European law firms are sometimes (perhaps rather unjustly) seen as the runt of the law firm litter anywhere outside of their home market, and their presence in this market is no exception. The more established foreign players in the region - the US, UK and Australian firms - rarely regard them as real competition. They dismiss continental firms politely as operating in slightly different markets, and bluntly as merely filling in gaps that established firms have left behind. Yet while continental firms may have moved in late, they are moving fast, often accelerating their growth through acquisitions and alliances.

Further, they have been very good at identifying niches in the market, in which they have now begun to consolidate a leading position. The big players may shrug their shoulders about losing work to continental firms in these specialised areas, but they should be wary that European firms may end up poaching more business through this initial niche play.

The latecomers

It is true that most continental law firms have lagged behind in the race to enter and prosper in China. Their US, UK and Australian counterparts are generally ahead both in size and time spent in the region. "While the Magic Circle firms were setting up offices in Hong Kong, the German and French firms were just beginning to incorporate," says Salans' Greater China managing partner, Bernd-Uwe Stucken. Those early entrants enjoy a natural advantage in relationships, reputation and expertise in the region, as well as being much larger.

Stucken says that continental firms with smaller operations simply cannot achieve the economies of scale the big international firms enjoy. Salans is one of the larger continental law firms with French headquarters, and already has three offices in China. But Stucken says its Beijing and Hong Kong offices are still too small and its Shanghai office would have to double in size, before the firm can come close to its aim of securing a dominant role in China.

Continental firms further suffer the traditional hurdle of jurisdictional disadvantage, because the governing law in large global M&A, bond issue and project financing is usually UK, US and - occasionally - Australian law. As a result, continental firms were held back from capitalising on the surge in cross-border transactional work that these legal counterparts have seen in the past decade.

However, this traditional disadvantage (the limited pool of large financial clients) has worked to their advantage during the financial crisis. "Continental firms have traditionally relied more on strategic investors, which insulated us from the collapse of the financial markets," Stucken says. "We didn't lose as much as others lost." And Stucken's 2010 outlook for Salans is bright. "Revenue is up by at least 20% since last year in our China offices."

Continental firms in PRC

Firm	Country of origin	Offices	Year first office opened
De Wolf & Partners	Belgium	Shanghai	2007
Bignon Lebray & Associ‚s	France	Shanghai	2007
LefŠvre Pelletier & Associ‚s	France	Shanghai	2008
Thieffry & Associes	France	Shanghai	1995
Beiten Burkhardt	Germany	Shanghai and Beijing	2003
CMS Hasche Sigle	Germany	Shanghai	2006
Peltzer ú Suhren ú Meinecke	Germany	Shanghai	2004
Schulz, Noack, Baerwinkel	Germany	Shanghai	1995
Schindhelm	Germany	Shanghai	2007
Taylor Wessing	Germany	Shanghai and Beijing	2003
Chiomenti Studio Legale	Italy	Beijing and Shanghai	2007
Lega Colucci e Associati Law Firm	Italy	Beijing	2005
Studio Legale Picozzi & Morigi	Italy	Shanghai	2006
Cuatrecasas, Gon‡alves Pereira	Spain	Shanghai	2008
Herrero- Advocats International	Spain	Shanghai	2007
J&A Garrigues	Spain	Shanghai	2006
Ur¡a Men‚ndez	Spain	Beijing	2009
Advokatfirman Vinge KB	Sweden	Shanghai	2007
Mannheimer Swartling Advokatbyr† AB	Sweden	Shanghai	2007
HIL	Netherlands	Shanghai	Undis.

This list does not purport to be exhaustive

Changing clientele

Most firms set up their representative offices in China as an extension of their core business in the continent, almost exclusively servicing the inbound interests of clients from their home jurisdictions. From modest beginnings, these continental European firms have developed both the reputation and relationships in China, and are attracting more local clientele.

Gide Loyrette Nouel, headquartered in Paris, is a case in point. When the firm first entered China two decades ago, it primarily advised foreign companies on greenfield projects in the infrastructure and power plant projects area in China. As the market has evolved significantly, Gide's China practice has also expanded - representing a broader range of foreign clients in new areas including M&A transactions, VC and PE investments, and dispute resolution.

Over the past five years, the firm has also been increasingly involved in Chinese companies' outbound investment work, particularly in Africa and the Middle East, which are regions the firm has a strong presence in. Last October, the Beijing and Istanbul offices successfully assisted Taiyuan Iron & Steel group in its US$300m investment in three Turkish mining companies. The investment is the largest involving a state-owned Chinese company in the mining sector in Turkey. Gide is now among the largest international firms in China, with more than 50 partners and lawyers working across offices in Beijing, Shanghai and Hong Kong.

Growing enthusiasm by domestic companies to venture into global markets has lured a number of European firms to China in recent years. Spanish firms Cuatrecasas and Ur¡a Men‚ndez, for example, established an office in Shanghai and Beijing respectively a year ago. Both firms have found China an increasingly attractive market for future growth. According to Cuatrecasas' senior associate Omar Puertas, who is heading up the firm's development in China, the aim of this new office is to accompany clients in their expansion strategies while attracting Chinese investment to Europe and Latin America.

Echoing Puertas, Beijing managing partner of Ur¡a Men‚ndez Juan Mart¡n Perrotto says that his firm intends to leverage strength in Latin America for the benefit of Chinese investors. "We see huge potential and synergies that may be generated by combining our Asian and Latin American practices," says Perrotto, who has gained many years of experience in legal practice in Argentina and Spain. "Given the current market conditions and China's demand for natural resources, Latin America will become the main destination of Chinese foreign investments in the coming years."

Breakdown of the largest Continental firms in China

	Salans	CMS*	Chiomenti Studio Legale	Gide Loyrette Nouel
Representative offices in China	Beijing Shanghai Hong Kong	Beijing Shanghai	Beijing Shanghai Hong Kong	Beijing Shanghai Hong Kong
Total number of partners and lawyers in China	6 partners 20 lawyers	6 partners 25 lawyers	6 partners 40 lawyers	10 - partners 40 lawyers
Number of partners in each office	Beijing - 1 Shanghai - 3 Hong Kong  - 2	Beijing - 0 Shanghai - 6	Beijing - 1 Shanghai - 1 Hong Kong - 4	Beijing - 3 Shanghai -3 Hong Kong -4
Number of lawyers in each office	Beijing - 3 Shanghai - 14 Hong Kong - 3	Beijing - 1 Shanghai - 24	Beijing - 15 Shanghai - 8 Hong Kong - 20	Beijing - 17 Shanghai - 16 Hong Kong - 7
Year established in China	2004	N/A	2007	1993
Note: *CMS is an alliance of nine independent European law and tax firms. This list does not purport to be exhaustive

Niche advantages

China's legal market, though relatively nascent, is already highly competitive. Even long-established US and UK firms have frankly admitted that they are facing fierce competition in this particular market. So how have continental firms - despite their slight disadvantage - managed to grow their market share?

The key lies in their niches. Some of the continental firms may have gained a competitive edge by being focused and structured to leverage and extend their expertise in a particular area of law, such as tax, while others enjoy a natural advantage given their extensive expertise and resources in their home jurisdictions, where the US and UK firms are less present.

This advantage becomes more evident with Chinese investment into Europe picking up pace. Italy's leading firm Chiomenti has reported a noticeable growth of Chinese outbound legal work into Italy in the past few years. In 2007, it was involved in one of the largest M&A deal by a Chinese company seen in Italy - Changsha heavy machinery maker Zoomlion's US$422m joint bid to buy 60% of the stake in Italian construction machinery maker CIFA.

Chiomenti established itself in Beijing in that year, which also marked the beginning of noticeable Chinese investment into Italy. The firm then expanded in China through its integration with Birindelli & Associates in 2008. This legacy firm has operated in Asia since 1987 and the combination gave Chiomenti a presence in Shanghai and Hong Kong, in addition to its existing Beijing office.

In April 2010, it entered into an exclusive association with Hong Kong law firm CdB and JC & Co to provide fuller service offerings in M&A, private equity, restructuring and litigation services in Hong Kong. "Chinese investment into Italy is a relatively new phenomenon, but it has increased significantly since 2007. Sectors including high-tech, industrial equipment, renewable and food and fashion have attracted [the] growing interest of Chinese investors," said Gianluca D'Agnolo, a partner of Chiomenti in Beijing. "From our perspective, the environment in Italy towards Chinese investment has become more friendly."

The firm is advising private and state-owned Chinese companies that are acquiring distressed Italian businesses after the GFC, but also investing in financially healthy companies. It also assists large Chinese banks in important credit recovery actions towards Italian companies and in the resolution of disputes through international arbitration. "In our firm, although the amount of legal work generated from Chinese outbound investment is smaller than that of inbound into China, it is growing at a much faster rate," says D'Agnolo. "Chinese outbound investment into Italy is a niche area, and other large Italian firms are yet to build a strong presence in China. For the time being, we still enjoy an advantage. In terms of inbound work, however, we are facing a much higher level of competition, mainly from large US and UK firms," he adds.

Salans is another example, being known for its strength and expertise in Eastern Europe and Central Asia. An important part of the firm's growth  is expected to be driven by Chinese companies that are increasingly active in emerging markets, such as Russia and Kazakhstan.

"A shift from inbound to outbound focus is inevitable in international firms in China, as PRC firms are growing stronger very fast. Assuming that foreign firms won't be allowed to handle domestic legal work in the foreseeable future, European firms will have to make a difference on the international elements to stay afloat in the market," says Rebecca Silli, a partner of Gide in Hong Kong. "The key issue is whether a firm has the necessary geographical coverage and strength in human resources required to win mandates for outbound projects." With 24 offices worldwide and niche expertise in Africa and Middle East, the firm has been frequently sought out by Chinese companies to advise on their overseas projects, mostly in the energy and natural resources sectors.

Building alliances

The price tag to enter China becomes higher each year. At the same time, the market becomes increasingly competitive, to a degree that the competition level here is even higher than in some of the European markets. Building a local alliance is now regarded by some firms as an effective vehicle for claiming a share of the action. French firm Cotty Vivant Marchisio & Lauzeral still does not have an onshore presence in the mainland, but partner Philippe Taverne says integration is one way into the market. "China is a busy market - it is crowded with many players already, both international law firms and Chinese local firms," he says. "We are open to finding partners and integrating with teams already present in China." 

Marccus Partners, a law firm of European origin which has 200 lawyers in seven offices across Europe, has recently found its 'best-friend' in China; entering into a "long-term entrustment agreement" with Shanghai mid-sized firm HHP. Under the agreement, the two firms will form a close relationship similar to a strategic alliance. HHP will use the Marccus brand in mainland China exclusively, and the two firms will work seamlessly with a uniformed interface for clients. Managing partner Bernd Sagasser noted that the strategic component of the agreement is to build a platform to expand into the Asia-Pacific region, together with HHP and alongside Mazars, the 12,500-professional strong advisory services group the firm belongs to. ALB