Look both ways
13 May 2013 | By Yun Kriegler
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Chinese firms are pushing ahead with international expansion as equally important internal changes are being played out
International law firms’ interest in China has not been dampened by the country’s slowing economic growth. In the first few months of 2013, firms such as Ashurst, Clyde & Co, Gibson Dunn & Crutcher and Stephenson Harwood have opened new offices there, while many, like Kirkland & Ellis, are waiting for the regulatory green light to do so.
But the increase in the provision of international legal services in China is not one-way. Several large Chinese firms are exploring ways to increase their exposure in overseas markets and are gaining ground on advising Chinese outbound clients.
Beijing-headquartered Zhong Lun, one of China’s largest law firms, is a good example of firms that are making greenfield investments overseas. The firm has recently opened an office in New York in the heart of midtown Manhattan. The office, Zhong Lun’s fourth abroad and 10th firmwide, is headed by two New York-qualified partners, Philip Zhang and TK Chang, who have extensive experience practising in US firms including Paul Weiss Rifkind Wharton & Garrison, Morgan Lewis & Bockius and Bingham McCutchen.
Coinciding with the New York launch the firm added the first Western partner to its London base with the appointment of former Norton Rose and Linklaters lawyer Tom Fairley. The appointment came a year after the firm’s opening in London by hiring a nine-member team led by three partners from domestic rival Zhonglun W&D. All three founding partners are Chinese natives qualified in England and Wales, and trained in English firms.
Managing partner Zhang Xuebing regards the New York opening as the ideal way to mark the firm’s 20th anniversary. He expects its geographical expansion to slow down in the next decade, although it will continue to add partners - particularly Western partners - in overseas offices.
“Until now, the overseas branches have been a facilitating function and a referral point in serving clients on inbound and outbound matters,” says Zhang. “They are fee-earning offices, but are yet to generate enough profits. We aim to develop them into meaningful local players that can win local instructions on their own merits. To achieve that we need to hire more Western lawyers on the ground - Western clients are still more comfortable dealing with them.”
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.
Hiring senior lawyers and partners from international firms has been a central pillar of Zhong Lun’s internationalisation strategy. Since the appointment of former Lovells Beijing managing partner Robert Lewis in 2011, Zhong Lun has also attracted the likes of White & Case partner Peter Ni, long-serving Freshfields Bruckhaus Deringer partner Carl Cheng and K&L Gates Hong Kong partner Clifford Ng to join it in Greater China.
As Lewis has put it, now that Chinese enterprises are expanding into overseas markets, Chinese firms need high-calibre lawyers who speak the language of commerce in both English and Mandarin to assist with projects in both directions.
And it seems the investment Zhong Lun has made in overseas offices and international partner hires is starting to produce results. For example, in 2012 the firm advised Huaxin Cement on the establishment of a company in Tajikistan, its acquisition of a stake in an Indian company as well as financing the construction of a cement production line in Cambodia. It is also active in Africa, having recently advised China Development Bank on a co-operative planning project with the People’s Republic of Congo.
Beijing-based Yingke is another firm expanding rapidly overseas, although it has pursued a very different path from Zhong Lun. Its international expansion kicked off in 2010 when it launched in Budapest via a joint venture with Hungary’s Várnai & Partners. In the following year it established an office in Verona, Italy and one in London. Most recently, the firm has expanded into Brussels, Tel Aviv and Milan through tie-ups with local boutiques. It presently has 16 bases outside mainland China, mostly small and servicing clients through local joint ventures, associations or referrals.
And Yingke has decided to go global via a different route too. Instead of trying to break into developed markets, its expansion started with emerging markets such as Brazil, Hungary, Turkey and Poland. Part of its strategy is to project manage Chinese clients’ investment and transactions in overseas jurisdictions that are not yet dominated by international firms.
To avoid direct competition with large global firms, it also targets the middle to lower end of the market.
Yingke’s bottom-up approach has delivered. In Italy, for example, its Verona office recently advised local wine maker Pasqua Vigenti e Cantine in the negotiation of a large-scale licence and distribution agreement with a Chinese red wine distributor. In Turkey it advised CSR Zhuzhou Electric Locomotive, one of the big electric locomotive manufacturers in China, on winning a $391m (£251m) public procurement deal to build 324 subway trains. In Poland it has assisted
Xuzhou Construction Machinery Group on its acquisitions and investment in a number of local companies. And its New York office, led by partner Zoe Qiao, has assisted Beijing Automotive Group and Chinese restaurant chain Haidilao with their ventures in the US.
Yingke’s managing partner Mei Xiangrong is the mastermind behind the Yingke phenomenon. Although its seemingly ruthless expansion has attracted widespread criticism, particularly among the Chinese legal community, Mei remains a firm believer in his strategy and his aspiration of creating a China-born global giant.
“We know we’re not perfect, but we believe in the direction in which we are moving - we’re not afraid of problems and are prepared to find solutions,” Mei admits.
Even in light of the global economic uncertainty, Chinese firms are enjoying much faster revenue growth rate than their international counterparts. However, the top-ranked Chinese firms are frank about the big gap they have to close before they catch up with the standards set by international firms.
Taking advantage of a slowing domestic market, the large national firms are putting much more focus on practice management.
Jun He, widely regarded as China’s blue-blood firm, shares a similar philosophy as its magic circle friend Slaughter and May in terms of client profile and international strategy.
According to Jun He’s newly elected management committee chair, Shanghai-based partner David Liu, the firm’s 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 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 become 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 China’s largest law firm by lawyer numbers for five years. But compared with previous years, 2012 was not an expansive year for Dacheng, as it only opened one new office.
Managing partner Wang Zhongde says Dacheng has entered its next phase of growth. According to its next five-year plan, management will focus on integration between practice groups and offices, and improve quality and consistency in client services.
Dacheng’s management are aware that the firm’s rapid expansion through mergers and rebranding smaller regional firms has attracted criticism. Many of its peers consider Dacheng a franchise or network of independent firms under a common name.
Wang acknowledges that some of its 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.
One of the key changes is adopting a ‘federal’ structure in Dacheng’s management. In the past the firm was managed by a committee of 15 senior partners, most in the Beijing headquarters. In April 2012 the firm overhauled its management committee selection process to allow equity partners across the firm to enter a public election to compete for places. The process is aimed at strengthening the relationship between Beijing and other branch offices 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 led 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 consistency in quality.
A number of large national firms were traditionally 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 the firm abandoned the old ways, whereby a firm’s founder was the sole decision-maker, and 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 firm has promoted younger partners to its management committee in the hope they will bring a new perspective, fresh thinking and renewed energy to the firm’s growth, which will be the future of the younger generation,” says Li.
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 such as financial and practice management software is equally crucial.
Some firms have already invested heavily in creating bespoke systems. Beijing-headquartered Guantao is one. The firm, with 210 lawyers across 11 offices, has budgeted Rmb3m (£300,000) and instructed a well-known Chinese software development company to develop 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 system.”
One of the features of this new system is secured remote access to documents and files which enables lawyers to work more efficiently on client matters outside the office.
Given that the oldest Chinese law firms are 20 years old and the majority are still small, there is yet to be a one-size-fits-all IT solution for the large players. They are mostly contracting companies to develop their systems.
For the firms with the most entrepreneurial spirit, the lack of existing products in the market means business opportunities. Yingke, for example, is in the process of setting up a division branded as ‘Yingke Cloud’, an online legal documentation service modelled on LegalZoom. The division aims to provide affordable and accessible virtual legal services to individual clients and small to medium-sized enterprises in China.
Yingke has already set up an internet company called Legal Cloud Technology and named former venture capital funds manager Liu Wei as CEO to lead the development of the Cloud.
To many sophisticated international firms, the internal adjustments and restructurings under way in Chinese law firms may seem like pretty primitive steps. But they are the steps Chinese firms must take to move forward - and they are indicative of the fact that they are moving upward too.
Key figures: China
GDP (2012) $8.4tr
GDP growth (2012) 7.8%
Number of lawyers 23,000
Number of law firms 20,000
Source: National Bureau of Statistics of China, All China Lawyers Association