Guangdong is described as a smaller scale sample of China’s overall legal market landscape, where the inland mountainous areas are equivalent to the underdeveloped West and the prosperous Pearl River Delta (PRD) acts as the province’s Beijing and Shanghai to host the most modern and international business.

It was the PRD region that pioneered the “Opening and Reform” of the rigid and poor communist China some three decades ago. With the country now becoming the world’s second-largest economy, Guangdong has also topped the national GDP ranking for years. As for legal business, the PRD region, which consists of the provincial capital Guangzhou, the two Special Economic Zones of Shenzhen and Zhuhai, and six other industrial cities scattered around, is once again where the relaunch and burgeoning happened.

“The business of the lawyers is undividable from the overall economic development,” says Xue Yunhua, the executive partner of Guangda Law Firm in Guangzhou. “There were many historical number ones taking place here, in terms of both the state administrative system and the actual practice,” he tells ALB, recalling his experience since 1986 when he started practice in a state-operated law office like everywhere else in China at that time.

Soon enough - only two year later - Guangdong started to pilot the partnership-type firms run by private practice lawyers. But it was not until 1992 that the Ministry of Justice approved such type of firms to be established nationwide. The first ever firm with a foreign practice was also located in this region.

‘The first ever case to have lawyers handle a non-litigation property deal was in Guangzhou; also the first case of lawyers involved in a SOE’s restructuring into a public company. The latter was first suggested by the government, But eventually, the rule was set up that all IPOs have to be advised by lawyers,” he says. “The 30 years of opening and reform(s) made the PRD one of the world’s largest and most active economic rims, which has paved (for) us legal practitioners a solid ground to develop upon and provided us a market with great potential,” says Laurence Chen, the founding partner of Guangdong Chen Liang & Co in Dongguan city of this region.

However, the PRD firms have their “birth defects”, according to Chen. The pressure for survival had never been significant in the good old times. A lack of foresight, bad planning, low-efficiency operation, unprofessional acts, insufficient competition and so forth, were not big issues because the booming regional economy covered them all up. But with the growth cooling down during the global economic crisis and the competition intensifying, such problems might prove to be fatal.

“The legal industry in this region was like a premature infant in the incubator. It was protected by the good environment,” Chen says. “But there is great uncertainty whether this infant can survive and grow facing the harsh conditions like now.”

Big or strong

One of the changes in the environment is the expansion of national firms into this region.
“There is (a) significant presence of our colleagues from surrounding regions and provinces, including Hong Kong, Beijing and Shanghai…and other advisory bodies like consulting and accountant agencies are virtually expanding into the legal consulting market,” says Chen.

“We local firms are in difficult defence,” says Tong Xin, a partner at Shenzhen-originated Guanghe Law Firm. “The top national firms have the brand to attract the best lawyers, and the famous lawyers once again make their brand more attractive,” he tells ALB. “Our advantage is we know the client bosses better. But we are not good at branding.” Xue also sees the competition for talent getting tighter and tighter. “It has been much more obvious that the firms are taking experienced lawyers from each other. And from my own experience, we had strong appeal to our own lawyers in the past. But over the recent years, I see some people leaving,” he says.

Brand does not only appeal to lawyers, but also to clients. In biddings against national firms, local firms are feeling the pain of being far from the central authorities, who decide and approve all the deals, according to Tong. “When it comes to financial(s) and securities, the client would think the Beijing firms have the advantages as all the relevant government authorities are in Beijing,” says Xue. “You know, in China, the businessmen are always keeping a close eye on government conduct,” Tong adds.

The same as in other regions, local firms have an advantage in litigations and arbitrations, thanks to their deep local connections. The exception is Shenzhen, the newly built city after the “Opening and Reform ” with most population immigrated afterwards where old network does not work . On the other hand, the national firms benefit from their wide network and are aiming at the high end markets of finance, securities, and corporate practices, according to Zhang Jianwei, partner at the Shenzhen office of Jun He Law Office.

“As a national firm, our resources can be allocated nationally. The key concern is the need of our client. For those in the PRD, our nearby office can provide services of higher efficiency and at a lower cost. Our internal system can guarantee the fairness of interest distribution,” says Zhang.

The Guangdong Lawyers Association is trying to push the merger of local firms to form some giants which are adequately competitive, given the fact that national industrial leaders, such as King & Wood Mallesons, had started international mergers, according to Xue. But the mission was difficult and the campaign has yet to be very successful – none of the top five firms in Guangzhou have had such initiatives.

“The big firms with a long history have their own concepts, culture, practices, working style, and distribution system. Unless we break down everything and start again from scratch , a merger is difficult,” says Xue. “Solely becoming big is pointless if it makes nothing stronger.” He adds that presently in China, sometimes smaller is better because over 70 or 80 percent of practices can be done by individual lawyers, and even better not by a team.

“Many practices needs personal networks or ‘guanxi’, and are not easy for a team,” says Xue.
However, Zhang does not believe that competition makes the PRD a ruthless battlefield. “The market volume of the PRD region is still big enough to hold enough firms. The clients require different level(s) and types of services. The legal market is built on the economic and legislation environment, and different firms have different positioning(s) and plans to acquire the living space,” Zhang said.

Crisis

A general threat to all firms, national or regional, though, is supposed to be the ongoing global economic crisis. The PRD region, known for its active small and medium export-oriented manufacturing, was the worst affected area. However, as many firms observe, the impact of the crisis on the legal business has not been direct or obvious. Actually, many of them have recorded steady growth despite this.

“Generally, our business has been growing year by year. Although not as fast as before, but basically it’s been good,” says Xue of Guangda. Tong of Guanghe says his firm reported a revenue rise and a headcount increase in both its Shenzhen and Guangzhou offices. He thinks there might be a lag in time for it to show. But a more important reason was that the legal business is not very dependent on manufacturing industries, which was normally lowly charged. When the export drops, the legal service does not necessarily go down.

Nevertheless, the crisis-stricken industries would unavoidably worsen the overall economic environment in the region. And the firms have made their adaptations. “Although the general economic situation and the property policies have caused an overall effect, as an incorporated firm, we have (a) stronger ability to mitigate the crisis. Loss here can be compensated there. The controlling measures resulted in more disputes. So, our litigation and dispute resolution practices are growing,” says Xue.
Lu Xiaoguang of Commerce & Finance Law Offices thinks that over the past two years, the market is recovering gradually. Zhang of Jun He shares the thought. But none of them would take a chance. “We also changed our practice by introducing new teams, such as dispute resolution and IP. As a result, our revenue has been steadily growing,” says Zhang. Xue adds that they will not sit and wait.

“We used to wait passively for clients to come. But now we proactively go out to look for new clients,” he says, “At the same time, we are expanding our existing services. We emphasise the professionalism. We further divide our practices, and staff every department with a team with a good combination of all age groups.” A new plan for the next 10 or 30 years to match the legal industry’s development with the type and pace of local economic growth would prepare essential fuel for the next rapid run of PRD legal business, suggests Chen.

“If we utilise the time window and opportunities brought by the crisis to proactively address the problems before, we can again recapture a leading position in China’s legal business,” says Chen.

To read the entire report, please click here. ALB

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