There is an ancient Chinese proverb: always more diggers than gold. And while China is today’s land of golden opportunities, Australia’s top law firms have all been busy ploughing. The financial crisis has uncovered a new mine of opportunities – but our domestic firms must fight tooth and nail for a share of the spoils, up against multiple rivals.
The full competitive threat of the Australian firm’s most dangerous opponent – increasingly sophisticated local law firms – remains unknown. All we do know is that law firms must strive harder than ever before for that competitive edge.
(HK + PRC)
New opportunities
“The financial crisis has shifted the balance of East and West”, says Allens Arthur Robinson’s head of greater China M&A, Campbell Davidson. The financial crisis slowed down growth elsewhere in the world but it accelerated China’s political and economic ascendancy.
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“The financial crisis has rushed China into a role we may have expected from it 20-30 years down the track. The supply of corresponding legal infrastructure has not kept up to pace with these accelerated financial leaps.” Campbell Davidson |
Now China’s relative immunity to the global slump has increased its relative global importance. “The financial crisis has rushed China into a role we may have expected from it 20-30 years down the track,” Davidson says. “The supply of corresponding legal infrastructure has not kept up to pace with these accelerated financial leaps.”
It is a hot race between law firms, both foreign and local, to see who can capture the biggest share of this ‘once-a-global economic cycle’ opportunity. Building the legal framework to match China’s rapid progress means more work, but also new opportunities.
Malleson Stephen Jaques’ chief executive partner Robert Milliner (pictured right) says that China’s financial services industry has begun to recognise the opportunities stemming from the economy’s enormous savings capacity. “We may see a demand from Chinese regulatory authorities for legal advice on financial products and how they should be brought into the market,” Milliner explains.
New openings may also rise on the back of increasing inbound investment into China, from investors made more cautious by the GFC. Milliner said that the increasing complexity of financing arrangements may demand sophisticated legal services in creating derivatives and hybrid instrument, while he also predicted an increasing demand for insurance products.
Australian rivals
Australian firms have real trouble differentiating themselves in their home market, given its extreme saturation. The Chinese market for legal services is much broader, hence the differences between the China practices of these firms become far more apparent.
Australian firms have each developed a fairly unique operating model and strategy for dealing with the biggest two challenges to thriving in the mainland, culture and business. Firstly, the major hurdle of culture and language is challenging because it is subtle and unspoken, says Freehills’ international managing partner, John Curtis (pictured left).
Australian firms have each developed a fairly unique operating model and strategy for dealing with the biggest two challenges to thriving in the mainland, culture and business. Firstly, the major hurdle of culture and language is challenging because it is subtle and unspoken, says Freehills’ international managing partner, John Curtis (pictured left).“It is very difficult to master for a non-Chinese lawyer. In fact with reference to working in Beijing, it is very hard even for a mainland but non-Beijing lawyer to master.” He says that when interacting with Chinese clients, it requires an enormous amount of time and energy to understand one another and avoid tensions.
The second big obstacle, heavily pinned to the first, is obtaining work. While it is old news that relationship building and reputation is a must for attracting work in China, each firm has sought to develop its own unique niche areas and attractions. The most obvious division in how Australian firms tackle the big two is between those with onshore physical presence and those with an Australian-based China practice operating on a fly-in-fly-out model.
Most of the top-tier firms have vouched for this option, but even within this classification subtle but significant distinctions can be made. Malleson Stephen Jaques, by far, has the biggest physical presence in Greater China but it leverages largely off its Hong Kong office, where its critical mass is based.
Allens Arthur Robinson is more active in the mainland and markets its ‘firsts’ in China: it is the first Australian firm to have established three offices in China. Davidson said that the recent opening of its new Beijing intellectual property office also made it the first international firm licensed to work on IP matters.
Blake Dawson has also put the strategic focus on China. Blake Dawson's Head of China Practice, Michael Wadley, tells ALB the firm had made a strategic decision not to target Hong Kong. “Hong Kong is essentially a place where money flows through,” Wadley says. “We are interested in developing a presence in China, where the assets are. They are the bosses at the end of the day.”
Minter Ellison’s international managing partner Mark Green says that their China office serves as an effective marketing tool. Minter’s Shanghai base is a small representative office on the ground, which acts as their eyes and ears by building contacts and bringing work home. Corrs’ co-head of the China business practice Anthony Latimer tells ALB that the firm has expanded its client base in China by working on high-profile matters and direct referrals.
representative office on the ground, which acts as their eyes and ears by building contacts and bringing work home. Corrs’ co-head of the China business practice Anthony Latimer tells ALB that the firm has expanded its client base in China by working on high-profile matters and direct referrals.And mid-tier Australian firms have made up for their quieter presence in China through other means. Hunt & Hunt’s China partner Jim Harrowell says that the firm’s China practice enjoys an additional stream of referred work from the firm’s membership of Interlaw. This may be a rich source of business given that Harrowell tells ALB Hunt & Hunt is the only Australian member of this international association of commercial law firms from around the globe.
Advantages
There are many advantages of having an onshore presence; with the most obvious being presence. Yet Corrs Chambers Westgarth’s Latimer said that physical presence makes little difference, as long as Australian-based staff make themselves available and mobile.
“Not being across the road means we cannot be at their office in half an hour, but we can hop on a flight and be there in eight hours.” The firm is an example of an offshore law firm, with six partners across its Melbourne, Sydney, Perth and Brisbane offices dedicated to China related work.
“Not being across the road means we cannot be at their office in half an hour, but we can hop on a flight and be there in eight hours.” The firm is an example of an offshore law firm, with six partners across its Melbourne, Sydney, Perth and Brisbane offices dedicated to China related work.Minter’s Green (pictured left) says “being able to give real-time advice on the ground when it is needed is a real attraction to our clients”. Wadley from Blake Dawson says that advice with immediacy has strong roots in Chinese culture. “When you are eating at a restaurant in China, you can see this. The customers are screaming: give it to me now!”
Offshore firms may also have a harder time getting over the cultural barrier. Latimer says the solution is a combination of modern technology, strong language skills in Australia and senior partners who have spent most of their lives in China.
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Making the reverse path►► MMLC Group makes a fascinating case study of a firm that has finished where most Australian firms begin. Matthew Murphy set up his own Beijing boutique international law firm in 1996, drawing on his 18 years of China and Asia Pacific legal and business experience. He tells ALB his firm tapped into a niche demand in China inbound work for consulting services, intellectual property expertise and guaranteed confidentiality. The larger firms, by reason of their large operating scale, regulatory restrictions, or policy, cannot offer either three. The demand for MMLC’s specialised services for China outbound work has picked up over time, especially cross-border work between Australia and China. In response, MMLC Group opened its first Australian office in Brisbane in 2004. |
Davidson from Allens says relationships take a long time to develop and requires the firm to be on the ground mixing with the local people. “You need a significant team of PRC lawyers, born and bred and educated in the PRC, with their own contacts and friends working in local firms and government”.
Having an onshore presence may also warm the hearts of local clients through its symbolic value, demonstrating that you are committed to the local market. So there is a general sentiment between the Australian firms that you have to be ‘in it to win it’. The firms which have not established themselves onshore claim they are not at any disadvantage, but a closer examination reveals it is because they lacked the capacity or acted too late.
Corrs is of the former group. Latimer tells ALB that the first piece of major China work came to the firm by a simple introduction, followed by a winning pitch and some luck, and the most anyone could ask for at the time were the airfares to China.
Freehills, the only top-tier still offshore, falls into the second category. The firm was late jumping onto the China bandwagon in 2004. And perhaps foreseeing it might never catch up to the already well-established China practices of its big rivals, it decided to fast-track its cultural learning curve by forming an alliance with local law firm TransAsia.
Local competition
Ascending local firms have replaced traditional firms in this market place – the US and UK firms – as competition for Australian firms in China. China’s modern legal system evolved in the early 1990s; the concept of a private law firm is only a decade old. But Australian firms admit that local law firms have come a long way in a relatively short time.
They are observant of their increasing sophistication, but what they find most obvious is that the fully competitive environment is yet to come. Local firms have the obvious upper hand in culture, language and contacts – but it is low charge-out rates that have hurt foreign competitors most.
The China partner of one of the top Australian firms tells ALB that local labour was significantly cheaper, at around US$600-650 an hour. US firms will charge around the US$900-1,000 mark and UK firms around US$750-800. Australian firms find themselves between the two, but he said it was still at a 20% markup on the local rate.
The Australian firms use a no-discount policy, but are flexible at the negotiating table, as are US and UK firms – sometimes offering more than 20% discount on their rates.
Australian firms have traditionally sought to differentiate themselves from the local firms on quality and experience. AAR’s Davidson says that they operate in slightly different markets, so that charge-out rates become a misleading comparison.
“We market ourselves on delivering world-class expertise on par with the UK and US firms, but at cheaper rates,” he explains. Davidson also says Australian firms have the edge on inbound work simply by virtue of being an international organisation established in China. “We are better positioned to explain the politics and practice differences to incoming foreign investors,” he says.
Wadley from Blake Dawson says Australian firms also have an edge on outbound work. Wadley says that local clients often judge the performance of local firms based on work they have done in their own jurisdiction. “Clients must often learn the hard way that this experience cannot match an Australasian firm with decades of experience in the region.”
But Australian firms commonly concede that this expertise gap has narrowed. “The financial crisis forced the rapid sophistication of the local profession,” Wadley says, “[it gives] local firms greater international exposure and greater maturity in analysis of the market and prospects.”
As Australian firms struggle to maintain their edge in quality, local firms have also begun to lose their monopoly on price. Davidson tells ALB that China’s top law firm King and Wood charge very close to the US/UK rates and some local firms have started charging foreign clients a ‘cultural premium’.
Australian firms have responded differently to this environment. Unsurprisingly, the bigger players like Allens and Mallesons continue to maintain a quality differential charging rate. On the other hand, Blakes has adopted a friendlier attitude. “We see local firms as less of a threat and more of an opportunity for forming alliances,” Wadley says.
Competitive arena
Australian firms should be indebted to the financial crisis for weakening the foreign competition. Wadley says that the global downturn hit much harder in the US and UK, and cost-cutting measures issued from headquarters have culled their China practices.
The US and UK firms have also suffered more because of their reliance on inbound work. The indisputable edge these firms have always maintained over Australian firms is their blue-chip client bases in home markets, which for years appeared to be an endless pipeline of lucrative referral work into their China offices.
However, when the financial crisis hit, what was their greatest competitive advantage became their downfall. The credit crunch crippled clients in their home markets, inbound investment dried up and so did their work supply. China outbound work, however, which comprised a significant proportion of the workflow for Australian firms, remained robust and effectively cushioned these firms from inbound losses.
Curtis from Freehills tells ALB that under normal market conditions, Australian firms still enjoy an obvious natural advantage over their foreign counterparts, simply because $90 billion of all China outbound investment went to Australia. The main driver is China’s appetite for energy and resources – which can only increase in future. Curtis says that Australian firms are also much closer to China, in terms of the match in technical skills, geographical local and time zone. “China is in the same time zone as Western Australia and only seven hours’ flight away if extra resources are needed,” he adds.
Allens’ Davidson says there is a significant advantage from simply not being a UK or US firm. He says the firm had considerable work referred from US and UK firms without a China presence, primarily owing to its Australian status.
“They prefer giving the work to us rather than the competition, because we are less of a threat,” he says. “They don’t want another US or UK firm like Linklaters to pinch their client –not only in Asia but also back in their home market”.
Hunt & Hunt’s Harrowell said the firm capitalises on being non-US and UK to attract local clients. The Chinese prefer dealing with Australian lawyers, because Australia has a reputation for not leting government tension fly through into the business realm. In contrast, Harrowell says, the US is notorious for using business leverage to put political pressure on China, for example to stop technology contracts. “Being Australian is a major marketing tool because we don’t carry that kind of political baggage,” he says. ALB