There is no longer any doubt that the Guangzhou legal market is in the top three after Beijing and Shanghai in terms of client pulling power and total annual income. 2010 saw 20 new players burst onto the scene bringing the total number of law firms to 394. And even though the revenue amassed by these firms is estimated to have increased substantially on 2009 figures, it is worth noting, though that the total revenue generated by the Guangzhou legal services market is still only one third the value of Beijing’s and a mere two thirds that of Shanghai’s.
But lawyers in Guangzhou remain optimistic that they can catch up to the country’s twin powerhouses—even if the task is a difficult one. But what the Guangzhou legal market lacks in political connections, or geographic locations, its firms more than make up for in quality of work, and astute business development strategies.
State of the market
The biggest highlight for most local players in 2010 was the 16th Asian Games held in Guangzhou. But while the government spent in excess of RMB 200b on infrastructure in the lead up to the games, only a fraction of this saw its way into the legal services market: estimates indicate that only RMB200m was spent on legal work. On the work front, law firms claim to have seen a spike in M&A work, insolvency & restructuring mandates, real estate and, of course, IP.
Trust Law Firm, one of the largest law firms in Guangzhou by headcount, enjoyed a 20% increase in revenues in 2010. The firm’s senior partner, Kenda Peng, puts a lot of this down to the increasing number of restricting and corporate insolvency matters the firm firm handled—Kenda believes the firm’s practice in this area grew by over 25% in 2010—and predict further solid growth for the remainder of the year.
“The companies in the Pearl River Delta region are mainly engaged in the trade processing businesses, but their development has bottlenecked,” Kenda said. “Due to the high cost of capital and sometimes the lack of it, many companies are forced to restructure their operations or face closure… therefore, the relevant practices at Guangzhou firms are expected to boom.”
GFE Law Office, one of few law firms that to have advised on multiple initial public offering (IPO) work over the past 12 months sees future growth in securities and intellectual property (IP). “With the Chinese government enhancing IP right protection… there will be a solid platform for growth for IP lawyers.”
Similarly, government initiatives designed to encourage commercial activity among the city’s small and medium sized enterprises has kept M&A and restructuring teams at a number of firms busy.
Wang Jing & Co.—a firm perhaps better known for its shipping and maritime law expertise than its M&A practice—claims to have seen about 60% of its income coming from outside its core areas—ostensibly from M & A and foreign direct investment. Guangxin Lawyers, has also seen its revenues increase on the back of M&A, FDI and restructuring mandates— registering a 15% of growth rate for the last financial year.
Apart from corporate M&A and insolvency & restructuring, Guangzhou’s real estate market, just like the sector elsewhere in the country, thrived during 2010. According to Guangzhou Bureau of Statistics, total investment in the city’s real estate market 20% in 2010. The booming sector has quickly developed in a staple for a number of Guangzhou law firms. Guangda Law Firm, which employs some of the region’s most astute real estate lawyers, has seen the firm post year-on-year revenue growth for the last few years as a result of the city’s real estate boom.
Even though Guangzhou enjoyed one of its more successful years for capital markets work, this was no cause for joy among the city’s major players. “Few Guangzhou law firms are able to provide IPO legal advice, and few companies [interested in listing] come to Guangzhou law firms,” says Wang Jing, the founding partner of Wang Jing & Co. “In order to be successfully listed, most companies prefer to find legal services from Beijing law firms because of their experience and geographical advantage.” Beijingbased player King & Wood, for instance, is thought to have acted on 70% of all Guangzhou listings in 2010.
The statistic is just as alarming in relation to securities work. Here, Beijing law firms have a 62.17% market share. According to a survey conducted by
Location, location, location
Geographical issues also make Guangzhou law firms less competitive when it comes to large transactions and investment projects. Beijing, as the country’s political centre, has a large number of state-owned-enterprises within close proximity to many of the city’s largest law firms, and Shanghai, as the country’s financial centre, has lured many multinational enterprises to plant their headquarters there. Those companies, which often generate large amounts of high-value, highly-sophisticated legal work would, according to lawyers ALB China interview, send this work to firms located in Shanghai rather than other cities and provinces in China.
Though Guangzhou is widely known to be a platform for many Hong Kong and Taiwanese companies looking to tap into fast-growing mainland markets, the total volume of transactions and investment from these enterprises is not enough to keep Guangzhou firms busy—and Trust Law Firm’s Kenda believes that the work is often of lower value and complexity. “Hong Kong and Taiwan enterprises also have less legal awareness than European and American ones,” said Kenda.
“Due to various reasons, few Guangzhou law firms consistently have the opportunity to advise on large transactions and investments,” said Xue. Xue, who has the seventh and eighth president of the Bar Association of Guangdong puts this down to the skill shortage noted above and also scale: “These problems…touch on another issue for the Guangzhou legal industry: the necessity of becoming larger in scale through mergers.” But while mergers may well deliver firms in Guangzhou the critical mass with which they can fight for larger, feefat mandates in the short-term, the question is whether growth through such measures is sustainable in the long-term.
In search of rational growth
It is obvious that large-sized law firms have an edge over the competition. In order to help Guangzhou law firms improve their competitiveness and increase their market share, the Guangzhou Bar Association and the Guangzhou Bureau of Justice have been encouraging the city’s law firms to strike mergers. But the idea has not been welcomed by some in the city’s legal services market.
“When the scale (of a law firm) increases, so too do costs. It is hard to balance these costs if a firm does not have a constant flow of large projects to bring in profits,” Xue says.
Wang of Wang Jing & Co adds,” It is also not easy to consolidate law firms of different structures and culture. In fact, the process of consolidation is a process of compromise and sacrifice, but many Guangzhou lawyers lack the spirit to pull this off.” According to Wang, most of Guangzhou lawyers are satisfied with their firms size and current achievements, and many do not aspire to anything more.
Trust Law Firm’s Kenda believes a different approach is needed: specialization is the key to increasing market share. “Instead of focusing their efforts on merging or competing with Beijing law firms, Guangzhou law firms should focus more on their improving their expertise and legal service quality… they should try and seize local market back first, rather than looking to increase their national share.”
The view is shared by Quan Zhaohui, the senior partner of Guangxin, “Considering the distinctiveness of the current situation facing Guangzhou law firms, rational growth is more suitable for the Guangzhou legal industry.” Quan said that in the near future, his firm does not have any grand expansion plans, but will focus more on “improving their expertise.”
While Guangzhou may be at a comparative geographical disadvantage when it comes to competing with Beijing and Shanghai for SOE and MNC legal work, the city has a distinct advantage over it national rivals when it comes to work coming from across the Luo Hu. “We should consider Hong Kong, and the outbound and inbound investment work that is coming from there, as a springboard to seize back market share,” said Kenda.
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