US law firms face hyper-competitive markets in Asia
The recent announcement that US-based law firm Fried Frank would close its Shanghai and Hong Kong offices and leave Asia highlights the intense and unique competitive pressures US law firms face here. The combined markets composing the Asia-Pacific legal markets – from South Korea through China and South East Asia to Australia and the Pacific Islands – are characterized by both opportunity and danger for any foreign law firm seeking to operate in the region.
Most economies in the Asia-Pacific Region are, according to a recent report published by the International Monetary Fund (IMF), experiencing substantial economic growth — and will continue to for the foreseeable future. And legal work associated with this economic growth covers a broad spectrum of legal specialisms. At the same time, the competitive landscape among legal services providers in the region is expanding and diversifying. The number and form of legal services providers in the region includes global behemoth law firms, large international law firms, elite large domestic incumbent law firms, elite local boutiques, NewLaw law firms, Alternative Business Structure (ABS) legal services providers, legal process outsourcing companies (LPO’s), the Big4 accounting firms, and tens of thousands of small and medium-sized firms.
In addition to a growing list of the types and numbers of firms competing for legal work (China alone has 19,000 law firms) — local legal markets like China pose unique and daunting additional challenges to foreign law firms. In China, for example, foreign law firms don’t just compete ferociously with local firms on cost — they must also struggle with skewed domestic regulatory and tax regimes which don’t apply to local law firms. US law firms, therefore, are up against headwinds so difficult that a practice focused on the provision of legal services within the region may not be the best approach to the region’s legal market. But there is an alternative.
US law firms have two core options in the Asia-Pacific Region
The first option US law firms have in the region is to seek to compete for local work with local law firms. This option, as I’ve described above, is fraught with danger and US law firm exits are frequent. The second option is to seek to serve the needs of the growing number of Asian enterprises, whether large or state owned to smaller and privately owned, in their aim to expand into the US market.
A recent King & Wood Mallesons (KWM) report and coverage of that report in Britain’s Telegraph newspaper, underscores how outbound foreign direct investment from China exceeds, sometimes dramatically, the amount of inbound investment into the country. At the same time, Asia’s family and corporate wealth is increasing and looking for more opportunity overseas, as Eric Chin (@) of Australia’s Beaton Capital (@) has outlined. And what those investors most need, according to Fortune magazine, are sophisticated advisors in those markets to help guide them.
US-focused investment is an excellent path to success for US law firms in Asia
The advantages associated with US law firms setting up in Asia as a means primarily to help facilitate outbound Asia foreign direct investment focused on the United States are numerous. They include the lack of a necessity to establish a local practice (even if via affiliation). Instead, US law firms can establish a nimble representative presence whose primary aim is the identification, pursuit and capture of work from outbound investors focused on the US.
When this posture is taken, local law firms that were once competitors now become potential referral partners. This representative presence strategy fundamentally alters a US law firms’ position in Asia from one of high-overhead local practice offices competing for local work to instead low-cost, high-return engines of growth tethered to Asia’s growing foreign direct investment focused on the United States. In this scenario, US law firms can ride the wave of Asia’s growth as a means to re-build US domestic law firm practices recently battered by competitive pressures and a decrease in M&A and other corporate work since the financial crisis of 2008/2009.
Given recent US law firm departures from Asia and markets for local work becoming more, not less competitive – a local representative business development presence focused on Asia’s investors and their advisors is a superb path to US law firm success here.