Small is beautiful in China, too

These big, national firms have never stopped moving forward: King & Wood opened its eleventh China branch office in Ji Nan, Shandong Province, in July 2009 and has fully extended its corporate finance business from financial centres such as Beijing and Shanghai to China's second and third tier cities.

But national firms are not the only ones to sense that great potential lies in the less-developed regions. Facing the penetration of larger firms, their regional peers are cultivating strengths of their own in order to survive and grow in an increasingly competitive market.

“There is competition with local rivals to some extent … It's hard to make comparisons between full service firms and local boutique firms as the positioning or orientation of the firms are different, and they all have their unique strengths,” says Wang Ling, Beijing-based managing partner of King & Wood.

Grandall Legal Group is also boosting its wide coverage and has identified the unique elements which help it grow in a different way. Rather than setting up subsidiary offices, it spreads its network by merging with leading firms in the targeted region. Among the firm's nine branch offices, seven were originally top regional firms.

“It's a quick way to pick up business as you have the local resources and network right there,” says Yan Huarong, partner of Grandall's Hangzhou Office in Zhejiang province. “Most importantly, it saves up to 80% of the cost compared with setting up a new operation which might require lawyers to relocate their practice from their native places.”

How local firms react
In April 2009, Grandall acquired Sifangda Law Firm one of the oldest firms in Chengdu, Sichuan province. According to Sifangda, the firm signed a “strategic co-operation agreement” with Grandall back in November 2007 and has been administrated and operated as an office of Grandall since then. It will be renamed Grandall Legal Group Chengdu Office after approval by the regulatory authorities.

Grandall is also planning a new acquisition in central China's Fujian province.

“From the perspective of regional firms, it's a good opportunity to get broader business, which may otherwise stay quite narrow,” says Yan.

Sifangda Law Firm is traditionally strong in real estate, arbitration, local regulatory matters, state-owned assets investment and infrastructure construction. It has been acting as legal counsel for the local government and state-owned companies. It expects to benefit from the new business and advanced management experience which is likely to come from the merger with Grandall.

“Grandall has a reputable practice in IPOs – IPO work generated from local clients is very little. Lawyers providing IPOs service in Sichuan are mainly from Beijing and Shanghai, not local lawyers.” says Shi Bo, a managing partner of Sifangda. “We are hoping to expand into that area with the greater platform.”

The firm's strong practice comes mainly from government infrastructure projects or resourcing of state-owned enterprises. But it has seen a gradual increase of advisory work from foreign investors especially in the past few years.

“That comprises around 80% of our work. And that is why we have a solid understanding of local regulations and policies and maintain a long relationship with the government and regulatory department,” Shi says.

But he also admits that the firm might lose the regional brand that it has maintained over two decades.

Grandall partner Yan senses that is will take longer for the regional firm to be fully integrated into the group. He estimates it to be around two years before the internal management of the subsidiary will come in line with the parent firm.

“On the other hand, setting up an operation from scratch, though it costs more and takes a longer time to establish, has a clear focus of practice and maintains consistent quality which is actually good for the recognition and spread of the brand,” says Yan, who witnessed the establishment of the Hangzhou Office in 2001. It is one of the few branch offices that are directly managed by Grandall.

As leading firms in the region have stepped onto a higher platform, this has led to new challenges for their rivals as their peers now seem to be in a better position to get business. Some smaller firms have followed their own way to secure themselves a leading position in their target market.

Small is beautiful
“Compared with the broad business of firms such as Jun He Law Office and King & Wood which dominate the market, we aim to be a specialist,” says Justin Ma, senior partner of JC Master, a firm based in Nanjing, Jiangsu province, which is one of the wealthiest provinces of the country and is regarded as a favourable destination for foreign investment.

Although mainland China is geographically large, it is all governed by the same legal system. There is basically no distinct jurisdictional difference wherever you practise as long as you are in China, according to Ma.

The eight-partner boutique firm, which houses no more than 30 fee-earners, specialises in securities and capital markets, venture capital, PE funds, M&A, foreign direct investment and corporate and commercial services. It is targeting a 20% growth in deal flow next year and is trying to enhance its innovative capacity to get more complex work. The firm is offering legal advice to a state-owned enterprise in connection with the acquisition of a mining company in Australia, and rendering legal services to a client regarding the takeover of a Singapore listed company.

Ma explains the ways that regional firms usually get business: to be entrusted work by foreign firms, to win it from clients directly and to get it through regional co-operation.

“Large firms could have problems of management across different regions and are not usually detail-oriented,” he says. “More importantly, we charge much less but have all our team provide a very focused and dedicated service with added value,” adds Ma, who has advised foreign listed companies and private equity funds on strategic investments into Chinese companies.

Staying small does not necessarily mean a lack of networking at home and abroad. JC Master has been a member of the International Alliance of Law Firms (a network of over 50 small and medium-sized firms from more than 40 countries around the world) for three years. The Alliance helps JC Master compete with large firms in an efficient and cheap way.

Another example of a small, specialised firm is High Mark in Hangzhou, Zhejiang province.

“We are in corporate governance, emphasising specialisation and team work, which large local firms very often neglect,” says James Zou, High Mark's founding partner.

The three-partner, twelve-lawyer boutique was established in 2002. It has a client base of private and foreign-invested enterprise and also specialises in dispute resolution and international and domestic arbitration. Zou foresees potential growth in his province in outbound investment in the mining and outsourcing sectors.

Strength in numbers
Another firm that is trying to tap into an extensive network at home and abroad, without having to establish costly new branches, is Solton, which is based in Chongqing in western China. It is a member of Lovells' successful Sino-Global Legal Alliance (SGLA), which was set up in September 2007.

“It makes it possible for us to have a broader business coverage across the country and develop more high-end commercial business through international communication,” says Guo Qiang, Solton's associate responsible for marketing and business development.

The Alliance has so far attracted 13 regional firms from 11 provinces across mainland China. They have received training in management in London and there is regular referral of business among members.

There are also domestic alliances: Qindao Law Firm in Qingdao city is a member of The Grand Compass Law Alliance, a domestic legal association which was initiated in 2004 and now has firms from 12 cities.

“The biggest benefit is the country network that makes it possible for us to expand our relationship with clients,” says Audrey Wang, a partner of the firm.

Qingdao, a city in eastern China's Shandong province, is well-known for its light industry, electrical appliance manufacturing, shipping and maritime work. Wang says her firm has been able to maintain relationships with local clients – such as home appliances brands Haier – as they expand countrywide.

“Otherwise, they will seek services from firms in other cities,” she says.

Natural limits
Though regional firms have used various successful strategies to build their businesses in the face of competition from the larger law outfits, they are still facing limitations. For example, in Tianjin there are around 260 firms but only 2300 licensed lawyers. This means that each firm has less than 10 partners, according to Bai Xianyue, partner of the city's Winners Law Firm, which covers FDI, M&A, IPOs, dispute resolution, IP and real estate, and represents many local listed companies, security houses and real estate companies as well as foreign investors.

“This means that there are less than five firms that have a team of around 30 to 40,” says Bai. He adds that “in whatever way you seek business, a firm's growth and the way in which it gets bigger is closely connected with the economic demand of the region that it sits in”.

The increase in preferential policies, a cheaper workforce and rich natural resources are attracting an increasing number of foreign investors to China's traditionally quieter cities. Regional firms are therefore expected to catch up rapidly with the growing demand.

Spotlight on Hangzhou, Shenzhen and Qingdao

Hangzhou: Hangzhou is a city which is primed for both inbound and outbound investment. It is located in Zhejiang province, one of the country's richest and most developed and is home to many high-tech companies, including Alibaba.com, China's biggest e-commerce company, which listed in Hong Kong in 2007. Wahaha is also based in the city.

The Hangzhou courts have earned a reputation for their expertise. In December 2008, the Intermediate People's Court ordered Samsung to pay Rmb50 million (US$7.3 million) to local company Holley Communications for infringement of a dual-mode mobile phone patent. The sum was the largest in the history of the industry. Another case, Hangzhou Dukuai Network Media Co, Ltd v Wang Linyang, won a place in the Supreme People's Court's list of the top ten cases of 2008.

The city now has more than 180 law firms and around 2500 lawyers. Local firm Zhejiang T&C was set up in 1986 and now provides a full-service, including a leading corporate/M&A practice.

Shenzhen: Hong Kong's closest mainland neighbour has been a popular choice for investors interested in manufacturing, although the economic slowdown has hit the sector, and the city, hard. Shenzhen's gross domestic product growth dropped from 14.6% to 12.1% in 2008, and is expected to drop to 10% in 2009.

The Shenzhen Stock Exchange provides some hope for capital raising, particularly with the promised opening of a junior board (the growth enterprise market) later this year (see A Gem of an exit in CLP June 2009, page 16). Draft listing regulations were issued in March. They indicate that the new board should provide a means of going public for many small and medium-sized enterprises, although entry requirements are relatively stringent when compared with similar markets overseas.

The city is also a good place for dispute resolution: it is home to a sub-commission of the China International Economic and Trade Arbitration Commission, which itself recently set up a dedicated mediation centre.

In May 2009, Shenzhen issued revised rules governing the employment of foreigners. The Implementing Measures on the Administrative Licensing for Foreigners Entering China for Employment in Shenzhen (Revised) (深圳市外国人入境在深圳就业行政许可实施办法 (修订)) adds new requirements to the administrative licensing criteria for employment of foreigners. Companies must now show the “special need for the job position that the foreigner is intended to take”, and that there is “a lack of suitable candidates within China at the moment”.

Many PRC firms have branches in Shenzhen, and all the large firms are represented. Much of their work comes from the banking and finance, corporate and shipping sectors.

Qingdao: Qingdao is perhaps best known for its beer, and Tsingtao Brewery is its flagship company. In January 2009, following its acquisition of Anheuser Busch and subsequent problems with the PRC Anti-monopoly Law, InBev agreed to sell 19.9% of its stake in Tsingtao to Asahi Breweries for US$667 million. A few months later InBev sold its remaining 7% share to Chen Fashu, a self-made billionaire with extensive mining investments, for US$235 million.

The city is also home to a large port and hence many import- and export-focused businesses. It has the stated goal of becoming northeast Asia's main shipping hub by 2010.

Many Korean and Japanese companies have offices in Qingdao. This has led to a number of Chinese banks establishing branches there, in the hope of winning foreign-related work.

Locally-established Qindao Law Firm is a leader in maritime services, as well as IP, banking and finance, corporate/M&A and dispute resolution.