,030-lawyer firm has recently completed its first generational leadership transition and improved its management and controls. As a side-effect its revenue flatlined.
But such measures are critical for his firm’s long-term future, says Sun, especially in light of the events that rocked some of China’s leading firms last year. Two elite Chinese capital markets firms’ pending negligence lawsuit in Canada in relation to the ‘Sino-Forest’ case and the penalising by the China Securities Regulatory Commission of several law firms for inadequate due diligence and misrepresentation in relation to IPO accounting fraud cases are two high-level examples.
“In its 30-year history the Chinese legal profession has for the first time faced challenges that could bring an established firm down overnight,” says Sun. “The thought is spine-chilling. The new management has decided that reform and improving our internal controls is essential. We don’t want to pursue short-term revenue growth and put our future at risk.”
One of the measures DeHeng has put in place is an approval committee for new cases and instructions. This means that before partners and lawyers can accept mandates, the committee must evaluate the risk and value and decide whether to accept or decline the business. This is in addition to a three-partner committee that reviews and signs off important legal opinions issued by the firm’s lawyers.
Due to this stringent internal control procedure it is estimated the firm turned away at least 10 instructions for domestic IPO transactions in what was an already tough year.
Guantao is another national firm that has put emphasis on its future, but it has turned to international expertise for advice.
The firm has appointed the former senior partner of UK alliance firm Ashurst, Geoffrey Green, as a strategic adviser. Green will advise the Beijing-based firm on management, strategic planning and business development issues.
“Guantao has just celebrated its 20th anniversary,” says Cui. “We need to think about our strategy for the next 10 years, during which time the Chinese legal profession will undergo significant change.”
Wave of consolidation
Although most of the large firms are content with their size, this does not mean there is no room for more big players. The past few years have seen a wave of consolidation among mid-sized firms.
One of this year’s new entries, Boss & Young, bolstered its size by merging with fellow Shanghai firm JoinWay. The enlarged outfit has 150 lawyers, including 45 partners, across six offices. It has an estimated annual revenue of RMB134m.
“The market is changing rapidly,” says Boss & Young managing partner Xu Guojian. “Many aspiring mid-sized firms are trying to break into the top tier. This is inevitable because clients are growing fast and increasingly demanding a wider range of services, ideally from a one-stop shop.”
Apart from consolidations in the mid-tier, a merger attempt between two top-tier firms, Jun He and Zhong Lun, has caught the attention of the local and international legal fraternities. If the merger goes ahead, the combined revenues would reach more than RMB1.8bn, putting the merged firm on a par with King & Wood Mallesons China in terms of annual turnover.
Many lawyers in China are betting against the likelihood of the merger going ahead, and it is understood that talks have been suspended due to difficulties in gaining partner support, along with cultural compatibility issues.
Whether or not the proposed merger makes it to completion, an attempt of such magnitude in China is unprecedented and sheds new light on the nature of the market.
As one insider points out: “The rationale behind the merger is to create arguably the strongest PRC legal services provider in every aspect. Both firms have established themselves as market leaders but we are hoping to take the firms to another level through a possible deal.”
The firms’ desire to be even bigger and stronger shows that the group of leading Chinese firms are not content or resting on their laurels. This is a natural progression as the market matures and becomes more sophisticated.