Despite the term “West China” being often equated with “underdeveloped” and “backward” in terms of legal services, this part of the mainland is enjoying the fastest rate of growth across the country as a whole. Liu Zhen speaks to lawyers in Chengdu and Chongqing, the two centres of the West China legal industry, about their efforts to catch up with the most advanced international management practices, converting the region’s economical potential into revenue, and the attempts of local entrepreneurs to go abroad and bring home opportunities for future growth.

Backward?

In 2004, when Jia Rui first relocated to Chongqing, China’s largest municipality, the Shanghai lawyer was shocked by how primitive most of the city’s firms were.

However, 10 years later, this partner at Haworth & Lexon Law Office is now convinced of West China’s potential.

“In 2004, from an outside observer’s perspective that I had, Chongqing was far behind eastern [China] standards,” he says.

Back then, very few firms knew about the importance of branding, for instance. “An official website? What was that for? They had absolutely no idea about it,” Jia recalls.

Many of the lawyers, he says, did not have proper offices to work from. Instead, they worked from home with a banner hanging outside their apartments.

“Most importantly, at most of the firms, the commission rates were too high, where an overwhelming majority of the revenue was being taken away by individuals,” he says.

With such a “backward” distribution mechanism in effect, a law firm could not possibly have built an effective team with true specialties, nor could it have controlled service quality.

“The ‘backwardness’ is mostly due to the backward mind set,” says Yuan Xiaobin, managing partner of Zhonghao Law Firm.

However, Chongqing law firms these days have learnt to better their managerial and distribution systems from industry leaders in Beijing, Shanghai and abroad. For example, the expensive office buildings at CBD areas have seen law firms moving in. In particular, it has been a couple of years since the top two law firms in terms of revenue, Zhonghao and Chongqing Solton & Partners, have both applied the corporate style of operation to their functioning.

“We are the first and, so far, the only law firm here to have a full-time managing partner to take charge of all management and operation activities,” points out Guo Qiang, managing partner of Solton & Partners. He says their corporate-style system has ensured the implementation of best practices and the subsequent delivery of best services to satisfy its clients to the greatest possible extent.

Zhang Zhaohui, partner at Zhonghao, says the firm has been proven to have an advanced and sustainable system of functioning.

“Telling from the exchanges I have had with foreign firms, the level of our specialisation has exceeded even some mid-sized foreign law firms,” she says.

There are similar stories from Chengdu, the other of the dual-core of West China’s legal industry. Law firms in Chengdu too have been learning and improving over the years. Mergers and self-expansions have forged bigger and stronger firms. For instance, Chengdu-based Tahota became the first Western-originated firm to reach annual revenues of 100 million yuan a few years ago, besides being the largest firm in West China with more than 500 employees.

“We are proud to introduce the knowledge management [system] into western [China] firms. And our goal is to develop in a scaled, specialised, branded, corporate-styled, grouped and internationalised way,” says Cheng Shoutai, founder and managing partner of Tahota.

In fact, Chengdu has a slightly larger lawyer population, with some 7,000 lawyers in 400 law firms, in comparison to Chongqing’s 6,355 practitioners in 607 firms.

Chengdu and Chongqing together are home to more than one-third of West China’s total lawyer population. And the whole Sichuan province, including the capital city of Chengdu, has more than 14,000 lawyers employed at its 970 law firms. Fact is that a small area between and around the two cities produces more than half of the GDP of China’s western provinces.

Although these firms, and probably a few others, have an advanced concept and practice, the major bulk of the law firms is still lagging behind – those which are less skilful, but more aggressive in the price war.

“We have many big firms in Sichuan, but not necessarily good ones,” says Peng Yongchen, partner at Jingtian & Gongcheng’s Chengdu office. “Many firms take a low- price strategy, which results in the slower growth of lawyers’ revenue than the growth of the average resident income.”

On the other hand, a number of western enterprises, in general, are less aware of the rule of law and the necessity for legal services, which compounds lawyers’ difficulties to charge fees, adds Peng.

Wang Zhijian, senior partner at Zhonglun W&D’s Chengdu office, also expresses the same point.

“Some Sichuan clients do not think as highly of legal services as those in the first-tier cities like Beijing and Shanghai do,” he says.
It is the same case in Chongqing too.

“In the Chongqing market, enterprises need to be educated to change their traditional opinion about legal services. They haven’t paid so much attention to legal services,” says Carrie Chen, partner at Clyde & Co’s Chongqing Joint Law Venture.

Fast growing

But such obstacles have not been able to change the positive attitude law firms have towards the West China market.

For instance, Clyde & Co launched its joint office with local firm Westlink earlier this year in Chongqing, marking the first formal presence in Southwest China by an international firm recognised by the Ministry of Justice.

“The reason we set up the Chongqing office is client driven … Southwest China is the fastest-growing economic region in this country,” says Michael Cripps, Clyde & Co partner.

Chengdu, with an active private sector,  is seeing rapid growth in the biopharmaceutical, electronic, logistics and service industries, while Chongqing’s “big eight” state-owned groups give it a strong edge in machinery and heavy industry manufacturing.

“We will be looking at a higher growth rate in the Chongqing office than that in Beijing or Shanghai. The scale is something we will need to grow on precisely – probably double or triple the size in the next year or two,” says Cripps.

West China’s immense potential appeals to domestic firms even more than it does to multinational law firms. Almost every top national firm has opened shop in either Chengdu or Chongqing, or both. “Whoever should be here has come already. They are all prepared to take a slice of the pie,” says Peng.

The populous regions of Chengdu and Chongqing are also the centre of higher education in the west, and have a higher-than-national-average speed of increase in lawyer population. And the arrival of national competitors has further heated up the already-fierce competition in the region.

The entire Chongqing market, made up of 607 firms, was worth about a billion yuan in 2013. But this figure is small; so small that several top national firms independently have a larger annual income than that.

“Many small local firms are weak in quality and competitiveness. This means they are defenceless when the national brands enter this region. As soon as the national firms arrive, they would be torn into pieces,” says Jia.

In fact, firms headquartered in other cities have already captured five seats in Chongqing’s top 20 firms, and their proportions are expanding continuously.

The concentration of business, therefore, changes accordingly. The lucrative top-end practices, in particular, are increasingly being monopolised by the top firms. On the other hand, some local firms, through mergers with national brands, try to borrow the brand and the platform that comes with such mergers.

“The old regional market barrier was broken as cross-region merger rises. The dominance of local firms is challenged,” says Han Deyun, founding partner of Solton.

“We value the brand and the advanced managerial system of Grandall,” says Li Shiliang, partner at Grandall Law Firm’s Chengdu office. Grandall Chengdu was restructured from former Chengdu firm Sifangda in 2012.

Wang of Zhonglun W&D Chengdu adds: “We can share the resources of the group too.”

As far as consolidation goes, local law firms agree that there will definitely be a huge shuffle in the market.

“Our choice is to go as a regional leader. We focus on expanding in Chongqing, not nationally,” says Guo of Solton.

“Our strategy is to avoid taking on the Beijing and Shanghai firms directly. We will focus on West China and differentiate our development. We will have more offices in western provinces like Xinjiang and Shaanxi,” says Cheng.

“Our goal is to set a standard bar for the law firms in Sichuan and West China,” he stresses.

“Professionalisation and specialisation are two development directions for the future,” says Yuan. “We don’t blindly expand the size. And we also need to educate clients and promote the correct standard of how to judge a firm.”

Getting out

One of the reasons for lawyers’ optimism is that the businesses of their clients are getting bigger and stronger, and so these firms are now looking at reaching out beyond the enclosed Basin of Sichuan.

"From Clyde & Co’s point of view, it is to service our international clients who are looking to invest in Southwest China. It is also to liaison with, and possibly service, PRC companies who are looking to invest outside China,” says Cripps.

“There are good opportunities in providing foreign-related legal services,” says Wang. “The practices have developed quickly over the past five years, and the types of deals have also increased.”

Many Sichuan companies are going out, primarily to Southeast Asia, as these countries are cheaper in terms of business, labour and judicial costs, he says.

“Among those Sichuan companies that started going abroad, mining, wine and machinery, and electronic trading are the most active sectors. This was oriented by the market, the state policy and the overcapacity in China,” says Peng. “The next hotspot I think is Africa … And we are assisting and encouraging clients to go abroad.”

Chen Yu, partner at Chongqing’s Exceedon Law Firm, indicates that the investment into East Europe, Southeast Asia, Africa and America from Chongqing is also rising steadily.

And how to translate clients’ cross-border growth into law firms’ earning has now become an all-important and urgent question. One way to do so is for these companies to acquire financing in capital markets.

Another possible way out is when clients go out in search for legal services in target jurisdictions and as long-time partners to western clients, regional firms can act as leading advisers.

It is also possible for law firms themselves to go out with its clients. For instance, Zhonghao has opened in Hong Kong, and Tahota is looking at the U.S as a prospective market.

“We will take attempts,”says Cheng, “as some important clients have suggested.”

“The development of our clients is an urge and drive for us. It is a compulsory course for us; how to catch up and match up with the development of the clients and how to provide integrated supporting legal services,” he adds.