Opinion | 03-11-15

Six roads international law firms are taking in China

The Chinese legal market is unique and over the last few years a number of international law firms have tried to conquer it. In this article our consultant Shawn Chen highlights the various paths that these law firms are taking in order to succeed in China. 

  1. Go in the opposite direction – develop China outbound work

    The majority of international law firms in China have been trying to build their China outbound business in recent years and many of them believe this will become their main China generated revenue stream in the future. Although 2013/2014 saw some breakthrough deals in certain popular industries and from large private Chinese companies, outbound deal flow and the majority of  fee revenue remains limited to a number of government driven sectors and government dominated state owned enterprises (SOEs). The key to building this workstream is to have a senior, locally well networked and internationally minded Chinese lawyer to act as the rainmaker and oversee the practice. At associate level Chinese language skills are crucial to communicate on the ground with Chinese clients, and associates should be able to advise on UK law (or US law) which frequently governs overseas deals (in the Middle East, Africa, South America etc.). This means international firms in China are keen to hire associates with excellent English skills and solid UK/US law training, instead of PRC lawyers who have only studied for a US/UK LL.M or worked in an international law firm’s China office for just a few years. 
     
  2. Go narrow – be a specialist

    Some international firms have succeeded and will continue their success in China by focusing on particular practice areas or industry sectors, such as shipping, construction, project finance, oil & gas and life sciences. There are around 200 international law firms in China who are highly homogeneous and basically ‘everything for everyone’, but now many have recognised the benefits of becoming more specialised. As a result, they are following suit and are hiring lawyers with particular practice experience. Partners and associates with niche skills will certainly find genuine opportunities in the lateral hire market.
     
  3. Go wide – provide more services 

    For years general corporate and banking/finance practices were the backbone for almost every international firm in China. However, in order to retain and develop business in the current more competitive market, many firms are trying to build some additional practice capabilities in areas which they did not offer before in China. Firms are adding services such as international arbitration, employment, intellectual property, compliance/regulatory etc in order to complement their existing general corporate and finance practices in China. 
     
  4. Go local – build real Chinese capability via various law firm ‘VIEs’ (Variable Interest Entities)

    PRC law stipulates that international law firms cannot advise on PRC law and PRC lawyers’ practising certificates are suspended once they join an international law firm.  In recent years, some international firms have opted to set up their own Chinese capability rather than refer work to a PRC firm (and split fees/lose full control of the client/matter).  Firms including Hogan Lovells, Jones Day, Bird & Bird, Baker & McKenzie and Simmons & Simmons have each set up a Chinese IP agency to cover more IP-related work; McDermott Will & Emery, Dentons and Clyde & Co have each established their own special tie-ups with a PRC firm. We have also seen some more novel structures such as what Baker & McKenzie has recently done; they have their own boutique Chinese law firm working in the same building.
     
  5. Go flexible – more billing models and lower charge out rates

    Many international law firms need to be more sensitive to clients’ concerns regarding cost and more readily accept discount requests, capped fees or contingent success fee proposals. To be more cost-efficient for their increasingly demanding clients, some international firms in China are becoming more pragmatic in terms of qualifications required when making new hires. This allows charge out rates to be more cost effective. More and more often international firms in China will judge a potential hire’s value by what they can do and contribute to the firm rather than what they have done before. They are now also more flexible in regards to remuneration and may apply at least two or three pay structures for associates at similar seniority; again helping to reduce costs for clients. For their China partners, more firms are willing to create alternative partnership tiers such as local partner, contract partner etc., and flexible partner incentive schemes, such as revenue-based extra bonuses and varied upside commission. That said, there are still a limited number of US firms who have tiny China offices and pay a global rate to a handful of associates and utilise only a single partnership structure.
     
  6. Go smaller or go back

    In order for international firms to succeed in the Chinese market they need to take one of the above paths and make changes happen. Firms who are not able to adapt to the fast-changing market will face an uncertain and difficult time. Ultimately, some of them have to send their expatriates home, cut support staff and running costs and encourage more secondments to clients. If after these ‘last resorts’ a firm’s China office remains unsatisfactory or too much of a financial drain, the final solution has to be closing in China. We have seen this happen recently: Fried Frank retreated from China in 2014; Vinson & Elkins closed in Shanghai in 2013; and Salans exited from Beijing in 2012.

 
If you would like more information on the Chinese market or your firm is looking to launch in the region please contact Shawn Chen on +86 21 6103 7331 or via email shawn.chen[email protected].