Dewey Ballantine last week became the latest firm to shut its Hong Kong office. The New York firm's announcement comes hot on the heels of CMS Cameron McKenna's shock decision to abandon mainland China and to reduce its Hong Kong office to an insurance boutique, to be run by one partner, Tim Ingham, and a small group of associates. The move will leave 40 of the firm's Hong Kong-based lawyers, including senior partner Christopher Clarke, without jobs.
Dick Tyler, Camerons' London managing partner, said that following a detailed review of the Hong Kong market, the firm concluded that there were no signs of a recovery. It decided instead to direct its resources into Europe. He said the firm was leaving Beijing because the office's main function was to support Hong Kong.
But one Hong Kong-based partner at another firm, who did not want to be identified, said: “Camerons has been very successful in Hong Kong, especially in construction, and it did very well during the boom. But since the 1997 crash the property market has been very flat, so there hasn't been much work around. So in recent years the firm has tried to diversify. But that takes time and investment.
“But I'm not sure if this is simply a reflection on the state of the Asian economy. It's probably more a reaction to what's happening in London. Overseas offices are expensive – they are a luxury that most firms cannot afford in the current economic climate.”
Tyler rejected both arguments. He said the Camerons Hong Kong office never undertook much construction work, and it only generated 15-20 per cent of the office's fee income. He also said the firm was not scaling back in Hong Kong and China to shore up profits in London.
Tyler refused to comment on the Hong Kong office's profitability, but did admit that, although turnover was up, so too were the running costs, and local partners admitted to a downturn in work.
Their withdrawals are in stark contrast to the strategies employed by the rest of the international legal community, which has been gearing up to exploit the prosperous Chinese economy following the country's entry into the World Trade Organization. It took Norton Rose just two days after a restrictive covenant preventing it from practising in Hong Kong expired to open an office there last April. The firm had previously quit the region in 1998 after its joint venture with Johnson Stokes & Master terminated.
Dewey, which declined an interview with The Lawyer, said in a short statement that its decision to pull out of Hong Kong – its only Asian office – was part of a continued effort to reassess the firm's presence the region. The firm says it is looking at various options, including opening one or more offices in China.
The firm's Hong Kong office, which was launched in 1994, is headed by John Otoshi, who will be relocated. The fate of partner David Zhang and the office's six associates is not yet known.
The office specialised in capital markets work, M&A and private equity. Although the firm was ranked a creditable seventh in Thomson Financial's 2002 league tables for announced Asian M&A deals for value, it was involved in just two deals. Its involvement in Cathay Financial Holding Co's acquisition of United World Chinese Commercial Bank in Taiwan was enough to give it a deal value of £1.846bn for the year. In contrast, Linklaters, which topped the deals tables, was involved in 50 deals with a combined value of £11.066bn.
Robert Lewis, head of Lovells' China practice, commented: “Dewey Ballantine is an outstanding firm, but overall it's not seen as being significant in the Chinese market.”
Dewey is not the first US firm to fall victim to the perilous Asian economy. At the end of 2000, Baker & McKenzie (B&M) and Shearman & Sterling laid off almost 50 staff between them in Hong Kong. Then last year Pillsbury Winthrop closed its Hong Kong office, blaming a continued dearth of capital markets work.
Tim Parkes, Herbert Smith's managing partner in Asia, said that he would not be surprised if more US firms pulled out, as they rely very heavily on their US clients investing in the region.
By contrast, UK firms have in general thrived in the region, often because they can offer both UK and local law advice. Jones Day Reavis & Pogue, Sidley Austin Brown & Wood and White & Case are among the handful of US firms with local law capability.
In China, there was a great deal of enthusiasm for second office licences, granted to a number of firms last December by the Chinese Ministry of Justice. The firms included B&M, Herbert Smith, Jones Day, O'Melveny & Myers and Vinson & Elkins.
Camerons, though, has bucked the trend by announcing plans to retreat from the country. As revealed in The Lawyer last week, the firm, in addition to scaling down its Hong Kong practice, is winding down its fledgling four-associate Beijing office and will continue to service clients through the recently opened Shanghai office of its French ally Bureau Francis Lefebvre.
Inevitably, the strongest-performing UK firms are those with a large contentious practice, including Herbert Smith and Richards Butler.
Camerons, though, is not the only UK firm reviewing its overseas strategy. Denton Wilde Sapte (DWS), which has more than 50 lawyers based in Hong Kong, is also reviewing its international network. Despite recently hiring four litigators and relocating a number of partners to Hong Kong, the office failed to make a profit in 2002.
The potential of the Chinese economy, however, is not in dispute. China currently has one of the fastest-growing economies in the world. And according to the Thomson Financial Asian M&A league tables, China was the busiest country in the region, with 770 deals, totalling $25.11bn (£15.47bn), announced last year.
Initial public offerings (IPOs) are predicted to rise in 2003, particularly in insurance. For example, China Life Insurance Co and Ping An Insurance are both reportedly hoping to list this year.
It is those firms with UK and Hong Kong law capabilities – predominantly UK practices – that are tipped to win the bulk of this work.
Looking back to 2002, Allen & Overy (A&O) and Clifford Chance, for example, had the key advisory roles on the Bank of China's IPO, while Freshfields Bruckhaus Deringer won the work on China Telecom's listing. On the other hand, Shearman and Sullivan & Cromwell's involvement was restricted to providing US law advice.
While some UK firms, particularly A&O and Simmons & Simmons, continue to exercise caution, for the time being their prospects still look better than those of their US rivals.