Last month The Lawyer launched a ground-breaking report on the Asia Pacific 150, providing a unique Pan-Asia overview of the region’s top local and international law firms.
Since there is not one unified Asia-wide legal services market, but a collection of individual markets across more than a dozen key countries and territories, there is still an opportunity to consider how domestic and international firms stack up in each separate market.
There is also more than one way to skin the proverbial cat. To take a slightly different approach than the extraordinarily comprehensive Asia Pacific 150 report by The Lawyer, I decided it would be useful to take a closer look at the Chambers rankings of both Chinese and international firms in China. While the individual Chambers law firm rankings are interesting in and of themselves, the real value is in the larger picture of the China legal services market which emerges as we consider the broader array of data points in a more complete context.
I will first note some of the general trends in the market in this first blog in this series, followed by a detailed look at the top 20 Chinese law firms and top 20 foreign law firms in China (based on this analysis of the Chambers rankings) in the following two blog entries, and in the last blog posting in this four-part series, I will make some projections on where the China legal services market may be heading.
Before I start, though, a word or two on why I use the Chambers rankings as the basis for this analysis may be in order. Quite simply, as will be explored in more detail below, in China, at least among the domestic firms, size and scale do not have the same direct correlation to quality and scope of services as will be the case in other markets or for international law firms in China, so it is useful to draw on some additional data points to assess relative market positioning in terms of quality. Of all of the legal services directories, Chambers has the broadest coverage in China, and the results are generally in line with what most of us in the market observe day to day. Having said that, I was surprised by some of the results, and some of you may be as well.
It is also important to point out that this is not a definitive study and is not intended to replace The Lawyer’s Asia Pacific 150 report, but only to provide some additional market data points specific to China. The Chambers rankings are simply a useful benchmark from which we can make some approximations as to relative market positioning in terms of quality and breadth of services. The limitations of this exercise should be obvious to all informed readers, but the fact remains that the data points cited in this series do highlight some interesting market trends.
Here are some general points which merit mention.
Domestic vs. international firm rankings
Chambers maintains separate rankings for domestic Chinese law firms and international law firms in China, which makes sense since domestic and foreign firms tend to occupy different market segments, although there is more and more overlap as the domestic firms continue to move up market and, in the absence of sufficient super-premium work, the international firms continue to reach down market into mid-cap deals.
The international legal services directories did not always separate domestic and foreign firm rankings in China. In the early to mid 2000s this created some consternation as some of the top domestic firms seemed to be ranked higher than many of their foreign counterparts, when the clear market consensus at that stage was that the domestic firms tended to play more of an ancillary role as local counsel on deals led by the foreign firms, so when I was at Lovells I was one of the foreign lawyers who campaigned for the directories to do separate rankings for domestic and foreign firms (which, not so coincidentally, also had the effect of moving Lovells up the chart as the top Chinese firms were relegated to the “kids’ table”).
I think the Chinese firms are now quite content with this arrangement, but for completely different reasons – at this stage the top Chinese firms are in relative ascendancy, particularly in terms of mid-cap work (which dominates the market) as well as litigation and regulatory advisory work (where the local firms have a protected market position), and so are happy to be evaluated head-to-head only against their domestic law firm peers and avoid what otherwise would be apples-to-oranges comparison with foreign firms that have quite a different profile and position in the market.
This separation of rankings does create some continuing challenges. For example, prior to this year, Chambers struggled to know what to do with senior foreign lawyers such as myself who had moved to Chinese law firms. Others in the same category would include Carl Cheng (formerly of Freshfields) in Zhong Lun’s Shanghai office, Meg Utterback (formerly of Pillsbury Winthrop) in King & Wood Malleson’s Shanghai office, and more recently Tom Jones (formerly of A&O), now of Fangda in Beijing, and Steve Toronto, who just left his position as general counsel for NBA China (prior to that he headed up the Beijing office of MoFo for many years) to join King & Wood Malleson in Beijing. Previously, since we were not Chinese lawyers we were not included in the rankings for our new firms, and since we were no longer in foreign firms, we were not rated as international lawyers – we were ghosts. Finally, Chambers decided to find a home for us in our new firms’ rankings, so we have now re-emerged from professional purgatory.
On the other hand, Chambers now appears to be somewhat conflicted about how to treat King & Wood Mallesons under this scheme. The current result is that KWM is ranked in both the domestic and international law firm categories, with essentially the legacy K&W side of the firm (referred to in this series as KWm) falling on the domestic side of the ledger and the original Mallesons side (or kwM) still being treated as an international law firm in China. While KWM may not agree with this arrangement, it has its own logic to it, since the strength of the KWm side is based in the mainland China offices while the kwM part of the firm is centered mostly in Hong Kong. More on this in later parts of this series.
Hong Kong vs. Mainland markets
This leads nicely into the next point – Chambers now treats Hong Kong as a fully integrated part of the mainland China legal services market for purposes of its rankings of the international law firms in China. This is a bit of a moving target in my view, and there are valid points to support such integration and equally valid counterpoints to suggest that Hong Kong is a completely separate legal market.
In support of the Chambers position would be the fact that more and more of the work of the international firms in Hong Kong is China-related, with more of the regional Asia work being done out of Singapore and other regional offices. It is also true that a growing number of China deals have a Hong Kong element, and Hong Kong arbitration is the preferred dispute resolution venue for China projects.
On the other hand, true China work is done primarily out of Beijing and Shanghai, with Hong Kong playing primarily a supporting role, and that role continues to become more specialised, being comprised more of the true Hong Kong elements of a China-related deal rather than the core China advisory or deal work. Hong Kong also has a separate legal system, and is a much more intensely competitive legal services market – it is very hard for late entrants (including the top Chinese firms) to make a serious dent in the market with so many top international firms firmly entrenched at the top of the tables.
Another indicator is transactional language. Many of the managing partners of global law firms I have spoken with recently have remarked how more and more deal negotiations in Hong Kong are conducted at least in part in Mandarin Chinese. But that means that English is still the default deal language in Hong Kong. The reverse is the case in Beijing and Shanghai – one expects that Mandarin will be the language of negotiation, or at least the negotiations will be conducted in dual language with translation, while it would be much less common (in fact quite rare) for negotiations to be conducted solely in English. (And if you are outside of Beijing or Shanghai, there would be no expectation that negotiations would ever be conducted solely in English.)
This is reflected in the staffing of foreign law firms offices in Hong Kong as compared with Beijing and Shanghai. Hong Kong still provides a comfortable home for non-Chinese speaking international lawyers, but this group of foreign lawyers is not well represented in Beijing and Shanghai, not just due to linguistic reasons but also because of the differences in the legal systems and the general way in which business transactions are conducted in China as opposed to Hong Kong. Even the way deal documents are drafted differs significantly from Hong Kong to mainland China, not just structurally but also in terms of written Chinese.
So the Chambers’ position to lump the Hong Kong and mainland China markets together (for the international firms but not the domestic Chinese firms) is open to debate, but in the end, this formulation is another driver for assessing domestic and international firms separately since the international firms’ relative positions in the broader China market are heavily influenced by their market position in Hong Kong, while the domestic firms are evaluated only based on their capabilities in mainland China, and principally in Beijing and Shanghai.
As a side note, Chambers has started to rate firms in certain regional markets within China, but other than Shenzhen (home to the second stock exchange, where all of the top national firms have a competitive office), it is not clear that these regional rankings are all that instructive. For example, ZL and KWm both have top-rated presences in Guangdong and Sichuan and no presence in Zhejiang, but we would not suggest that Jun He (band 2 in Guangdong and no presence in Sichuan or Zhejiang) and Fangda (not ranked in any region outside of Beijing and Shanghai) are somehow incapable of running deals in other regions of China. Similarly, none of the top national firms in China would concede anything in the regions to firms like Grandall, Da Cheng and Yingke, all which have franchise operations across China (Grandall is ranked band 1 in Guangdong, Sichuan and Zhejiang, while Da Cheng has only a single band 3 ranking for Sichuan and Yingke has no rankings for its regional offices).
Consolidation of Positions at the Top of the Market
When composite rankings (using weighted scoring) are taken into account, there are clear break-away groups of law firms leading the way in the China market, with a leading group of four firms on both the domestic law firm side (Zhong Lun, KWm, Jun He and Fangda), and another group of four firms on the international law firm side (Bakers, CC, Links and A&O). On the international law firm side, within the leading break-away group of four firms, there is identifiable separation between the top two firms (Bakers and CC) and the next group of two firms (Links and A&O), followed by a further drop-off for the rest of the top 10 firms in the rankings, while on the domestic law firm side, the top four is a bit more of a 3+1 configuration (with Fangda chasing the other top three firms in the number four slot), with a much steeper drop-off thereafter among the trailing domestic firms (see charts in later blog entries).
Such composite rankings clearly reward the larger full-service firms which have the potential to be ranked in more practice areas. This accounts for why Fangda ranks below ZL, KWm and Jun He – Fangda has consciously adopted a narrower platform and is extremely competitive in each of the disciplines in which it actively practices. But much the same could be said for Jun He, which is also smaller in scale than KWm or ZL, but is in a virtual statistical tie with KWm, which is significantly larger than both JH and ZL. (Of course, rankings are not the only measure of success. Revenues per partner/lawyer are higher at JH and Fangda, given their focus on more profitable practice areas and heavy reliance on foreign clients, while ZL has higher profits per partner than KWm due to a different approach to cost management.)
A similar observation can be made about some of the China offices of the top New York firms, like Skadden, Sherman & Sterling and Simpson Thatcher – these firms are fabulously successful in China as super corporate boutiques, but since they do not aspire to be full-service in China they do not show as well when composite scores as used. I suspect this is why Chambers does not present composite rankings, because it is not clear that a band 1 ranking in shipping is the equivalent of a band 1 ranking in corporate M&A.
Still, as long as we understand the obvious limitations of this approach, there is value in looking at composite scores as this presents of picture of who in the market offers both breadth of practice and quality of service. After all, the rationale for the growth of full-service business law firms is the ability to provide the full range of legal services at the highest standard of quality under one roof. Composite rankings present a useful and informative snapshot of who is in the best position to deliver top quality services across the spectrum in the market. And in this case, all of the leading firms are very strong in all of the traditional core corporate and banking practice areas, so are not rising to the top of the table on the back of a string of top ratings in ancillary practice areas alone.
Moreover, the distinct advantage in the rankings that the leading groups of firms have over the rest of the market suggests that the Matthew Principle (unto those who have shall be given and from those who have not shall be taken away) may be in operation in the China legal services market and the momentum of the leading group may be difficult to stem. Having said that, as will be noted in subsequent blogs in this series, there have been some dramatic changes in the rankings in the last 5-10 years on both the international law firm side and the domestic law firm side, so we cannot rule out further shifts going forward.
The UK Firms Lead the Way on the International Side
Nine of the top 12 international law firms in the composite rankings are UK-based firms, while the remaining eight firms bringing up the rear in the second 10 are all from the US (charts to come in subsequent blog). This is an even higher concentration of UK firms at the top than 10 years ago. The dominant position of the UK firms in China reflects the historical strength of UK firms in Hong Kong, which is one of the reasons that I opted to join Lovells rather than returning to a US firm when stepping down as Asia general counsel of Nortel Networks (may it rest in peace) in 2001.
But even this fact does not tell the entire story, and it is probably more accurate to say that the top twelve firms are all able to draw upon strength in their respective Hong Kong offices to provide a foundation for their overall China operations (and since the Chambers rankings treat Hong Kong as an inseparable part of the China market, strength in Hong Kong is obviously recognized and rewarded in the China rankings overall). More on this point in part three in this series.
The Beijing Firms Lead the Way on the Domestic Side
This is a point I have made in prior blogs – many foreign lawyers assume that Shanghai is the New York of the Chinese legal profession and Beijing is the Washington D.C. equivalent, but the indisputable fact is that the Beijing firms dominate the Chinese legal market. Of the top 20 domestic law firms, 16 are based in Beijing. China has not yet achieved full “rule of law” but has a variant that is more aptly described as “rule by law” or “rule by approval”, and since Beijing is the seat of government it is also the ultimate source of law, which emanates not just from the legislative bodies but also from the powerful ministries. Beijing firms seized the early advantage they had by virtue of their proximity to the key government departments and ran with it, never looking back.
One telling fact is that of the Shanghai-based firms, only Fangda has a competitive Beijing office, while all of the top Beijing firms are strong competitors in Shanghai. In that regard, Beijing is more like New York – it is very hard for other domestic law firms from other cities to crack into the top tier of the Beijing market. That is unlikely to change in the near or even the medium term.
Size Matters – Except for Domestic Chinese Law Firms
The Lawyer’s Asia Pacific 150 report ranks firms based on number of lawyers for the very sensible reason that this is a more reliable basis for comparison across the region since revenues and profits will differ from market to market within the region. This works very well for international firms who base staffing levels on demand for legal services which can be delivered in a profitable manner. This connection breaks down among many Chinese law firms where the norm (certainly outside the top tier of domestic firms) is for each partner, rather than each practice group or office, to operate as an individual profit center.
This is best demonstrated by the fact that neither of the two largest Chinese law firms, Yingke and Dacheng, which are also the two largest firms in the Asia Pacific region, rank in the top 10 Chinese domestic firms based on the Chambers rankings. In fact, one of the two fails to rank in the top 100 domestic firms based on the Chambers rankings. The Lawyer Asia Pacific 150 report already clearly notes that size does not always equal quality, citing revenues per partner and other factords, but the Chambers rankings underscore the point even more dramatically.
At the same time, if one were to rank the domestic Chinese firms by taking the ratio of total Chambers rankings to number of lawyers, Fangda and Jun He would jump to the top of the tables given their high number of rankings notwithstanding their relative smaller size and scale. So this is just another example that what works outside of China does not always work in China.
These observations should be sufficient to set the stage for the more detailed analysis to come. Coming up in part 2, we will take a closer look at the top 20 Chinese law firms based on the weighted scores from the Chambers rankings. As will be seen, after the top 10-15 firms, the field thins out very quickly on the Chinese law firm side. In the medium to longer term, that may prove to have significant implications for the development of the legal market in China.