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The Business Side of China Law Firms

Got an email the other day from a Spain lawyer friend with the following question:

I wanted to follow-up with a quick question and ask for your opinion on the operation of foreign law firms in China. If you’ve done a blog post on this before I became a reader, I apologize for the redundancy. However, if you haven’t, this might be an interesting topic.

I’ve noticed that the presence of foreign law firms is growing rapidly in the Chinese market. However, it seems that the scope of services –and expertise– that foreign firms can offer here must be quite limited as compared to their local counterparts. What kind of services can they hope to offer, now and in the future? Do you think the China based offices of these firms are currently profitable? Or are they losing money with the hopes that over the years, they will have established the necessary expertise and local network to turn these operations into profitable ventures?

Any thoughts on this matter would certainly be enlightening for those of us witnessing this phenomenon in action.

I LOVE this question because it is really a whole slew of great questions, all of which I frequently discuss with clients, potential clients, and other lawyers, but few of which I have ever addressed here. Until now.

Let me break it down.

“I’ve noticed that the presence of foreign law firms is growing rapidly in the Chinese market.”

Yes, the presence of foreign law firms is growing rapidly in China, but I think much of this is a function of the time it takes to open an office in China, not some sudden onrush of firms seeking to go there. Yes, every time a new office opens, the law firm’s managing partner talks of how important Asia is to the firm’s practice and the importance of thinking long term, but I don’t buy that. Big law firms laying off hundreds of employees are not necessarily thinking long term. What is really going on is that it takes a large cash outlay, hundreds of hours of time, and years of waiting and schmoozing to get a law office open in China. After having incurred/undertaken all this and finally succeeded, virtually no firm would then back down.

“It seems that the scope of services –and expertise– that foreign firms can offer here must be quite limited as compared to their local counterparts. What kind of services can they hope to offer, now and in the future?”

It depends on how you define “limited.” Foreign lawyers in China cannot go to court and cannot physically register trademarks, copyrights or patents. They also are not supposed to give China legal advice without the assistance of Chinese attorneys. This leaves whole swaths of legal work that can be performed and it is mostly the sort of work foreign law firms wish to perform. For example, the typical foreign mega firms with offices in China might focus their practices on providing legal assistance in the following areas:

  • International business tax
  • Chinese company public offerings (IPOs) in New York, Hong Kong, and London
  • Big case dispute resolution
  • Complex financing of infrastructure projects
  • International Trade and other Regulatory Matters
  • International mergers and acquisitions (M & A)
  • Private equity/venture capital (vc)

These all tend to be big money practice areas, oftentimes requiring huge firms with massive worldwide depth. To a large extent, these mega firms face very little competition from Chinese law firms, at least so far. Competition from Chinese law firms will no doubt increase as time goes on, but (barring major political change) I am confident most of the mega firms in China now will still be there ten and twenty years from now.

Chinese lawyers who go to work for foreign law firms cannot retain their license to practice law in China. Despite this, the mega-firms manage to draw top Chinese lawyer talent.

Many of the mid-sized foreign firms in China are seeking to do these same sorts of things. But, to a certain extent, I am convinced many of them went to China hoping to capture some growth there and, more importantly, in an effort to prevent their domestic clients from going to other firms. The fear is that once a client goes to another law firm in China, it may not come back as often for domestic matters.

My law firm (we call ourselves an international boutique law firm) has carved out its own, very necessary niche. Our work mostly consists of acting as “China counsel” for our small and medium sized business clients. Our practice consists mostly of the following:

1. Helping companies (mostly companies from North America, Latin America, the EU, and Australia) figure out the proper entity for their China entrance and then helping them get legal as a Wholly Foreign Owned Entity (WFOE), Joint Venture (JV), or Representative Office.

2. Helping companies sort through their China intellectual property issues.

3. Drafting China contracts for our clients. These mostly consist of Licensing Agreements, OEM Contracts, Non-Disclosure Agreements (NDAs), Management Services Agreements, Inter-company Agreements, and Employee Manuals and Employment Contracts. With the exception of Inter-company Agreements, these are nearly always done in both Chinese (as the official version) and English (for the benefit of the client).

4. Helping companies purchase Chinese retail and industrial assets.

5. Doing small company M&A work.

6. Helping companies with their employment law issues.

7. Providing day to day business law advice.

8. Handling CEITAC arbitrations and overseeing China and international litigation and arbitration matters, including white collar criminal actions.

The most salient advantages my firm offers our clients doing business in China or with China are the following:

1. We are bound by US and EU and Australian lawyer ethical rules.

2. We know what it means for Western businesses to be bound by Western ethical practices and laws.

3. We understand Western business culture. In particular, we know what Western clients want and expect from their law firms. Yet we also live and breathe Chinese business and legal culture every single day.

4. English is our first language, but we also have nearly a dozen lawyers and paralegals who are completely fluent in Chinese.

5. All of our China lawyers went to US or EU or Australian law schools, which law schools are widely considered the best in the world at training people to “think like a lawyer.”

I am absolutely convinced these things will mean our law firm’sChina business will continue growing.

“Do you think the China based offices of these firms are currently profitable? Or are they losing money with the hopes that over the years, they will have established the necessary expertise and local network to turn these operations into profitable ventures?”

I think the top mega firms are making huge sums of money in China and building their practices for the future. I suspect many (certainly not all) of the mid-sized firms are losing money in China and will never be profitable there. These firms are chasing Chinese clients for overseas legal work because they do not have sufficient in-country legal work to keep their attorneys busy. To get these Chinese clients, they greatly reduce their rates, wrongly figuring they will be able to raise them later. I have heard of one mid-size law firm that took on an antidumping case for a Chinese client for a $100,000 flat fee and then had to spend more than $1,000,000 in attorney time on that one matter. To make matters worse, their Chinese client went to another law firm the next time it was investigated for dumping.

I would love to hear from you all on the topic of foreign law firms in China.

16 responses to “The Business Side of China Law Firms”

  1. There are foreign mega-firms that look to compete in the FDI area. They of course would love to solely do M&A, PE, and securities. However, they built up large staffs of fee-earners that need to earn fees. As a result, a number of them go after the FDI work.
    I do not think the model of the large foreign firm doing FDI work is sustainable. The better local firms are getting pretty good at serving foreign FDI clients. Plus, the local firms are able to hire staff in specialized areas that aren’t profitable for large foreign law firms.

  2. China desperately needs to enforce its laws/regulations prohibiting foreign law firms from practicing Chinese law, and give more power/autonomy to the local law societies in China. Unless China’s Ministry of Justice does this, China’s legal professional will be forever stunted. Moreover, foreign lawyers need to be given a path to admission to practice PRC law in China. Such foreign lawyers will be invaluable in enforcing restrictions on the practice of PRC laws against other foreigners.

  3. Two questions to ponder:
    Are legal services like media? A prior post argued that the Chinese government sees media and communications as a risk to be managed more than a market to be opened and exploited. The same could be true of foreign lawyers. Foreign lawyers might import uncomfortable ideas about corporate governance, torts or free expression. Zealous Western-style advocacy will invariably rub someone in power the wrong way. The CCP may decide that foreign lawyers are not worth the risk.
    Is China Like Hollywood? Every few years, a large national firm attempts to compete in my field, which is entertainment law. The firm always opens an expensive office, throws a few parties, generates some press and tells everyone about their “long-term commitment.” Then they learn that entrenched referral networks funnel almost all of the clients worth having to about a dozen firms. Within three years, the newcomer closes its “long-term” outpost.

  4. I’ll have to come back and read & comment again when I have more time, but interestingly enough, I just put an entry up Friday about the opportunity that Chinese firms have during the economic crisis and at the same time, why many of the international firms are going to struggle mightily.

  5. There are altogether 171 foreign law firms registered their officec here in China and another 65 something from Hongkong. Most of the offices are concentrated in Beijing, then Shanghai and Guangzhou. There will be more for sure to come.
    I think that the office here in China is first a market strategy and then a profit center. Of course, there is a limit for their services. But you can easily go around the limit by working together with the Chinese counterpart.

  6. Carson,
    I agree with you, but the best big law firms know their high end niches and stick to that. Chinese law firms are becoming way more sophisticated, but there are still plenty of foreign law firms in London and there will in ten years still be plenty of foreign law firms in China.

  7. John,
    What you are saying may someday be true, but not now. Right now the foreign lawyers are taking almost no work from Chinese law firms.

  8. P,
    Great questions.
    Two questions to ponder:
    “Are legal services like media? A prior post argued that the Chinese government sees media and communications as a risk to be managed more than a market to be opened and exploited. The same could be true of foreign lawyers. Foreign lawyers might import uncomfortable ideas about corporate governance, torts or free expression. Zealous Western-style advocacy will invariably rub someone in power the wrong way. The CCP may decide that foreign lawyers are not worth the risk.”
    — Difference is that foreign lawyers grease commerce and they are viewed as an essential lubricant for making foreign companies comfortable with investing in China. China made this call many years ago and there are no indicators it is changing its mind.
    “Is China Like Hollywood? Every few years, a large national firm attempts to compete in my field, which is entertainment law. The firm always opens an expensive office, throws a few parties, generates some press and tells everyone about their “long-term commitment.” Then they learn that entrenched referral networks funnel almost all of the clients worth having to about a dozen firms. Within three years, the newcomer closes its “long-term” outpost.”
    — Yes and No. The big huge foreign law firms in China are the equivalent to you. They have the networks. They will do fine. But the medium sized firms that go in thinking that just by being in China the work will come that are and will continue to get slaughtered.

  9. I guess there must also be some (perhaps, intangible) added value from the clients’ perspective that a firm has an invested presence in China.
    At a time when everyone is saying that Western businesses must have a China strategy, it makes sense that law firms should invest in China (perhaps not necessarily in a local office sense) to understand the business of (key) clients.
    Do you think it would make more sense for some firms to form partnerships with firms like yours? I would be surprised if you already have not received some “outsourcing” from other firms with less capability on the mainland.
    Cheers,
    Shawn

  10. Shawn,
    Between 25 to 50% of our work comes to us from law firms without a China presence. They prefer us to the big firms both because we are less expensive but also because they know there is no way a Seattle based boutique international law firm would/could ever get domestic work from their Des Moines/Buffalo/Phoenix/Grand Rapids/Indianapolis/etc. based client.
    We are often asked about “partnerships,” but way more often from law firms in foreign countries than in the US. We always turn them down because we do not want to be in a situation where we have a formal agreement to refer our own clients’ work to any given law firm since no one law firm is always THE solution.
    Yet at the same time, we have had extremely close and very long lasting (at least five years) relationships with law firms in Dalian, Qingdao, Shanghai, Seoul, Pusan, Vladivostok, and Moscow and (countless US and European cities as well) unless we have a good reason not to do so, we choose those law firms and we believe they similarly choose us.
    Then again, we have those same sorts of relationships with Seattle law firms. We even keep a list of firms we refer clients to when they have a bankruptcy issue, a tax issue, a white collar criminal issue, etc.
    I’m guessing its’ the same way in the logistics business also, right?

  11. Yes, it is similar to the degree that the work we refer to another firm is complementary in nature. However, we do have formal partnerships or commercial partnerships with certain firms in certain regions (DHL in APAC).
    There are also instances where we may use a product of a company (Oracle Database) while competing with the same company on a bid (Oracle Transport Management System).
    And like you, we have formal partnerships with firms in markets where we don’t have a formal office (Korea, Russia, South Africa, etc).

  12. Right on Dan. As i often must convince and educate my clients, some of whom have been in China for many years, the rules and the playing field are not the same. They often don’t listen and pay dearly. I suspect now that economic conditions are forcing everyone to strictly control their bottom line, they might start to listen. Same with potential clients when i try to explain that we can lose our license for ethical violations and Chinese lawyers are not held to such high standards. While there are some good ones out there, the rules and playing field are not the same. You’d think it would make sense to them, but many have to touch the fire and get the blisters before they realize they have been burned.

  13. “foreign law firms is growing rapidly in the Chinese market” I am not agree with your opinion because today’s trend is global marketing. And any body wants to grow our business anywhere if they were in china or any other country. Who perform well they make their place.

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