After much gamesmanship, hostilities finally broke out between the US-led coalition and the Iraqi regime on March 20. Despite the build up, the commencement of military action seemed to take everyone by surprise.

Australian Attorney-General Daryl Williams might include himself in that list. Scheduled to speak on the morning of March 20 at a conference in Sydney, Williams' absence, explained by Ian Govey, general manager of Civil Justice and Legal Services in the Attorney-General's department, was due to "Cabinet commitments".

Although not there in person, Williams' message to the audience at the conference on buying and selling legal services into Asia, organised by the International Legal Services Advisory Council (ILSAC), was clear: Australia's leading law firms should be more aggressive in seeking opportunities in the region.

Australia's balance of trade in legal services has grown year on year since the Australian Bureau of Statistics first started collecting data on legal exports in 1987/88, with the legal services sector consistently exceeding all other professional services such as architecture, accounting, engineering, management and surveying.

With ILSAC estimating that no more than 140 Australian law firms are engaged in international trade, Williams believes there is no reason why that figure should not be nearer 400.

Speaking on Williams' behalf, Govey said: "The legal profession must identify export markets and develop the right strategies, partnerships and strategic alliances that will allow it to penetrate foreign markets."

Significant growth in exports would not occur, added Govey, "unless the profession takes a more active interest".

Among the audience were representatives from each of Australia's major commercial law firms. While some have aggressively expanded overseas offices, others have formed strategic relationships with overseas partners. Previous experience has taught all, however, to tread cautiously.

Below is an extract from a transcript of the panel discussion at the ILSAC conference, which examined how opportunities in Asia might be converted from the perspective of a general counsel, a legal services supplier, and Austrade.

Chaired by ILSAC member and chief executive partner of Mallesons Tony D'Aloisio, the panel included: Ken Broda, CEO of Deutsche Bank Asia in Hong Kong; Linfei Liu, a partner with Jun He Law Offices in Beijing; David Graham, general counsel and managing director of Morgan Stanley in Hong Kong; Lucien Wong, the managing partner of Singapore's Linklaters Allen & Gledhill; and Martin Walsh, the national manager of Infrastructure at Austrade.



Panel Discussion

D'Aloisio: Ken, if I could throw this over to you. With the war now occurring in Iraq, what do you see as the economic consequences for the region?

Broda: Well, it depends on what the outcome of the war is: how long... how short... how clean... how dirty. So, you can't give a precise prediction. But I would say, on a relative basis, the region is well placed. The major concern [it] has is of course for the blockage of oil exports, because the region is very dependent on oil as a major energy source. And the storage capacity of a number of the major countries in the region is not that great. So, if there was a drawn out conflict and a disruption of oil supplies, that would be the main area of concern.

The financial markets across the world have already built in a short war scenario. That's why we're seeing a major rally in world stockmarkets. But again, if that's not the outcome, you'll see that reflected in poor stockmarkets. And you'll see it reflected in the currency markets as well. But, overall, with all the uncertainty that we have... Asia should not be materially affected, subject to the comments I've made.

D'Aloisio: Martin, do you have any comment?

Walsh: Comparing what happened after September 11 where, in China at least, there was not even a dent in the volume of foreign investment going into the country... this conflict, no matter how long it is, probably will not affect this. It could even strengthen the image of China as a safe haven for international finance.

D'Aloisio: Staying with the business scene in Asia, there has been talk over the years on whether Hong Kong will maintain its position as a financial centre of capital markets or whether that will gradually shift to Shanghai. And whether the investment banks will maintain substantial parts of their operations in Hong Kong or whether they will move into China. What's the panel's perspective on this? Are we looking at a gradual shift to Shanghai and China or, for the next five or 10 years, [will] Hong Kong remain the dominant financial market in the region? Ken, do you want to kick that off?

Broda: I can't put a precise timeline on this, but there's no doubt that the objective of the Chinese Government is for Shanghai to be the major financial centre for greater China, to be the major financial centre for Asia, and to be one of the world's major financial centres.

We have just fewer than 100 people now in our three branches in China. So, there is a drift. Banks are moving more and more offshore, cross border. Onshore, a lot depends on the licensing: renminbi licences, internet banking licences, the securities JVs etc. But really, it does come down to currency convertibility, the QFII initiative, and then, finally, social infrastructure: because you will only get people to move with their families. But certainly in Shanghai that is well underway.

I don't know if it's five years or six years away or what the timeframe is but there's an inevitability about it. I don't think that means necessarily the demise of Hong Kong. Hong Kong is looking at tourism, education and other services to maintain its position as a major centre.

D'Aloisio: David, do you have a perspective on this?

Graham: I would really echo a lot of what Ken has said. There is inevitably going to be a gradual move towards Shanghai from Hong Kong. It is, to my mind, a five to 10-year horizon. I don't think it is immediate. All of the investment banks are clearly looking very carefully at China and they're moving from an offshore model to an onshore model. But a lot of the basic infrastructure, including things like the legal services, means that people are not going to be jumping in very, very fast.

I'm not sure there is a 'first mover' advantage there in the way that there has been perceived to be in other markets. So I think people will tread very cautiously.

Before we had the handover... in 1997, there was a couple of years where we thought Singapore might take over as the new Hong Kong - as investment banks moved people down to Singapore to hedge their bets if there were difficulties after the handover. Ultimately that has not materialised and people have now moved back to Hong Kong.

I think what you are seeing however in terms of Hong Kong as a centre - and certainly Morgan Stanley has been looking at this - is that it is a very expensive place to do business. Frankly, in the current economic environment, it is an uneconomic place to do business for a large part of what you do. Therefore, there has been a gradual and continual moving of, particularly, back office type functions. For example, with people who do not need to be in Hong Kong to meet with Hong Kong based clients - to move those people to lower cost jurisdictions.

At Morgan Stanley, we have operations, for example, in Sydney where we have some of our IT and human resources people who were relocated and who perform a regional function. So I think there will be a gradual reduction in the types of people and the size of operations in Hong Kong, partly because of this outsourcing to less expensive jurisdictions, but also because of the gradual move to putting more resources on the ground in China.

But I still think we have a long way to go before China can really match what Hong Kong offers for the international community. I do think a gradual move in that direction is at least five or 10 years down the road.

D'Aloisio: Linfei, Jun He operates out of Beijing and Shanghai, so you must have looked at Hong Kong as another place you might set up business. What is your perspective about Hong Kong and its future?

Liu: I agree with what has been said, but I'm a little more pessimistic about the possibility of China taking over from Hong Kong as a financial centre. I think it will take at least 10 years, maybe even more.

Many factors will come into play. For example, you will need to have a well-trained population providing financial services, a large legal population etc.

D'Aloisio: A supplementary question to that is that firms, when they go into China, are asking... do they go to Shanghai or to Beijing? What's your view on the relativities of those two cities?

Liu: I think it's better to have two offices - one in Shanghai and one in Beijing. If you have to make a choice between those two cities, I think it will come down to what your target area of services will be. For example, if you are talking about providing services in a much-regulated area, you should probably be in Beijing because that's where the rules are issued. And even given the fact that Chinese rules are, typically, not terribly well drafted, it is almost always necessary that lawyers will have to meet up with officials for some sort of consultation i.e. what a particular clause in a rule may mean.

Shanghai, being the largest city but quite a long way away, obviously would not provide the same degree of convenience to meet with the relevant authorities.

D'Aloisio: Lucien [Wong], looking at it from the perspective of a Singapore firm who may follow its clients, how do you view Hong Kong and the relativities of Shanghai and Beijing?

Wong: We wouldn't look at Hong Kong at all. We wouldn't follow our clients to North Asia. We'd probably look at China and in particular Shanghai, rather than Beijing. But there's no justification yet for Allen & Gledhill to have a Shanghai office... we'll have a Shanghai presence by sending one or two of our lawyers to the Linklaters' Shanghai office to serve our clients in China. That is probably the strategy that we'll adopt for the time being unless our business in China justifies the opening of our first overseas office.

D'Aloisio: Two years ago, and for some time, Singapore was really seen as an alternative to, and could in fact overtake, Hong Kong as a financial centre. Is that happening and if not, is there disappointment? What is the expectation there?

Wong: I think with Hong Kong and Singapore, there's always going to be competition between the two centres. In some areas of business, Singapore will have an edge over Hong Kong, and in others... no.

In these tight economic conditions, the investment banks are pulling back some businesses to Hong Kong and consolidating those business units. But some have pulled back, for example FX Trading, to Singapore. So I think it really depends on the business.

Graham: I think I would agree with that. The greater opportunities are seen in the north Asia countries. They're seen in Korea, they're seen in China.

The south east Asian countries, which are obviously better serviced out of Singapore - Malaysia, Indonesia, the Philippines, Thailand - they have more difficulties. Frankly, there has been much less business coming out of those jurisdictions in the last two or three years. Although the prospects are perhaps better in one or two of [them], it is still very difficult to ignore the north Asian jurisdictions if you've got limited resources and you need to cut your costs.

Singapore has, from my perception, suffered a little bit from what has been going on in surrounding areas and from the fact that life in Hong Kong, after the handover, has gone on pretty much as it was. There was no huge change. Life is pretty much the same other than the general economic downturn. So I think there are, probably, issues for Singapore going forward. Equally there are issues for Hong Kong, but I think they are more China issues rather than south east Asian issues.

D'Aloisio: Ken, do you have a perspective on that?

Broda: Well, I think geography has driven a lot of this, with Hong Kong's proximity to China and Korea. In asset management and some of the cash management businesses, Singapore is still at quite an incredible height. But, as David mentioned, we're all looking at hubbing, consolidating and outsourcing. And when you're talking about outsourcing and hubbing models, there are three areas you look at: Singapore, Sydney and India - and that can only be in Bombay or Bangalore.

The way I see it, in terms of the major processing that's going on, I think India has very clear-cut advantages and I think you'll see far more outsourcing and far more hubbing and therefore a transfer of headcount - not only from Hong Kong and Singapore and other parts of the region, but globally.