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China remains the keystone of the region, but dynamic younger players are nipping at its heels
Were Frank Sinatra still alive, it is doubtful that he would have chosen to sing about 2007 as having been “a very good year”. To be fair it was no annus horribilis. Yet last year was also the first time in recent memory when the world saw wobbles in the global economy in the form of the sub-prime mortgage meltdown in the United States, rising oil prices out of the Middle East, and in countries such as Australia the distant but increasingly real spectre of “stagflation” – that unenviable vicious circle of rising inflation, interest rates and unemployment.
ALB 50: ASIA’S LARGEST FIRMS
*Number in Asia **From 1 July #Approx figure only - table updated 1/12 to distinguish Deacons HK from Deacons Australia
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ALB makes every effort to ensure firms likely to appear in the ALB 50 are contacted. Firms were requested to provide accurate data promptly.
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Against this backdrop, then, it is fascinating to watch the maturation of Asia’s legal and financial markets which have so far escaped the worst impacts of the global credit crunch. According to a report by Merrill Lynch’s T.J. Bond, Asian markets, and especially China, are likely to remain largely unaffected, thanks in no small part to their happy isolation from more turbulent credit markets. Only four per cent of outstanding global credit is accounted for in Asia, the report notes: “Compared to the US, we think Asia stands at very different points in its investment, credit, and housing cycles. The market for domestic credit is not globalized, and not subject to contagion as the US credit cycle turns down.” While down considerably from its 5000-plus highs, the Shanghai Stock Market Index is still well up from the beginning of 2007.
Likewise, while the recent earthquake in China’s Sichuan province was a human tragedy on a massive scale, economists and bankers do not see the event having any major long-term effect on the Chinese economy. The area where the quake took place is not a manufacturing centre and did not have a major impact on the country’s transportation network, although Merrill Lynch did note that some supply shortages might cause temporary regional inflation spikes.
Despite all this, not everyone is sanguine that the very dynamic, very good times will continue to roll for law firms operating in China and Asia, both as a consequence of global economic turmoil eventually bleeding into the Asian economies, and the natural maturing of the Chinese legal market.
“The market in China is going to become increasingly competitive and an increasing number of firms are going to attempt to make a go of it over here”, predicts David Jacobs, Asia Pacific Regional Chairman of
Baker & McKenzie. “But if there is a global economic slowdown than that is going to effect law firms simply because there will be fewer deals and more firms competing for them.”
Any slowdown in work will likely pluck the low hanging fruit of late arrivals first, suggests Robert Lewis, managing partner of UK-based
Lovells’s Beijing office. “A lot of firms coming from places such as the United States have come in riding the crest of a very good wave in their home markets. Now with many of these firms, especially those from the US, going to find themselves affected, this slowdown, if and when it comes, it is possible that in 2009 and 2010 we will see firms revisit their level of investment, possibly leading to some retrenchment as they find their initial investment is unsustainable in terms of getting an office in China up and running and moving independently.”
All this, he suggests, is part of a natural maturing of the Chinese legal market which will make it increasingly difficult for new entrants to catch up with established players.
The other major challenge for law firms of all stripes, whether firmly established or just opening in China (and a number of other Asian jurisdictions such as Singapore, whose recent deregulation of the legal market has sparked a new wave of competition and talent wars) is finding qualified staff who can produce quality work in a bi-lingual, bi-cultural environment and ensure a quality product that enhances, rather than detracts, from a consistent client experience. While many local Chinese firms have experienced meteoric growth, anecdotal evidence suggests that this growth has lately been joined by a concern that some firms have “grown too fast” and that work product has, as a result, suffered.
“For us as a foreign firm the talent pool is still very limited beause everyone is looking for esssentially the same candidate”, says Lovell's Lewis, referencing the dream lawyer who is “bi-lingual, bi-cultural and can do deals in and out of China”.
“The challenge for some of the largest China firms is that they’ve grown very very quickly and in this market where there is not a lot of ready-made talent, Obviously there are not a lot of people in that category but I do feel that over the past few years we have not only remained in a competitive position on the hiring front but that the talent pool has expanded a bit.”
Entangling Alliances
Nearly a quarter century after the words were spoken, it is hard to believe that in 1984 then Australian prime minister Bob Hawke found himself in political strife after he declared that his country’s future security and prosperity depended upon Australia becoming “firmly enmeshed with the progress of China, South-East Asia and the Pacific region”. The liberalisation of economies from China right through Vietnam, Indonesia and India, and the interconnected resource and consumer spending booms such reforms have touched off, have made such an economic enmeshment not only a reality but a necessity.
Such enmeshment is occurring more and more in the legal industry as well, and is likely to continue through 2008 and beyond as Australian, British and American law firms team up with local Asian counterparts to create strategic alliances of one sort or another. Last year, the exclusive alliance between
DLA Piper and Australian firm
Phillips Fox made headlines; lately such deals have been picking up pace. Recently signed alliances have seen Sydney-based
Gilbert + Tobin team up with Chinese giant
King & Wood at the end of last year, a move which was in many ways the formalisation of a relationship that had dated back to at least 2005 when the two firms worked on a several competition and telecommunications projects together, and UK-based
Lovells build the Sino-Global Legal Alliance with nine leading independent Chinese law firms.
As Danny Gilbert, managing partner of
Gilbert + Tobin, told
ALB soon after inking his firm’s deal with
King & Wood (which itself teamed up with Japanese firm Miyake Yamazaki in 2005), “For them to entertain relationships with one of the major global firms I think would cause them some tension, because global firms have their own strategies about establishing the dominance of their own brand.” To put it another way, legal alliances can be compared to those between airlines, with regional carriers able to grow their own traffic by teaming up with non-competitors who can feed passengers, or clients, into other markets. And while in he long run the best of these alliances will be those which bring together complementary, rather than competing, skill sets, in the shorter and more medium term, such groupings will likely have the further effect of tying up and solidifying the Chinese market.
Go (south and) west, young man!
But while China certainly is, and will remain, the dominant player in the Asian legal market for a good long time, the rest of the region is also poised for growth. But at that market matures, law firms which have already established themselves in that country are looking to consolidate their positions in Asia by growing elsewhere in the region, while many newcomers are attracted by the dynamism and fluidity which exists in India and south-east Asia.
Illustrating the money flows through India’s legal community, FoxMandal Little, India’s largest entry to this year’s ALB50, recently announced dramatic salary increases across the board for its lawyers. Associates and senior associates will receive an increase of between 50% and 100% while partners have seen an increment of between 30% and 60%. Salaries for newly qualified lawyers, meanwhile, have gone up by 45-50%.
Meanwhile confluence of factors, from continued liberalisation in Vietnam, which has in the very recent past been the scene of a number of equitisation deals as the government in Hanoi seeks to divest itself of centralised control and ownership pf the economy, to resource and manufacturing booms (complemented by increasing political stability) in nations like Indonesia, have become attractive centres for dealmaking firms from Europe, the UK and Australia.
September’s sale of a 10 per cent stake in Bao Viet, Vietnam’s leading (and state-owned) insurance firm marked not only the biggest M&A deal in the country’s history but is opening the floodgates to a tranche of other work. A report released in May by the Australian Strategic Policy Institute noted that while Indonesia has enjoyed impressive and sustained economic growth over the past several years, that growth is more impressive in that it takes place against a backdrop of decreasing government debt and relatively stable inflation.
Even smaller nations such as Cambodia, which has since 2000 experienced an average 9.6 per cent growth rate and last year saw foreign direct investment of US$600 million are attracting major players such as
Allens Arthur Robinson, which has had a presence in that nation for over a decade and today has four lawyers on the ground in Cambodia, including one new partner freshly minted as this magazine went to press.
South-East Asia is particularly poised for growth, says
Allens Arthur Robinson’s Jim Dunstan, executive partner in charge of the firm’s Asian operations. “China is still vast, and because of its size and the amount of money involved that is going to be the natural target for really big work. But Indonesia in particular we think is a very exciting market going forward, with its large and growing resources practice, as are Vietnam and Cambodia, where large resource transactions are also starting to happen.”
Says Dunstan,“I think South-East Asia is really starting to come into its own after a difficult period.”