9 May 2011
The gap between Chinese and Western law firms is narrowing. Joanne Harris reports
A few years ago an international law firm in China or Hong Kong was a great place to be if you were a Chinese lawyer. The international firms gave you a chance to experience work for sophisticated clients investing money in the Greater China region.
But that is starting to change. Particularly in China, international firms are losing local talent as associates and even partners begin to return to domestic practices. The trend is even spreading to Western lawyers, with a handful of foreigners leaving Anglo-Saxon firms to join firms headquartered in the People’s Republic of China (PRC).
Recent laterals from US and UK firms to PRC practices include the April 2010 defection of Hogan Lovells’ Beijing head Robert Lewis to AllBright Law Offices. Earlier this year Lewis moved again, this time to Zhong Lun Law Firm in Beijing as international managing partner. Zhong Lun Law Firm also hired Peter Ni from White & Case, where he headed the firm’s Greater China tax practice.
As well as Lewis, AllBright has made senior-level hires from firms including Simmons & Simmons, Pillsbury Winthrop Shaw Pittman and DLA Piper in the past two years.
Meanwhile, King & Wood has been hiring from international firms, picking up Clifford Chance partner Rupert Li in early 2010 and Pillsbury’s former Beijing managing partner Meg Utterback later in the year.
Lewis explains that while he thinks international firms will always have a role to play in the market, the balance of power is shifting towards PRC practices.
“There are going to be certain market segments where local firms have distinct advantages,” he says, highlighting areas such as banking, renminbi financing, regulation, compliance and litigation. “It’s evidence of the continuing development of the nature of the legal work that’s being done that many of these categories seem to find local firms in a position of competitive advantage.”
“Large Chinese law firms have a jolly good business,” adds David Stannard, Asia managing partner at Norton Rose. “It’s a very big economy; there’s a lot going on in China. That will drive the growth of these firms. We’re seeing the role of international firms changing in the Chinese market. Initially a lot of the work was foreign direct investment. A lot of that work is now being done by domestic firms and, to be honest, that’s probably right. It’s their province.”
Lewis says that in his opinion the Beijing firms have an advantage over those headquartered in Shanghai, as they are closer to the key government and regulatory contacts who still wield significant power in China.
Talking the talk
Most of those moving to domestic firms are likely to be Chinese lawyers, according to Lewis. “It’s going to be easier for fluent Chinese speakers to make the switch,” he points out. “It’s not going to be just anybody who can jump in.”
AllBright partner Victor Wang agrees. He notes that the firm has made senior lateral hires from a number of international outfits recently, but has also been successful in recruiting PRC-qualified associates. According to Wang, these associates are looking for “more autonomy and flexibility in selecting clients”.
He points out that PRC firms tend to have a more diverse client base, practising a wider variety of law than international firms can manage in China. Wang also believes that domestic firms are becoming better at supporting their junior talent, although it is clear that the internal management culture of Chinese practices remains very different from that of Western firms.
Other lawyers in the region note that senior partners in Chinese firms have traditionally held a vast amount of equity and, owing to tax regulation, can distribute as much as 75 per cent of revenue as profit. This is undeniably attractive to lawyers, on top of the appeal of working closely with large and powerful Chinese companies.
However, over in Hong Kong the trend is much less marked.
“Hong Kong isn’t experiencing the same kind of problems - local firms are competing with international firms on an equal basis,” says Warren Hua, a partner at Gide Loyrette Nouel’s Beijing office.
Stannard agrees. “In Hong Kong the international firms have been part of the legal community for so long that we’re [no longer] terribly foreign,” he says.
UK firms in particular have now been in Hong Kong for a considerable number of years, and many large Wall Street firms have also been present for some time.
Recent years have seen the arrival of a wider variety of international firms, ranging from mid-tier US and UK practices to independent European outfits. The arrival of more US firms is predicted, although those lawyers already present believe that newcomers should think carefully about what they want to achieve by being present in the region. Just last week Simpson Thacher & Bartlett announced it was adding Hong Kong law capability to its local office.
Long road to profit
“It’s a far more complex journey than people realise,” says Linklaters Asia managing partner Stuart Salt. “To get where we’ve got to in China we’ve made a huge investment in the past 15 years. This isn’t a Dick Whittington situation where the streets are paved with gold. You’ve got to work pretty hard.”
Salt adds, however, that the investment has paid off and he expresses surprise that some firms still regard Hong Kong and China as “an investment case” rather than a jurisdiction that produces a profitable and sustainable business.
Andrew Ostrognai, managing partner at Debevoise & Plimpton in Hong Kong, says trying to build a full-service offering might not be the best way forward.
“It does seem that some people think if you do a particular type of work then you need to do it in Hong Kong as well as everywhere else,” Ostrognai comments. “My view is that this is becoming a dangerous way to think.” He says firms should look for a unique selling proposition in the region and build on that rather than provide the type of work Chinese firms now do well.
Perhaps surprisingly, given the importance of Hong Kong as a hub for investment both into and out of China, not all the local firms have offices there. One that does not is AllBright, although Wang reveals that the firm has considered its options in the special administrative region.
“We’re still debating the proper way to establish a Hong Kong office,” he says. “The issue is in what form [it should be].”
He explains that there are two options under consideration: establishing a mainly liaison office in Hong Kong staffed with AllBright lawyers or moving to merge with a Hong Kong firm. AllBright has had discussions on the latter option, but so far has not made a decision on the best way to go.
Lewis says Zhong Lun’s January 2010 association with Hong Kong firm Roger Ho & Co is “critical”. The two firms will formally merge after three years, in accordance with local bar regulations, but are essentially working as one firm.
“Most of my deals now have a significant Hong Kong element,” says Lewis.
He says the next evolution in the development of Chinese law firms will be a slow expansion internationally. Currently, few PRC firms have offices overseas. Zhonglun W&D Law Firm has small offices in London, Paris and Riyadh; Jun He Law Offices is in New York and Silicon Valley; and King & Wood is also in New York and Silicon Valley, as well as Tokyo.
“There will be a market-driven need for Chinese firms to set up small offices around the world,” Lewis predicts. He says this will be driven by Chinese companies’ appetite for outbound investment. “They’re going to want somebody who can play a liaison role,” he explains.
Others are less certain that Chinese firms will try to open up internationally.
“Some Chinese firms will grow into regional powerhouses but probably not internationally,” comments Wang.
Associations with foreign firms are likely to be the norm for the near future. Recently, a number of European firms have forged alliances with Chinese practices, both formal and informal.
The development of the market will depend very much on what happens with the regulation governing practice in China. With lawyers in international firms still barred from practising PRC law and formal joint ventures with PRC firms banned, there is still a long way to go before domestic and international firms are competing at the same level.
However, the opportunities for lawyers in both segments of the market remain significant, and practitioners are confident that liberalisation will happen eventually.
Pointing to developments in Singapore and Japan as examples, Wang is optimistic that the future is promising both for Chinese lawyers and their Western counterparts. “A lot of things in China aren’t predictable,” he says. “In general, Chinese people are quite open-minded.”