[ 'Sea turtles' job choice pivotaltorise of local firms ] [ Helping a PRC industry group succeed in the US International Trade Commission ] [ Go local or international? ] [ Competition or cooperation? ] [ Rising in the East ]
For an industry so young and subject to such overwhelming political and governmental influences, it comes as no surprise that Chinese law firms have been involved in much jockeying for position. They still find themselves very much in the throes of an M&A phase that will sort out the men from the boys, and the criteria in this race for a limited number of memberships of a new lite - call them the Red Circle' firms - appear to be threefold: size, structure and spread.
Achieving critical mass
Ongoing encouragement from the Ministry of Justice for local firms to bulk up to a point where they would have the resources to compete with international firms for work on complex, multi-jurisdictional deals has doubtless been successful to an extent. Leading firms now boast lawyer counts in the hundreds, and impressively comprehensive lists of practice areas adorn their brochures.
Kevin Qian for one is in little doubt that a top tier will break away from the host of smaller firms: "Within the coming 10 years, we will see the emergence of seven to eight scalable Chinese firms with over 300 lawyers," predicts the Shanghai-based Allbright partner. He estimates that currently in Shanghai there are around 6,000 lawyers spread across more than 500 firms.
Clearly size already counts, especially on major deals where local firms are competing with or working alongside international firms with deep seams of expertise to call on. Jonathan Zhou of Fangda, for example, currently sees Beijing as having a leading pack of five firms and Shanghai two, but adds that probably only two of the Beijing firms are really at the level that constitutes a threat to the internationals. Shao Chunyang of Jun He sees the Beijing firms King & Wood, Jingtian & Gongcheng and Commerce & Finance along with his own Jun He as being ahead.
This having been said, several firms are focused more on carving a niche than cutting a swathe, and where this is the case, a dominant individual or small group of lawyers with leading reputations in a given practice area can often be found.
"It's difficult to define a top tier at the moment," says Zhang Danian at Baker & McKenzie. "You have several firms trying to offer a fully comprehensive service, like Jun He, Allbright, King & Wood, Haiwen, Zhong Lun, and Jin Mao; and then you have firms that are ahead in particular fields - Fangda for securities work, Pu Dong [Law Firm] for specialist FDI work, Duan & Duan for local government work, and so on. On top of that, you've got local litigation specialists that the international firms often work with."
Mitch Dudek of Jones Day in Shanghai says the leading firms are distinct from the crowd, and therefore form a "well-defined" top tier, but not necessarily on the basis of size. "You know who to use depending on the particular area. For some kinds of more sophisticated banking work, for example, Llinks comes to mind," he says. "They're all young firms with young lawyers - you need to know who you're dealing with." Robert Lewis of Lovells in Beijing, meanwhile, says: "A top tier of firms definitely exists. In general, the Beijing firms have had more success in expanding outside their home territory - into Shanghai, Shenzhen and Guangzhou.
In-house lawyers that ALB spoke with name Jun He and King & Wood as being the standout firms, with Jingtian & Gongcheng as close runners-up and Allbright, Fangda and Boss & Young as the leading Shanghai-based contingent. Meanwhile, King & Wood's Susan Ning sees Jun He, Jingtian & Gongcheng and Zhong Lun (all Beijing-based) as her firm's closest competitors. Lester Ross at Paul Weiss Rifkind Wharton & Garrison in Beijing also names Jun He, King & Wood and Zhong Lun, along with Commerce & Finance law firm, as being top of the pile and "trying to position themselves more broadly both domestically and internationally, establishing footholds overseas". (Jun He has a New York office and King & Wood has offices in San Francisco and Silicon Valley, for example - see map p40.) Ross also picks out Shanghai firms Llinks, Pu Dong and Fangda as leaders in financial transactions.
Partnership structure essential
Size for size's sake is one thing; being scalable and sustainable is another.
A pervading concern running through the corridors of client corporations and international law firms is to what extent the outlandish recent growth rates of local firms have been matched by accompanying development of internal management and partnership structures. After all, what is the point of having 200 lawyers under the same umbrella if they are not properly sharing clients, fees and profits as well as costs?
Most of the larger local firms seem to be taking stock of their practices in this regard now that at least some of the dust kicked up by the flurry of M&A activity over the past two to three years is settling - "They're starting to talk about it much more now," says Lewis at Lovells. And while all firms ALB spoke to claim they are indeed sharing profits as well as costs, they remain unconvinced that rival firms are doing so. Also largely unconvinced are the clients and international firms with whom they work.
"Maybe no local firm has a true partnership structure in the Western sense," suggests Jun Wei, partner and chief representative of Hogan & Hartson in Beijing. "It's because of the history. Nine years ago they all belonged to the state - it was 1994 before the first real private partnerships appeared. They were typically just three or four lawyers, each of whom had their own client accounts. It started that way and in many cases it's continued that way. It takes time to evolve."
Lewis agrees. "The vast majority [of local firms] are still operating much more like barristers' chambers than partnerships, and they themselves identify this as an area for improvement," he says. "The fundamental step of sharing profits is a difficult one to take." Lewis singles out King & Wood, Jun He and particularly Llinks as being the exceptions to this rule, adding "but there will be others - I'm impressed with how well they understand the need to move in that direction."
Allbright's Qian agrees about the time factor. Citing the example of his former firm Pillsbury Winthrop (then Pillsbury Madison & Sutro), which he says has had 130 years of history through which to perfect its current highly complex partnership structure, Qian explains: "As a firm, we do share both costs and profits, and we have lateral partners and the like, but some partners and groups work together more than others. We're looking to integrate more We're still working on it."
A few floors down the immense Jin Mao Building from Allbright's offices, Zhang at Baker & McKenzie comments that the local firms "still have some way to go" to achieving a sound management structure. "In many firms there's no clear direction or distribution of work. There's not much cross-selling or referral going on," he says.
"As the Chinese legal system gets more sophisticated, you can't operate as a one-man shop." This view is mirrored by Ross at Paul Weiss. "A lot of individual partners still practise on their own, which is why it's still important to identify the individual as much as the firm," he says.
Others lawyers make fewer concessions to weakness in this area. Shao at Jun He claims his firm constitutes a true partnership, sharing profits, mobilising partners across offices, and focusing on training lawyers. His firm posted a 60% revenue increase last year and has grown at 50% "every year". Similarly, Zhou at Fangda sees his own firm as more mature than most in terms of structure, due to its employing a lockstep approach to profit sharing, and taking a guarded approach to mergers at the expense perhaps of a fully comprehensive service. "We're looking for organic growth," he says. (The firm recruited 10 new associates last year to add to its stock of 40 lawyers.) "Big isn't necessarily beautiful, and we see high risk in terms of management and quality of advice in rapid expansion through mergers." He reckons only two Shanghai firms are true profit-sharers, with only six in the whole of China.
King & Wood's Ning stressed her firm's "one-stop shop" strategy, and consequently that "the integration of resources and expertise is now more the focus". In its 10th anniversary year, the firm is now reaching its "critical mass", she says. Last year was the fastest year of growth for the firm - it recruited around 20 partners, most via three mergers with smaller firms, taking its total partner count over 70. "There are always so many new faces at our monthly happy-hour party, it's hard to keep up," she says. But in how many ways?
On the question of whether partnership issues are actually holding Chinese firms back in terms of winning work, however, Jun at Hogan & Hartson notes that clients aren't always fully in tune with the internal workings of the firms they instruct, and that in any case silo mentalities aren't by any stretch of the imagination absent from long-established Western firms. Charlene Zhu, senior counsel with Ericsson in Beijing, supports this view. "We don't necessarily know how good each firm's internal structure is. We ask, but whatever the answer, we'll find out sooner or later. And the firm won't get a second chance if the service they offer isn't good enough," she says.
More certain is that local firms have taken and are taking a Great Leap Forward towards more sophisticated management. As Neil Hyman of Slaughter and May in Hong Kong puts it: "Chinese firms still aren't as collegiate as US or UK firms, but there's been significant change in the past five years. You can see it in meetings - where as before there'd only be the single contact partner in there, now you see several lawyers. Chinese firms are making the cultural change required to become viable long-term providers of a quality service."
Beijing or Shanghai? And what about the provinces?
Currently, the dichotomous nature of the local industry is undisputable: it's a tale of two cities. Say Jun He and everyone knows it's a Beijing firm; say Llinks and everyone knows it's a Shanghai firm - in spite of the fact that each has an established office in the other's home base.
Beijing had a headstart on Shanghai - its private law partnerships started operations in the early nineties as opposed to 1997-8 for Shanghai firms - and, as Steven Robinson at Hogan & Hartson puts it, "Beijing firms tend to be bigger and stronger; some Shanghai firms have good reputations but they tend to be provincial, regulation-wise." And because China still has a planned economy, major national decisions and projects tend to be centred on Beijing, even though decentralisation is ongoing.
Many Shanghai lawyers, though, will tell you their city is catching up fast. "Actual local demand, the Olympics aside, is quite small in Beijing - companies had their HQs there but their operations were outside the city. In Shanghai, the local market is much stronger - there are good projects right here in the city," says Zhou at Fangda, who eyes the forthcoming Shanghai Expo 2010 with relish. Because the Shanghai municipal government will use the Expo as a spur for further large-scale urban infrastructure development as well as event-specific transactions and construction, many lawyers put it on a par with the Beijing Olympics in terms of total legal work to be generated.
"The quality of people in Shanghai is very high," continues Zhou. "There are 50 colleges here, thousands have studied overseas, and they teach English in the primary schools now. We can pull in the best talent from the whole nation."
Its stock exchange, one of China's two, puts Shanghai at a natural advantage in complex financial transactions, and the city's lawyers intend to leverage this advantage against the potential flood of financial work that could come with WTO-related deregulation in fund management, securities, insurance and the like.
The question, however, of to what extent leading Chinese firms can or want to break away from being pigeon-holed as either a Shanghai or a Beijing firm is one that relates directly back to the partnership issue.
"At the moment, the centres of demand for legal services are Beijing, Shanghai and Guangdong [these three account for half of China's economic activity] Yes, the pecking order is based on size and coverage, and some firms are trying to have a larger footprint; but the challenge is to move the quality up a level across that whole footprint It's getting better month by month, and the prospect for local firms is fantastic, but for the time being you can't have enough brand confidence in a firm for nationalising to work," says Lewis at Lovells. In short, consumers of legal services are still choosing lawyers not firms; so what's the use of a national brand?
Nevertheless, several firms, perhaps those who feel more comfortable with their management structures, are expanding geographically from Shanghai and Beijing. Fangda, for example, has opened a Shenzhen office (but doesn't expect many firms to be opening offices in other provinces); Jun He now has offices in Haikou, Shenzhen and Dalian; and King & Wood is in Chengdu, Guangzhou and Shenzhen.
"Opening our offices in Shanghai and Guangzhou was mostly due to strategy," says Susan Ning at King & Wood. "But the Chengdu office, for example, was part strategy, part accident. The idea initially came form a client, and we saw the importance of development in western China." Overall, Ning characterises her firm's geographical expansion as being driven by the market, but makes the point that the firm's strong partnership structure has made expansion more workable.
There is also the question of to what extent offices outside Beijing and Shanghai are actually necessary. Zhou at Fangda reports that half his firm's lawyers are, at any given time, on the road working on projects anywhere from a few miles outside the city to thousands of kilometers away in China's emerging western provinces. And while several in-house lawyers emphatically expressed a preference for using litigators based in the locality of where the proceedings are taking place, Lewis at Lovells reports from his time in-house at Nortel successfully employing trusted Beijing litigators right around the country - or at least letting them make the decision, where local connections were vital, to refer the work. This having been said, one in-house lawyer tells ALB: "The more offices a firm has, the better - they must have both a Shanghai and a Beijing office as a minimum."
And as a final piece of context, consider that to have a presence in every province in China, a firm would need around 30 offices, some of them catering for provincial populations of almost 100 million.