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.