This January, ALB visited several well-known local law firms and key in-house counsels in Chongqing and Chengdu – strategic cities in western China that have attracted a large influx of non-local firms in the past two years. National law firms with substantial advantages have reshaped the competitive landscape in the region. In the face of competition, how should local law firms in Chengdu and Chongqing pursue a suitable development path? What are the opportunities in the legal markets of these thriving cities? Li Shangjing reports.

As an economic hub in western China, the Chengdu-Chongqing eco¬nomic circle has experienced significant changes in the legal-service market in the past two years.

“Law firms in western regions have long had their own geological advan¬tages, but the influx of non-local firms has completely disrupted the original structure, posing the most realistic threat to local firms,” Wang Zongqi, a se¬nior partner at Sichuan Mingju Law Firm, told ALB.

According to the latest data from Sichuan Province Lawyers Association, Sichuan had a total of 15,526 lawyers, 1,130 local law firms and 65 branches of non-local law firms as of end-2015. Many partners are concerned that small and medium-sized law firms in Sichuan and Chongqing are bearing the brunt of the “aggressive invasion” of major law firms from Beijing, Shanghai and Guangzhou, a trend that became more obvious last year. As of December 31, 2015, there were 737 law firms in the city, with 686 or 93.08 percent of them employing fewer than 30 lawyers.

Preliminary statistics from ALB show 12 out of China’s top 20 largest firms in 2015, including Dacheng, Yingke, Zhong Yin, DeHeng, AllBright, Zhong Lun, Grandall, Guanghe, Tian Yuan, King & Wood Mallesons, Zhonglun Wen De and Jincheng Tongda & Neal, have set up offices in Chengdu. Seven of them, including Dacheng, Yingke, Zhong Yin, DeHeng, AllBright, Zhong Lun and Grandall, also have offices in Chongqing.

In addition to domestic law firms, foreign firms have also opened offices in western China. As early as end-2013, Clyde & Co from Hong Kong and West¬link Partnership in Chongqing set up Clyde & Co Westlink JLV in Chongqing to help local enterprises go global and foreign businesses invest in China. Carrie Chen, a partner at Clyde & Co Westlink JLV, told ALB that establishing a pres¬ence in Chongqing was a strategic choice because of the city’s political and policy advantages as a Western powerhouse.

To be more attuned to what’s happening on the ground, the majority of non-local firms that opened offices in Sichuan have recruited large numbers of local employees, including local heavyweight partners.

A number of partners say that non-local brands have significant advan¬tages in bidding, which shocked local firms. Many branches of non-local firms just bear a name and internal integration remains limited among offices na¬tionwide, but when bidding, local branches can capitalise on the performance of the head offices to gain an edge, snapping up nearly all the local financial market business.

Jane Lu, director of AllBright Law Offices in Chengdu, said most of the law firms bidding for projects from state-owned enterprises in Sichuan are nation¬al law firms. “We usually no longer compete for business with local firms in the practice areas of finance and capital markets.”

Local firms have adopted different ways to deal with this reshuffling in the legal-service market, one of which is to join forces. Take Mingju, where Wang Zongqi practices, for example. The firm was formed in September 2013 through the consolidation of over 30 small and medium-sized local law firms in Sichuan.

Wang said it has become difficult to compete with firms from Beijing, Shanghai and Guangzhou. Apart from banding together, regional firms can only have advantages by highlighting their homegrown characteristics.

“Our five-year plan is to open 30 offices to cover the entire southwestern China: first in 21 cities and prefectures in Sichuan and then in all the south¬western provincial capitals. So far, I believe no firm can dare say it has offices in every city and prefecture in Sichuan. We aim to establish presence in every local market to highlight our characteristic as a homegrown firm.”

THE REGIONAL FIRM MODEL

Looking at the legal markets in Chengdu and Chongqing, the “invasion” of outsiders has a relatively big impact on small and medium-sized players, while larger local firms are less affected, having devised their own ways of responding to the situation. While striving to stay ahead of the pack, regional law firms also have a different development philosophy.

Solton & Partner in Chongqing has chosen a development model that has “one alliance, one head office and five branches.”

“Central and western China is a local rather than national market. Ninety-five percent of all cases are closed locally and don’t need to go to Beijing. Our lawyers serve on a provincial basis. The local market is big enough for a firm to develop and do well. So we have decided to be a leading player in the local market and connect with the market outside Sichuan via alliances. Solton has a clear strategy. We do what we ought to do but don’t do what we should not do,” says Han Deyun, managing partner of Solton & Partner.

Except for the head office in Yuzhong district, Solton & Partner’s other five branches are all located in downtown Chongqing, namely in Yongchuan, Wanzhou, Yubei, Qianjiang and Fuling districts.

Han said this method of establishing presence locally has helped Solton raise its revenue by more than 20 percent last year, becoming the first law firm to reach over RMB 100 million in the region in terms of both the contrac¬tual revenue and the revenue received. He also explained that Solton used to position itself as a commercial law firm and developed relatively slowly as a result. Now, however, it aims to become a full-service firm because being a commercial law firm means having a smaller scale despite a higher per capita revenue.

“Per capita revenue represents power while scale means influence, which is similar in the way overall GDP and per capita GDP interact with each other. The running of a law firm should be both powerful and influential,” Han adds.

But not all leading law firms in western China opt for or approve of focus¬ing on the local market as a development model. Zhonghao Law Firm, which was the first firm in Chongqing to extend its reach to other parts of China, positions itself as “originating in the west, developing in China and gradually going global.”

Robin Yuan, Zhonghao’s managing partner, told ALB quite frankly that he often discusses the development strategies of law firms with Solton’s Han, and they even debate sometimes, especially about the operating models of regional law firms (whether to adopt the corporate system or the partnership structure) and the specialised development of lawyers.

Zhonghao, which opened its Shanghai office in March 2000, has em¬braced corporate-style operations since its early days. Yuan said Zhonghao has just done away with the headquarters structure and plans to open an office in New York this year, embarking on the path of international develop¬ment by integrating firms under the corporate structure.

“We abolished the concept of headquarters during our leadership re¬shuffle last year. All our offices are parallel and managed by the board of directors. There is no longer a division between the head office and branches. We manage our offices based on the corporate system of international law firms. Using a sector-focused specialisation approach, lawyers will only focus on one practice area.”

As Zhonghao took on a corporate-style development model, the firm met a lot of resistance at the beginning and was sometimes regarded as an outlier, but Yuan believes that the commission system is too loose and the corporate set-up ought to be the future direction of law firms.

With its soon-to-open New York office, Zhonghao will have a total of eight offices, driving the development of a regional law firm in its own way.

EXPLORING OPPORTUNITIES

The Chengdu-Chongqing circle is experiencing closer economic cooperation and greater policy advantages.

A new era began last year as the high-speed rail link between Cheng¬du and Chongqing opened on December 26, with the bullet train leaving Chengdu for Chongqing at the maximum speed of 300 kilometers per hour for the first time.

However, it’s not just the new high-speed railway that has brought about acceleration. Last November, China and Singapore signed the framework agreement on the “China-Singapore (Chongqing) Demonstration Initiative on Strategic Connectivity” in Singapore, officially launching the third inter governmental cooperation project between the two countries, with Chongqing as the operating centre.

The China-Singapore Chongqing project is the third inter-governmental coop¬eration project between the two countries after the success of the China-Singapore Suzhou Industrial Park and the Tianjin Eco-city. Governments of the two countries will work together in the four areas: financial services, aviation, transportation and logistics, and information and communications technology.

In terms of finance, the Chongqing project will continue to model itself after the cross-border RMB business system used in China-Singapore cooperation projects in Suzhou and Tianjin. It will also push forward the building of “green channels” for Chongqing companies seeking to list in Singapore and financial innovations such as cross-border credit extension, equity investment funds and financial settlement.

For aviation, cooperation between Chongqing Jiangbei Airport and Singapore Changi Airport will be strengthened, with the aim of opening a Fifth Freedom Right. In terms of transportation and logistics, the development of multi-modal transport between Chongqing and Singapore will be promoted.

Finally, for information and communication technology, Singaporean companies will be allowed to set up e-commerce businesses in Chongqing, participate in com¬munications technology project tenders and enjoy other preferential policies.

Liu Zhiqiang, senior partner at Tahota Law Firm in Chongqing, told ALB that many lawyers in Chongqing have served Singaporean companies – including renowned ones such as Temasek and Hong Leong Group – for many years well before the frame¬work agreement for the China-Singapore Chongqing project was signed. But overall, the total size of the Singapore-related legal-service market is still small.

He said after the launch of the China-Singapore Chongqing project, it will prompt a number of Singaporean companies to invest in Chongqing and Chongqing com¬panies to do business in Singapore, which is definitely a positive development for Chongqing lawyers.

“On the one hand, Chongqing lawyers who are less involved in international deals than their coastal peers can take this opportunity to ‘venture outside’ and take on more foreign-related legal business. More importantly, Chongqing lawyers can work more closely with their Singaporean counterparts to lay a solid foundation for serv¬ing foreign clients in the future. In terms of challenges, the foreign-related legal ser¬vice market brought about by the China-Singapore Chongqing project will inevita¬bly prompt legal services in Chongqing to internationalise both clients and rivals. If Chongqing lawyers or firms fail to pay attention to this blue-ocean market and adapt to new situations and markets, they could be phased out by market dynamics.”

As Chengdu and Chongqing lead the country in economic growth in recent years, and with the China-Singapore project and the One Belt, One Road initiative also at¬tracting much attention, law firms are exploring different ways to excel in Chengdu’s and Chongqing’s legal markets, where opportunities and challenges co-exist. The western China market will become more robust as firms catch up with the trend and adopt the development model of seeking common ground while preserving their uniqueness.