Challenges and opportunities

The global financial crisis has not diminished law firms’ passion for the country’s most cosmopolitan and fast-paced city. Rather, it provides a timely opportunity for ambitious firms in this up-and-coming financial centre to prepare for a new wave of competition. ALB China investigates

The booms and busts of Shanghai’s economy have been undeniably affected by the weight of the sinking global financial markets. That does not mean, however, that law firms have been discouraged from exploring more opportunities in Shanghai, a magnetic city that attracts people from throughout China and the rest of the world. Indeed, more domestic and international legal players continue to arrive in the mainland’s most exciting city with each passing month.

Each challenge provides an opportunity to stand out above their rivals. In the legal profession, the situation is the same. For highly qualified, well-experienced lawyers, making a move to Shanghai is always a choice worth considering, regardless of the global economic situation.

Even so, the legal market of Shanghai is not yet mature enough to be an international financial hub, after only about 20 years of development. It faces the double-edged sword of competing with a market as free as that of Hong Kong while remaining close to the authority of Beijing. In succeeding in this, Shanghai displays its unique advantage in dealing with numerous privately owned entities and foreign investments in the region. The future still looks bright for Shanghai, even in a world of economic gloom.

International firms remain adventurous
Despite the ongoing economic downturn that is impacting the region, international firms have continued to expand in China, where the effects have been relatively smaller.
That remains especially true in Shanghai. By the end of 2007, there were 103 foreign law firms that had representative offices in Shanghai – some 60% of the total 177 in China. (There were also 67 in Beijing, three in Guangzhou, two in Shenyang, and one each in Dalian and Chongqing.)

Hong Kong firms also endeavoured to boost their presence in the Yangtze Delta region. By the end of 2007, 66 Hong Kong firms had representative offices in 13 cities in China, Shanghai dominating with 18 of those offices. The remaining 48 were in 12 different mainland cities.

In 2008 alone, four well-known foreign firms – Bird & Bird, Cuatrecasas, K&L Gates and Miller Canfield – gained government approval to open an office in Shanghai.

This year, more firms are planning to enter the Shanghai market. Italian firm Chiomenti Studio Legale, for example, is only a few months away from gaining a licence to operate. It will be the firm’s second mainland venture, having secured a PRC licence in Beijing in 2007. (PRC regulations stipulate that foreign firms need to have operated in China for at least three years before opening an additional office. Chiomenti is eligible for a licence by virtue of its strategic merger with Sino-Italian firm Birindelli & Associati last May.)

US firm Wilmer Hale has applied for a licence to open a new office in Shanghai; it opened its Beijing office in 2004. In addition, other main international firms without an office in Shanghai, such as Loeb & Loeb, have also expressed interest in showing a presence. They will be more cautious in moving to the next step, though. The pace of future expansion will not be as quick as it has been in the past. However, Shanghai is still the key market in Asia-Pacific, according to Luigi Bendi, Chiomenti partner in charge of the firm’s Asia team.

Many firms that ALB China spoke to said their Shanghai offices at least are not cutting staff at this stage. Some even anticipate encouraging growth in team size in the near future. They have made internal transfers from other regional offices and hired laterally from international law firms and leading local law firms in the region. However, there is little hope for any salary increase for employees.

Australian firm Mallesons Stephen Jaques, for example, transferred partner Martyn Huckerby from Sydney to Shanghai to head the region. Now Mallesons’ Shanghai office has seven lawyers under Huckerby’s leadership, with five assistant staff – a relatively condensed team.

“Our growth in mainland Shanghai has been very significant compared to three years ago,” Huckerby says. “We have also planned for continuing growth in terms of accommodation of staff in our current premises in Shanghai, but now we may take it a bit slower. For those that expanded too aggressively in size in the past three years, now would be a difficult time.”

International firms are experiencing more pressure in competing with both overseas counterparts and local firms, especially faced with the current market sentiment. Many multinationals are cutting their budgets for legal services and taking a slower approach to M&A. “People are more cautious about investment now and new projects take more time to come out,” says David Boitout, partner at Gide Loyrette Nouel in Shanghai, who specialises in acquisitions and corporate restructuring matters. “However, thanks to our traditional business and existing clients, we have managed to keep our staff without redundancy until now. Some of our team in Shanghai, like the taxation team and labour team, are quite busy now, because of the adoption recently of new regulations of contracts, and M&A and corporate lawyers focus on liquidation and restructuring matters, due to the economic downturn.”

The global financial crisis does influence clients’ choice of firms as they are increasingly cost conscious. For low-risk work, they are more willing to consider local PRC firms whose fees are more competitive than those of their international counterparts. But when it comes to high-risk work, international firms are still used more often.

Shanghai-based Julie Zhu, general counsel of AkzoNobel in charge of North Asia, recently told ALB China that the company’s budget for legal services was cut by 10% in China. However, this was still the lowest percentage of cuts when compared to other regions.

“Price is definitely an element that we consider when choosing legal advisors but, more importantly, it depends on jurisdiction and what kind of service we need,” Zhu says. “For global transactions, we have a list of international firms that we traditionally use. For domestic asset transfer or paper preparation, we usually choose local top-tier firms such as AllBright in Shanghai and Jun He in Beijing.”

NEXT: Local firms on the move

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