Lagging

While it is argued that a vigorous legal services industry grows on the foundation of a prosperous economy, Fujian provides a counter-argument in that an active legal market needs far more than a high GDP coupled with quick growth. The southeast province ranked 12th in China in terms of economy size, but has yet to fully translate that into businesses and profits for law firms, according to many lawyers there.

“The Fujian market does not match its economic development,” says Xu Yongdong (许永东), chief partner of the Fuzhou-based Topwe Law Firm.

In 2012, the total revenue of all Fujian law firms collectively was less than two billion yuan, which is about 0.01 percent of the provincial GDP of 1.97 trillion yuan. In contrast, this ratio in the Changning District of Shanghai was 0.8 percent, and 0.14 percent in Guangzhou.

“In terms of the percentage of legal revenue in total GDP, we are dozens of times behind the first tier cities,” says Xu.

The volume of the market is much smaller. Provincial capital Fuzhou and national Special Economic Zone Xiamen are the dual cores of Fujian’s legal industry. Last year, firms in Xiamen recorded a total turnover of about 470 million yuan.

“It was way less than that of our headquarters in Beijing, a single office,” says Guo Hongqing (郭宏清), managing partner of the Xiamen office of Dacheng Law Offices.

Official figures show that in June 2012, there were 6,076 lawyers working in 489 law firms in this province. This was a 10.6 percent increase from the same period the year before in terms of headcount, and a 9 percent increase in the  number of firms.

However, according a survey by the Fujian Lawyer Association (FLA), there are now only 130 lawyers who practise on foreign-related issues. Also, the profit margin in Fujian is smaller when compared with other similar second tier regions.

“The legal service is very much undervalued,” says Li Rongcun (李荣存), managing partner of Wang Jing & Co’s Xiamen office. “For a similar contract, we charge 100,000 yuan in Beijing and 50,000 in Shenzhen; here we would probably accept only 10,000.”

An obvious demonstration of Fujian’s unattractiveness is the absence of a big international firm running an office here, with even the top tier national brands showing some amount of hesitation to enter the market. Only a handful of national firms have opened shop in Fujian in recent years and for most of those who are already here, it is not as if they “came” here; just that a local firm changed its banner to appear as them.

“The market is too small to attract the big players,” says Li.

Another aspect is that law firms in Fujian are unable to operate like the national leaders. For instance, due to the market volume, it seems unrealistic to divide practices into specific areas. “Many firms are said to have various ‘departments’ or ‘practice groups.’ But in fact, most lawyers do not actually belong to a particular group. They still do all kinds of cases,” says Dacheng’s Guo.

“But without genuine specialisation, neither the firm nor the lawyer can step out of this small region,” he adds.

Meanwhile, the loose internal structure in which individual partners run their own teams independently instead of fully integrating into the firm is seriously impeding the upgradation of Fujian law firms.
“It is a big problem. It leaves us with no time to think about long-term development. The star lawyers are too busy with their endless cases, and the small lawyers spend all their time looking for cases to survive. Nobody has the time to think about new ideas or try out innovations,” says Xu.

“This makes us lag.”

Society of acquaintance

Fujian is located on the southeast coast of China, just between the Yangtze River Delta and the Pearl River Delta, two of China’s major and most industrialised areas. However, Fujian has somehow stayed insulated from the economic radiation of either of these two deltas. Although it has some of China’s major sea ports, its land transportation to other provinces falls behind due to its mountainous topography. Also, it is culturally and linguistically very different from any other province in China, and all these factors make Fujian a relatively isolated region.

“Fujian’s economy is relatively limited in a self-cycle, and has insufficient interactions with the outside,” says Xu.

And without enough external exchanges, there can never be enough cross-boundary investments, mergers and acquisitions, or other economic activities that demand the provision of legal services.
“That’s why the business is mostly litigation and regular company issues,” he says.

Sociology studies, such as Fei Hsiao-Tung’s From the Soil, stated that a traditional Chinese society is bound by personal relations and connections in which conventionality rules, not law. This so-called “society of acquaintance” cannot function in a large-scale modern economy, or what is called a “society of strangers.” Interestingly, such a culture and its traditions remain strong in this considerably industrialised province, according to Xu.

When it comes to the legal industry, the effect of a society of acquaintance is also evident. The trust is built on long-term connections, which adds a flavour of “human touch” to the business.

“It is a small community here. We’ve known each other for long. It’s common to work with someone you know from school, or a friend of a friend,” says Huang Wangqing, general manager of the legal affairs department at Xiamen ITG Group.

On the flip side, it is difficult for anything or anybody from outside to gain admission into the closed ring. Even the local administration is sometimes unfriendly towards the “strangers,” according to Guo. And there is a lack of exchange with “distant” colleagues from other cities or provinces. As a result, new ideas and practices from elsewhere can hardly get in. Any sort of development can only rely on spontaneous change, the pace of which is also slowed down by a conservative atmosphere.

“Fujian is far less open than provinces with similar development levels, and Xiamen is especially inaccessible to others. It is a little surprising, but it is true,” says Guo. “The development of the legal industry would be slow, such as there is unlikely to be [a] significant merger or integration of firms in Xiamen.”

There aren’t many firms who have the ambition to go big, and the aggressive ones face strong resistance, according to Guo. Xu adds that Topwe is the only firm in Fuzhou that is run under a corporate-style system, which is believed to be the ultimate direction of the most advanced internal management being taken up by the country’s best firms. Other firms are willing to see Topwe’s pioneering attempt, but would like to “wait and see.”

“It is all about vision,” Guo says.

Private sector

While being conservative in a lot of areas, the Fujianese are, in sharp contrast, famous for their boldness in being adventurous. A significant percentage of overseas Chinese have originated from the province, as have some of China’s best-known private entrepreneurs and their brands in retailing, food, clothing and sports manufacturing. In fact, it is the rapidly-growing private sector which contributes majorly to Fujian’s affluence.

However, these private enterprises are not yet ideal clients and the potential in their huge businesses is far from being extracted to translate into revenue for legal advisers.

“A big company is not necessarily a big client. No. A big client for us lawyers is who pays a lot,” says Ron Xu (徐建生), partner at Sphere Logic Partners (SLP) in Xiamen.

“Presently, state-owned enterprises (SOE) are, by far, better clients.”

“There is a saying, ‘who wins the SOEs, wins everything.’ The highest-earning firms are mostly working for the big SOEs,” he says.

This is why Fuzhou has higher legal earnings than the Minnan Golden Triangle - Xiamen, Quanzhou and Zhangzhou - that together account for 40 percent of Fujian’s GDP. As the provincial capital, Fuzhou is home to most of the province’s SOEs.

As the SOEs are required to develop their own in-house legal teams, they demand lawyers provide them with more high-value services.

“We want them to take initiative and be more predicting and proactive, and able to help us evaluate and diagnose potential risks we don’t notice. We don’t like passive responses,” says Chen Yan, general counsel of the Fujian Petrochemical Industrial Group. “They have to display quality services, therefore, to uplift their financial value in the eyes of the companies.”

Fact is the central planners of China did not allocate many key SOEs to Fujian because it was considered as the frontline of war. And many SOEs here are not as big as those in some other much less developed west provinces such as Sichuan or Chongqing, according to Ron Xu. There is a limit to their overall spending on legal charges. This means law firms have to, on all accounts, explore deeper into the private sector (to which the majority of their clients belong).

“Private capital has its own personality that strongly prefers speculation and high-stake adventures. And at its early stage, it is definitely inseparable from incompliance. Some of them tend to choose the corner-cutting approach of collaborating with the administrative power rather than seeking help from [the] law,” says Xu Yongdon of Topwe.

In China, people’s awareness and need for legal services are still in transition, with big differences between regions, informs Li.

“For example, a man in Shenzhen having a dispute would probably like to hire a lawyer to resolve this according to the law. But such things are not very likely to happen in Xiamen,” he says.

Personal relations still work here. A joke says when given a one million budget for a lawsuit, a Shanghai company’s management may want to pay that one million to hire the best lawyer, whereas a Xiamen boss would only hire a 50,000-yuan lawyer, and spend the rest of the money on reinforcing the useful connections.

“Some of the private entrepreneurs do not even know what exactly a lawyer does, and how a lawyer could help with their business. They only consider us as a rubber stamp in the end. They do not realise how important it is to get us involved from the beginning to see it through,” says Ron Xu of SLP.

The good news is that not all private companies are like this. Huang Wenting (黄文婷), the general counsel of China’s largest sportswear maker Anta, says although privately owned, the Quanzhou-based company has been  paying high attention to legal affairs since it went public in Hong Kong, and has started expanding globally and dealing with numerous intellectual property infringements.

“We work with external law firms a lot, including local, national and international ones,” she says. “I would like to see them react quickly and have [a] specific team just working for us.”

Western Strait

As a legacy of the civil war of the late 1940s (Fujian had confronted the defeated KMT forces on the island of Taiwan across the Strait), the province is still regarded as a potential battlefield of sorts. The confrontation resulted in Fujian lacking state investment in civil projects and a consequently underdeveloped infrastructure. The military tension did not ease until 2008, and in the next year, the Chinese government approved the construction of the Western Taiwan Straits Economic Zone, which mainly covers the coastal cities of Fujian.

“As this national strategy moves forward, we can expect a big change in the legal industry here,” says Xu. “The point is, there will be more communication with the outside.”

More and more national companies, especially the large central SOEs, will expand into Fujian, bringing in not only major opportunities for law firms but also modern management concept and ideas, says Xu. The Fujian economy will then get an opportunity to get integrated further into the national circle.

At the same time, some Fujian firms are also considering more exchanges with colleagues and moving up into a bigger arena.

“Integration is an inexorable trend,” says Tan Mulin (檀木林), partner at Grandall’s Fuzhou office, which merged into the Grandall franchise last year. “Joining a national platform means an improvement in internal structure, internal management and product development.”

Guo, whose firm used to be one of the first law firms in Fujian before its merger with Dacheng in 2005, adds that joining Dacheng has given his firm access to the latest knowledge and information, national-scale resources and client database, as well as learning and training opportunities.

“The advantages are very clear,” says Guo. “When you climb higher, you can see further.”

A different approach to go national is to join an alliance. Tenet & Partners, the largest firm in Xiamen, is a member of the Sino-Global Legal Alliance (SGLA), which was founded by Hogan Lovells and local firms from major cities and regions in China.

“Based in the Western Strait, we hold on to the idea of serving the whole country. We have managed to expand our access in other regions via the SGLA referral network,” says Bai Shaoxiang (白劭翔), senior partner and executive director of Tenet.

Topwe joined the Elite Chinese Legal Alliance (ECLA), another national union headed by the Bejing DHH Law Firm. Although the practice cooperation is effective, Xu Yongdong suggests more exchanges should be focused on management given the imbalanced development of members.

“Unless there is exchange between the management, we are unable to think on the same page,” he says.

SLP, as one of the few firms specialised in foreign-related practices in Xiamen, went one step further to join the Lawyers Associated Worldwide (LAW).

“Working for foreign or multinational companies has become the major part of our revenue. And during this, we leant a lot.” says Ron Xu.

Specialisation

Given that more than 95 percent of Fujian firms are medium-sized (10 to 30 people) or small (under 10) ones and the average size in the province is 11 people per firm, which is below the national average, FLA head Xue Yuqing (薛育卿) calls on the small and medium firms to take the approach of quality and specialisation.

“The large firms define the direction of the whole industry,” he says, “... while the small and medium firms determine the overall level of development,” he says in a report.

Firms seem to agree to this. Dacheng Xiamen has completely separated its shipping and criminal departments from its other departments and vertically connected to its respective practice groups across the nation, according to Guo. Bai says Tenet has been working hard on dividing lawyers into different practices to sharpen their specialty and avoid duplication of labour. Family law and labour and human resources affairs are two of their most proficient areas. “There will be no place for panacea lawyers,” he says.

Li believes Wang Jing & Co has found its strength in its shipping and Japan practices.

“Competition is not a big problem for us because we have exclusive advantage in shipping. Nobody can compete with us on expertise in this area,” says Li.

What SLP has learnt on project management while serving as PRC counsel for foreign clients’ inbound deals could enable the firm work as the key counsel to Chinese companies in their outbound transactions, according to Ron Xu.

“We would like to transplant these experiences to Chinese clients. Especially since they are completely clueless about outbound transactions. No one here has more experience or knows the details better than us. So this is our niche,” he says. “We are also developing an online IP enforcement service that would probably be the market leader nationwide.”

By improving Topwe’s internal structure to enable specialisation, Xu Yongdong says the key to everything is to find out and provide what the clients’ really need. Thanks to the complete work divide, Topwe now has specialised knowledge management and market study, and is able to exploit two very promising markets: (i) Advise the government on economic policy decisions or investments, analyse political, economic, social and technological effects (PEST) and (ii) Provide solutions which abide by the law, assist the nouveau riche in the region to manage their assets and to plan for inheritance.

“The questions in front of us are: Have you found a new demand from the client and how can you fit in to meet the demand?” says Xu.

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