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 élite - 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.
'Sea turtles' job choice pivotal to rise of local firms
Many are the highly educated and often experienced and accomplished lawyers returning to China to practise - "Our roots are in China - it's very natural for us to come back," says one lawyer. After the family reunion, this select group of people, often referred to as the 'sea turtles', face a choice: join (or get a transfer within) an international firm, where exposure to the highest level of work is excellent and the salary is high; or head to a local firm, where status and recognition are likely to be more commensurate with the lawyers' credentials. According to the lawyers within both local and international firms in China with whom ALB spoke, more and more are opting for the latter. And for good reason.
Within local firms, which due to broader political factors have very short histories, lawyers can become partners very young. "They've had exposure to high-value, complex deals overseas but also have a good grip on local business and culture," says Jonathan Zhou of Fangda, which receives hundreds of CVs every week from Chinese lawyers overseas wishing to return. "Nevertheless, whereas a law degree and strong English skills might in the past have been enough for a lawyer to go straight in at partner level, now local firms require people to be at a more senior level, to have local experience, and to be fully up to date with Chinese law. But their chances of making partner are still much greater than in the international firms." It is a stated element of Allbright's now "more organic" growth strategy, for example, "to focus on young lawyers and make them partner".
Clients among corporate legal departments - themselves often returnees - see the trend for overseas-trained lawyers to join local firms as increasingly obvious over the past year or so. "It's very hard to make partner in an international firm," says Chen Yuanxing of Dupont in Shanghai. "There's more ownership and more opportunity available in a local firm. You also get a greater feeling of accomplishment, of validation." Along with this comes greater flexibility in terms of fee-setting, and less pressure on billable hours. "You feel you can make a difference," he says.
Chinese lawyers opting to join an international firm will most likely be at a more junior level. They will be attracted by more money in the short term, and the chance to gain experience of working for foreign clients on deals the complexity of which is still seldom within the scope of the local firm. To do so, they must surrender their local practising certificate (they don't, however, have to surrender their Chinese law qualification).
However, there are trade-offs. By surrendering their practising certificates, these lawyers are narrowing the range of work they can take on - litigation, for example, can only be taken on by those practising local law. And there's the question of status and mobility. "Some international firms have HR issues," says Shao Chunyang of Jun He in Shanghai. "They hire Chinese lawyers to do the research into local law, but handle the management and marketing themselves - even though they may not speak Chinese or have a good understanding of the culture."
Of course this is not to say there aren't ambitious and consummate Chinese lawyers plying their trade at high levels within international firms, and doing so with the recognition they deserve. One such lawyer is Zhang Danian, managing partner of Baker & McKenzie's Shanghai office. Zhang himself, however, points to the fact that some of his classmates from Duke have now left UK and US firms in favour of locally-based concerns.
For most returnees, the dilemma of whether to work for an international or a local firm will be a pleasant one in which to find themselves. But one thing is for sure: their contributing expertise to the latter is swinging the balance of power in the Chinese legal services market.
Competition or cooperation?:
How local and international law firms are dividing up the fruits of China's boom
"Any international firm that considers itself in competition with local firms is wrongly positioned and bound to fail."
This is the assertion of Robert Lewis, managing partner of Lovells in Beijing. What leads a man so close to the China market to arrive at such an ardent conclusion?
The context is a legal services market the supply side of which has been transformed in a handful of years, and continues a rapid evolution. The changing skylines of Shanghai and Beijing are apt metaphors for the growth of the legal services industry. "Ten years ago there was nothing; now China is teeming with high-end firms," says Ed Turner, Hong Kong-based managing partner of Shearman & Sterling.
FDI advice has always been the industry's mainstay, and a peak in FDI in the late '90s (see chart on page 44) was the catalyst to an explosion in local law firms. Everyone agrees that local firms can now offer a quality of advice far closer to international standards than one would have dreamt of just a few years ago ("The local profession has very quickly got to a point where it's respectable - there are lawyers here who are good enough to practise anywhere in the world," says John Cole of Minter Ellison). Some of this is thanks to the influx of returnee Chinese lawyers who bring Western training and experience to local firms (see box on page 37); some of it is thanks to a whole range of other dynamics involved in the interplay over the last decade of local firms with international firms; and some is thanks to the industriousness and energy of a domestic industry, eager to replace precociousness with prowess, which is doing all it can to catch up with the phenomenal broader growth of China.
And therein lies the other crucial piece of context: the staggering economic and trade expansion that China is enjoying, and the consequent swelling of the pie that law firms take pieces of. "The numbers are breathtaking," says Mitch Dudek, partner with Jones Day in Shanghai. "I read somewhere over 200,000 apartments were built in Shanghai last year alone." Meanwhile, the Ministry of Commerce reported 57% year-on-year growth in FDI for the first quarter of 2003, 40% growth in foreign trade and 17.2% growth in industrial output. Breathtaking indeed (whatever your views on how verifiable Chinese government statistics are). "Lawyer numbers haven't kept up with economic numbers," adds Dudek, "and so it's almost like foreign lawyers here are supplementing the numbers."
Home advantage
The clearest advantage local firms wield, at least on the surface of things, is their ability to practise local law (the Ministry of Justice deems this out of bounds for foreign firms). Opinions vary, however, on the extent to which this is really the case. Ning of King & Wood describes it as "an open secret" that foreign firms do advise on Chinese law; another local lawyer says foreign firms practise Chinese law "every hour of every day - otherwise they wouldn't survive"; and a foreign lawyer in China draws a subtle distinction between not advising on Chinese legal affairs at all, and simply avoiding providing a formal legal opinion on Chinese legal affairs (the formal legal opinion is often only required for "a bit of insurance"). Says Robinson of Hogan & Hartson: "There's a difference between advice and opinion. A memo can serve as a de facto legal opinion that might be good enough for, say, a private placement - and that's not to say the legal due diligence is any less thorough."
But whatever your take on this question, some advantage to the local firms does exist, notably in litigation.
Protectionist regulation aside, many local firms are confident they score over their foreign peers in a number of clear areas.
"I'm convinced that local firms have a distinct advantage in terms of their understanding of Chinese culture and business practices," says Qian of Allbright. "The client now has a choice."
This is a theme adopted by several local, and, perhaps more tacitly, foreign lawyers. Ning at King & Wood cites "more prompt and precise advice in local matters" and "a more accurate understanding of new regulations and legislation" that "helps to close the gap opened by the greater experience and expertise" of international firms. Similarly, Zhou of Fangda says that local firms can handle the language and interpretation issues involved in applying a rapidly developing local law. "Chinese firms are taking advantage of the fact that the finer points of new local laws are sometimes out of reach of international firms - they're unable to interpret the subtle differences." Whereas in the past local firms would advise on the local law aspects of deals at the request of foreign firms, now they can do both sides themselves, he says, adding confidently: "The best talent is in the Chinese firms." Certainly most local lawyers will tend to have a better grip on the nuances of the way things are done in China.
The situation is neatly summarised by David Liu at Llinks in Beijing. "Both international and local firms are now facing the same clients, as international clients are becoming more localised and domestic clients are becoming more international," he says. "International firms are taking advantages of their global network, integrated support, and international experience; Chinese law firms are taking advantages of local expertise and growth from local culture."
Room for everybody
The question of whether the new, improved local firms are actually taking work from international firms is one that is perhaps obscured by the current (re)positioning of the internationals.
"We are seeing more and more clients stepping over the international firms," says Ning at King & Wood, and while Ross at Paul Weiss for one agrees with her to an extent, he characterises this work as "low-end work for which standard documents are the way to go - not work that we're really bothered about losing".
Liu at Llinks, meanwhile, also sees local law firms taking more and more of what he prefers to call "house-keeping work" from the internationals. "For high-profile or complicated transactions involving foreign investors or financiers, Chinese law firms are taking more active roles in structuring, documentation and negotiation, rather than just "opinion shopping" as before," he says. "This has been partly due to more domestic decision makers in those transactions, but also it seems foreign investors and financiers are approaching Chinese firms more directly as the PRC law regime becomes more and more sophisticated."
Lewis at Lovells similarly refers to domestic firms' share of the "vanilla FDI work" continuing to increase over the next few years, but, like Ross, he's quite happy for that to happen.
The point here is that everybody's happy. Most larger local firms deliberately target inbound FDI work, where the fees (paid by Western clients) have been ratcheted up and local firms have been assimilating foreign expertise for years. Meanwhile, most foreign firms are focusing on a growing amount of higher-level work. And the two are wholly intertwined, with referrals going in both directions and de facto alliances being nurtured at the signing off of every successful deal completion. Foreign and local firms (Baker & McKenzie and Jun He, for example) even swap staff for training. "You can't come here with a colonial attitude," says Cole at Minter Ellison, who like many ex-pat lawyers in China speaks Mandarin. "You need the help and support of local firms... you need to be able to sit down with local lawyers and bounce ideas around."
Local and international firms are feeding, and feeding off, one another now as much as ever, and on the surface at least harmony reigns. As Ross at Paul Weiss puts it, "I don't see much elbow sharpening going on... There's a reasonable amount of professional collegiality out there, and while some firms might be doing some discounting for Chinese clients, I don't think there's much stealing of clients." And while there are plenty of reports of smaller local firms understandably being "a bit scared" and lobbying hard to retain or heighten the protectionist measures thus far imposed on foreign firms in China, none of the larger local firms ALB spoke to had anything to say other than to stress that the relationship was symbiotic rather than rancorous.
Many foreign lawyers indeed show what appears to be a genuine willingness to let local firms take their rightful place. "We're sliding along in the upper band of the market, and we're cooperating closely with local firms in that band," says Turner at Shearman & Sterling. "If there's a privatisation IPO, for example, neither of us can do the whole deal by ourselves." But he sees change ahead: "How many MNCs will use only a local firm to do a major FDI project in China? That's the test. We see it happening in Korea and Taiwan - now there's no necessity for a foreign firm to be involved. At the moment the foreign firms are adding transactional expertise, but we're on the cusp - it would be naïve to think the local firms aren't going to get there." So will the foreign firms get pushed out? "Yes, there'll be a squeeze on, and the more marginal firms will get pushed out first. But it's still true that almost all financial techniques are developed in London or New York, and it's firms like ours that can introduce the necessary legal techniques to a country like China. We've got to play that hyper slice of sophistication," he says.
The fee challenge
The general picture, then, is one that shows the international firms going higher up the market as local firms' burgeoning expertise allows them to scoop up somewhat less complex work by themselves. And of course nothing is more central to this trend than fees. While partner hourly rates charged by international firms are typically around US$550 (although the figure can reach US$700 at the upper end), the equivalent for a local firm is more like US$250 (although figures as high as US$350 are mentioned for top local firms and lawyers). And so if increasingly cost-conscious in-house counsel can make the saving and still get solid advice, they will (see box on p40-41). As Charlene Zhu at Ericsson reminds us, US$550 is still more than a month's wage for many Chinese. Shao at Jun He, meanwhile, makes the point even more starkly: "It's like a peasant buying a designer suit."
Several lawyers report that local firms' fees not only are lower but also tend to be structured in more competitive ways, in that there is much less of the reluctance shown by the internationals to offer flat, capped or discounted fees rather than straight hourly billing. (Partners in local firms may be less constrained by the management structure under which they operate when it comes to making the fee fit the client.)
The advantage local firms have in terms of being free to practise local law is perhaps debatable (there is full consensus that the Ministry of Justice's attempt, with the introduction of new regulations in early 2002, to clamp down on foreigners' advising on Chinese legal affairs had an effect that was at best psychological); the advantage they have in terms of the fees they charge is not. And it is one that foreign firms are well aware of and seem to have taken on board strategy-wise.
"Their price advantage will pose a challenge going forward," says Zhang at Baker & McKenzie. "When MNCs come into China, they will still retain a firm like us, but once established they'll use local lawyers for operational issues."
Indeed most are in no doubt that there is an ongoing indigenisation of legal services in China. But that's not to say they are unduly worried.
Growth from all angles
Why the lack of concern? Part of the reason, as mentioned above, is the symbiotic relationship between local and foreign firms. Another part is that the story doesn't begin and end with law firms advising Western MNCs engaging in FDI and JVs in China - the type of work in relationship to which the local firms have taken their biggest strides in recent years. In many of the new areas of growth, the foreign firms will still be a street ahead in level of expertise offered.
The next "big new thing", says Turner at Shearman & Sterling, is outbound work in which Chinese companies look to access capital markets abroad as a necessary vehicle to their global ambitions. "We've been feasting on inbound investment for a decade, but now globalising, outbound investment is on the rise," says Turner, adding that as well as the direct capital markets work thus generated, which firms like his own are so well positioned to win, Chinese companies' "traipsing around the world" will produce plenty of litigation and arbitration on what for Chinese companies is very foreign soil. Looking even further, Turner sees work on commercial deals involving Chinese companies overseas overtaking the financial work. "Chinese companies will be building infrastructure projects in India, buying technology companies in Silicon valley ... there's huge potential there."
Other lawyers pick up on the infrastructure theme in particular. Robinson and Jun of Hogan & Hartson point to the fact that Chinese companies "have significant competitive advantage in infrastructure-type investment work" and will likely become very active in Eastern and Central Europe, Africa and South Asia over the coming years, for example.
The Chinese government has been encouraging its newly privatised former state-owned enterprises (SOEs) to invest offshore, and Zhang at Baker & McKenzie sees the process as already well underway. "The majority of the work now is from western MNC clients coming into China, but if you look at the economy and the market you see more Chinese enterprises looking to become MNCs themselves," he says. Some local companies expanding out of China will be following a pattern seen among Taiwan and Korean concerns in the past decade, where former manufacturers for western-controlled business lines have earned so much foreign exchange from their endeavours that they eventually find themselves in a position to "buy the brand".
The table on p44 gives some firms' rough estimates of how the proportions of inbound and outbound work they do will change. No firm thought their outbound proportion would decrease; most predicted it would increase significantly.
Meanwhile, the line between outbound and inbound work will likely blur, as newly promulgated laws lift many of the restrictions on M&A activity in China. "Foreign companies already established here who are looking to consolidate will make local acquisitions here, and some will buy overseas holdings of other Chinese companies," say Jun at Hogan & Hartson. (See chart on p42.)
Even the inbound side shows signs of, as Turner at Shearman & Sterling puts it, "getting interesting". Something he describes as "a huge change" that has gathered pace over the past couple of years is the availability of local capital to foreign concerns investing in China. "The dynamic nature of China's export machine," he says, "has left local banks loaded with dollars, and they'd rather lend it to BASF to build a new chemical factory than some crapped-out SOE." Inbound investment is increasingly showing an M&A character rather than just the simple JVs of the past, he says. "Now companies want to buy their customers, buy into their markets, buy the retail outlets - that sort of thing," says Turner.
The other notable trend here is, put simply, the arrival of a whole host of overseas mid-cap companies. Some of these companies are going in on the coat-tails of their large-cap customers who are already well established in China; others (and the Germans are said to be particularly vigilant and active here) are picking up on the development of Chinese domestic industry and, for example, partnering with local manufacturers. "The arrival of mid-cap firms is a very significant ingredient," says Lewis at Lovells. "Through the '90s, 'process aggravation' meant you had to be a Fortune 500 company to make China worthwhile. Now, market dynamics mean smaller companies must be in China, and the process aggravation has eased." He mentions the Chinese company Huawei, a telecoms manufacturer that two years ago reached sales of as much as US$3bn, as an example of the industrial power and ability to attract supplier companies from overseas that China's leading companies now wield. "China is the workshop for the world, especially in the telecoms industry," he says. "The supply chain in its entirety is moving here ... You have to be here."
And while Lewis is referring to industry, exactly the same goes for legal services. Turner puts China participants into one of two camps: the pretenders and the true believers. He places himself squarely in the latter. "You've got to be involved in China ... no matter what happens."
Go local or international?: four in-house lawyers shed light on the buying decision
Carlo van den Akker
vice president, general counsel Asia, Philips (Hong Kong based)
"I don't really believe in the added value of global law firms in China," says Hong Kong-based van den Akker, who has worked in the Asia-Pacific region for 12 years. The one-stop-shop approach, he says, is not one that attracts him, because there are still "issues regarding sustained quality" with the global law firms in Asia. "The majority of firms we use are local Chinese firms which provide good quality for a decent price... We're very happy with them," he says. He has only a few international firms on his standard list.
To put his comments in context, note that Philips' policy is to do as much work in-house as it can, using external firms mainly when workloads peak, for litigation, or for very specialised work.
"In China we need a lawyer who can offer two things: high-quality legal advice, and local connections [guanxi in Mandarin]. To get a combination of the two, it's often better to go to local firms," says van den Akker. "And local firms have improved so much - as well as the guanxi, they now speak great English and have overseas training and experience."
If, however, a project has global implications for the Philips organisation, or requires legal advice that is highly specialised, van den Akker will probably select an international firm. In this case, he will require firms to provide profiles, quotations with financial caps, detailed timelines, breakdowns of costs, regular communication, and the like. "But usually I don't haggle over the price too much if the quotation is reasonable," he says. "That may have too great an impact on quality."
Shawn Li
senior counsel, Johnson & Johnson (Shanghai-based)
Li emphasises the impact on his company's buying decision that the influx to local firms of overseas trained and experienced lawyers has had, but also points out that more of these high-calibre people can now be found in in-house legal departments in China. In these positions they offer just what the general counsel sitting in an office in London or New York wants - a lawyer fully au fait with Western language, techniques, and compliance standards. Companies are therefore outsourcing a lower proportion of their work, even though the total amount of work they outsource may be rising.
Li reports that the bigger, or more specialised, a project is, the more likely he is to use an international rather than local firm, but that for purely local matters the greater cost efficiency of a local firm is hard to beat.
And while he will choose firms on their merits for specialised or regional matters, he needs a 'primary', or default, firm to "achieve continuity and a deeper understanding of our business and [company] culture". Notably, he says this firm, which has not yet been selected, must be "a Western-style" firm - "We need to rely on a whole range of lawyers working effectively together, and they all have to be highly ethical," he says.
Chen Yuanxing
senior counsel, Du Pont (Du Pont China Holding Co Ltd) (Shanghai-based)
Dupont's own corporate lawyers will perform most JV and M&A work in house, but litigation, IP/ trademark/ patent work as well as other specialist areas will all be outsourced.
"In terms of service, the international firms are still better equipped," says Chen. "They have greater awareness of Western cultural norms and what Western companies require from a lawyer - you're going to get memos just the way they need to be. And international firms are still more reliable ethically than local firms when it comes to conflicts of interest."
Chen explains that sometimes his group head of legal in the US dictates that he uses, for example, Clifford Chance or Baker & McKenzie in China, because the company is using them elsewhere in the world on the same deal.
However, he stresses how cost-conscious he is. Dupont has no separate legal budget over and above the expenses relating directly to Chen and his colleagues, so the bill for external legal work on projects is allocated to the department from which the work directly derives, often as an unbudgeted cost.
"International firms' fees are typically hourly and uncapped, and I don't like that inability to control final cost," says Chen. "Local firms are not only cheaper but also more willing to negotiate flat, capped or discounted fees."
For litigation, Chen uses firms based in the city in question - "You need someone with connections and good knowledge of local law... I might choose a former classmate that I know in that city," he says, adding: "The budget will always be tight, and I'll always want a flat fee."
Charlene Zhu
senior counsel, Ericsson (Beijing-based)
"In the beginning we mainly used international firms in China," says Zhu. "Our GC is Swedish so communication in English was essential, and also we thought international firms' way of doing business was closer to our expectations. But things have been gradually changing."
Zhu's perception is that "certain top local law firms" have grown and matured, and, again with the help of returnees, now can offer more experience in dealing with foreign clients.
Dealing with local firms often means more work, reports Zhu, as what they produce will require more thorough review - "If the litigation is in Chinese and the lawyer I'm using can't speak and write good English, I'll be as busy as hell!" she says. But consider the fact that hourly rates charged by local firms are generally lower than those of the international firms, and for matters only involving local law the local bid becomes much stronger, she says.
According to Zhu, for cost efficiency reasons Ericsson too is outsourcing a lower proportion of its legal work than before. Nevertheless, she considers that the demand for legal services in China, for example from telecoms operators, can only go up in the coming years with increasing amounts of FDI flowing into China. In general, she sees international firms' share of the market shrinking as local firms become more and more competitive, but says she will continue to favour the internationals for project finance, taxation and other matters that require complex documentation in English, and "things that involve, for example, worldwide arrangements for sourcing or outsourcing, where it will be hard for local firms to offer advice in a global context".