Chinese firms are growing rapidly and developing global credentials, forcing international competitors to retreat from the region. Global Insight explores how domestic activity and inbound work are driving the business models set to challenge established global players.

In January 2017, Morgan Lewis more than doubled its presence in China when it poached nine partners from fellow United States law firm Orrick to boost its Beijing, Hong Kong and Shanghai offices. The move took the legal market by surprise. A number of other US firms – including New York powerhouses Chadbourne & Parke and Fried Frank, as well as Cadwalader and Troutman Sanders – looked to be struggling with their China business models, closing offices and retreating from the region.

One reason for the difficulties facing international law firms is the rise of their Chinese counterparts. China’s largest firms have seen revenue increase markedly in recent yeas – with 17 of the top 30 by revenue opening one or more new offices in the past 18 months. Many Chinese firms have added new practices, strengthened current ones and grown incredibly quickly, mostly through lateral hires. And with these firms becoming more competitive, an increasing number of Chinese lawyers have opted to return to domestic firms from global players.

The most high-profile moves in the last few months include the former Head of Financial Regulatory Practice at Clifford Chance, Yang Tiecheng, joining Han Kun Law Offices, China’s most profitable firm; the Head of Linklaters’ China practice, Fang Jian, moving to Fangda Partners; and a five-lawyer team joining JunHe from a Beijing firm closely connected to Pinsent Masons.

Combined with the fact that an increasing number of foreign lawyers are also joining Chinese firms – due to the faster track to partnership, among other reasons – it seems that Chinese firms are developing their global credentials at the expense of Western competitors.

‘It’s a definite trend,’ says Stephen Revell, a member of the IBA Law Firm Management Committee Advisory Board and a partner at Freshfields Bruckhaus Deringer, ‘but Chinese firms are not generally making these lateral hires in overseas markets. It’s mostly in China and Hong Kong, so these laterals are not giving Chinese firms extra local firepower in London or New York.’

The recruitment drive by Chinese law firms is an ‘inevitable outcome’ of their rapid development and increasing sophistication, argues Stuart Fuller, Head of KPMG Law Australia and Asia Pacific Regional Leader for Legal Services at KPMG.

Fuller, the former Global Managing Partner at King & Wood Mallesons, says: ‘the ability to practise PRC law and international law within a PRC firm, combined with its local capability, knowledge and client connections, as well as a global platform and perspective, is extremely powerful and a very attractive proposition for clients.’

Top 10 fastest growing Chinese law firms by number of lawyers (2014–2016)

Source: The Lawyer China Top 30 2017

The inside story

One continuing area of focus for firms is Chinese outbound mergers and acquisitions (M&A). 2017 was the second most active year on record – amounting to $150bn, compared to $217bn the year before. Deal volumes are expected to increase again in 2018 following changes to the Chinese government’s foreign investment policy and increased clarity on outbound investment regulations.

Recent headline-grabbing deals include ChemChina’s $44bn acquisition of Swiss agribusiness Syngenta in February 2016 and China Investment Corporation’s $13.7bn purchase of European logistics company Logicor in July 2017. However, these aside, advisory work relating to outbound M&A is often not particularly profitable for global firms due to fierce competition and domestic client expectations around pricing.

This is equally the case for domestic firms in China, says Warren Hua, a member of JunHe’s Management Committee and the partner responsible for international development. ‘In fact, when Chinese firms are cooperating with international firms on such advisory work, international firms are mostly the ones having a larger, or much larger, profit margin than Chinese firms,’ he says.

China’s firms will nevertheless have benefitted from the recent M&A boom. In addition, the Chinese government has reportedly been encouraging domestic businesses, particularly state-owned enterprises (SOEs), to only instruct Chinese law firms.

‘This will be built around acquiring infrastructure, land and technology to serve China’s interests, as opposed to those of a single entrepreneur,’ says Graham Wladimiroff, a former member of the IBA Asia Pacific Regional Forum and Vice-President and Assistant General Counsel at Avery Dennison. ‘Using Chinese firms also supports the growth of the service sector and helps protect Chinese interests abroad.’

While agreeing that SOEs are being encouraged to use Chinese firms, Revell says this is primarily for domestic work. ‘Chinese law firm growth is a mainly domestic story driven by inbound work and domestic activity. Those trying to justify it by reference to outbound work are in danger of missing the big story. For example, there are many more laws in China today that Chinese companies need advice about. And there has been a shift in inbound work in the sense that some of it is moving from international firms to Chinese firms – partly because international firms cannot practise local law.’

Also driving the growth of domestic firms is the fact that Chinese clients are becoming more sophisticated, including in their approach to fees. As Revell explains, ‘there is now a greater understanding and an increasing acceptance that, if [Chinese clients] want to be successful in the US or Europe, they need a good law firm at their side and to pay market rates.’

Alternative law firm model

The rapid rise of Chinese law firms has resulted in a broader range of law firm business models in China than in other countries. JunHe, for example, is among a number of firms that have adopted a ‘best friends’ approach to cross-border work.

‘Chinese firms are certainly looking at each other to see if they could learn something from their peers to make themselves more competitive in the market, whether in terms of attracting talent or promoting internal cooperation,’ says Hua. ‘Bigger firms can also learn something from smaller firms. For example, Tiantong is a small firm with less than 20 partners, but its business model and internet strategies are being studied by many Chinese firms due to it having the highest profits per partner among all Chinese firms.’

According to Revell, some firms are not law firms in the traditional sense and will face challenges around training people to become good lawyers and partners. ‘Western firms put a lot of effort into the training and development of associates and grooming partners in areas such as soft skills,’ he says. ‘Some Chinese firms do get it, but having the resources and commitment to doing it is another thing. It’s something they’re going to have to focus on.’

To some extent, says Fuller, the China experience offers some useful lessons for the future of global firms, too. ‘The growth in the market in China, the regionalisation and globalisation of its economy and client base, and the pure strategic need to be in China if you wish to be genuinely global, is driving an alternative model to the established global law firm.’

Stephen Mulrenan is a freelance journalist. He can be contacted at stephen@prospect-media.net