Another foreign law firm has chosen to not maintain a physical presence in Asia – while instead focusing on foreign direct investment from Asia into the jurisdictions where they practice.
This strategy is employed by firms primarily as a means to secure work around Asia’s growing foreign investment while not being exposed to Asia’s constituent economies’ domestic regulatory and competitive pressures — and more recently, an economic downturn in China – which could extend elsewhere in the region.
This development was one focus of a recent report on Asia by Yun Kriegler (@TheLawyerAsia) in The Lawyer – where she outlined how US-based law firm Chadbourne had decided to leave Asia 15 years after opening in China. Instead, the firm will focus on outbound foreign investment from Asia to the international jurisdictions where it continues to practice.
“Chadbourne & Parke”, as Kriegler detailed, “joins a growing group of international firms that have recently reduced their presence in Asia. In January, Fried, Frank, Harris, Shriver & Jacobson decided to close its Hong Kong and Shanghai offices (19 January 2015). In 2013, US firm Vinson & Elkins closed its Shanghai office (12 July 2013).”
With a crowded, competitive legal market in Asia and the recent downturn in the Chinese economy – is it best for some foreign law firms to not open in the region — and instead, focus on outbound foreign investment?
Precedent: The case of Corrs Asia Strategy
One law firm that has been pursuing the not in Asia but focused on Asia foreign direct investment strategy is Australia’s Corrs Chambers Westgarth (@Corrslawyers). In an interview for this article, Corrs CEO John W.H. Denton explained the strategy:
“A common misconception is that there’s only one strategy for dealing and engaging with Asia. As a premium independent Australian law firm, Corrs Chambers Westgarth has pursued an alternate international engagement model which has proven very effective for our clients, rather than merging with an international firm.
Corrs is an Australian based firm, so we are strategically positioned within the Asian region. Rather than having a representative office outside of Australia, Corrs relies on deepening strong, longstanding relationships with other significant law firms around the world to give clients access to genuine depth and expertise on the ground. Internationally, there are over 45 firms involved in the model, which continues to grow each year.
We engage with Asia through being entwined in the region, and through being as efficient as possible in how we do business. Corrs has deep and enduring relationships, which is stronger than any bricks and mortar presence would be. We continue to experience a year-on-year increase in our international client base, derived from the strong growth of inbound referrals, successful secondment and scholarship programs and increasing client brand awareness in Asia, as well as North America, UK and Europe, the Middle East. International clients now account for almost 40 per cent of the firm’s large corporate client base.
It is our ambition to be the most globally connected law firm based in Australia. We have a unique global engagement strategy based on relationships and connectedness, with a seat at the table at the highest level of international business and politics, including at the G20, ABAC and International Chamber of Commerce. Corrs is the only firm in the Australian market to have these established senior business and government relationships.
Asia is diverse, you need more than bricks and mortar. A traditional way of trying to engage with Asia might be merging with a Chinese-based firm. Or opening in Hong Kong or Beijing. But this fundamentally ignores how China works and it ignores how much of Asia works. The tasks of governing, ruling, and regulating in Asian states usually fall to sub-national governments.
Understanding comes through doing. It comes through time. And it comes through people. This is the strategy we have taken with Asia and its working very well. Success in Asia comes from partnerships. It comes from making the most of complementary interests and working collaboratively with partners in Asia, not just competing against them.”
The challenge of generating work from China
The challenges to generating work around Chinese outbound foreign investment were raised in an article last month in The Lawyer by Yun Kriegler. In that article, she outlined: “A key rationale behind the concept of firms like King & Wood Mallesons (@kwmlaw) is to leverage legacy King & Wood’s relationship with its domestic clients and to capture the surging outbound investment from cash-rich Chinese companies. But translating this trend into actual financial rewards proves to be a big challenge, not only for KWM. But for all global firms chasing Chinese outbound work.”
Kriegler interviewed Stuart Fuller, KWM Global Managing Partner, for the story, who addressed the challenge of capturing work around Chinese foreign direct investment (even for a firm with an elite domestic Chinese practice as KWM maintains). In that interview, Fuller cited low recovery rates and competitive pricing as essential elements of seeking to secure work around Chinese foreign investment.
The challenge of generating profit in Asia
As Nick Seddon, a Partner with Australia’s Beaton Capital outlined in an interview for Asia Law Portal in March: “Asia is a tough market to make a profit in and almost impossible to make as profitable as the US core market when it’s firing on all eight cylinders as in 2014. For some firms, Fried Frank is clearly one of them. The value of having offices in Asia (sometimes intangible) doesn’t make up for the dilution to profitability.”
Can a remote strategy work?
With the challenge to generating work from China and Asia in general in mind, I put the question of why this is a challenge to Chris Devonshire-Ellis, Founder of Asia-Pacific region foreign direct investment practice Dezan Shira & Associates – which maintains 28 offices and over 300 staff in operations throughout China, Hong Kong, India, Singapore, and Vietnam together with alliance partners in Indonesia, Malaysia, the Philippines and Thailand. The firm also maintains client liaison offices in the United States and Europe.
Devonshire-Ellis outlined in an interview for this article that: “A lot of foreign firms came to China and established operations in the mainland and sometimes Hong Kong in order to facilitate an explosion of Chinese outbound investment. But in doing so, in some cases, the research underpinning these efforts was not good.
A majority of Chinese outbound investment comes from state-owned enterprises (SOE’s). China uses them to acquire assets overseas. Larger Chinese joint venture firms – such as King & Wood Mallesons (KWM) and large international practices – handle these matters.
They take that business – which requires specific contacts at a senior level within the Chinese government – as well as a lot of trust which needs to be placed in the firm by the Chinese government. These are things that are difficult to have. A lot of firms didn’t realize this. There’s a market research gap here.
The second type of foreign investment comes from Chinese entrepreneurs operating privately held companies. This market is significant in terms of numbers but less in terms of value.” Devonshire-Ellis also cited the challenge to recovery rates from Chinese privately held companies. As well as regulatory challenges when taking these companies overseas.
“You can’t, therefore, come to China and not have a presence and expect to generate meaningful revenue”, he continued. “And if you do come – you’ll need to hire local nationals with local legal education. This applies in particular in China vis-a-vis the rest of Asia.”
“What was done in Asia 25 years ago”, Devonshire-Ellis, concluded, “coming here and starting from scratch – isn’t feasible now. Now a law firm would need to make a local acquisition. They then must consider — how do you merge the practices?”
Richard Smith (@RWS_01), a Sydney-based legal business development professional with extensive experience with both international and Australian legal practices doing business in Asia. An interview for this article — also observed that: “I believe you need relationships on the ground in China to benefit from [foreign investment from China]. Much as many leading American industrialists spent time in London in their day.”
Laterals seen as preferable for firms still eyeing a physical presence in Asia
While the out-of-Asia but focused-on-Asia foreign investment may appeal to some foreign firms. An on-the-ground presence will remain a desirous component of an Asia strategy for many. Given current conditions, Devonshire-Ellis recommends foreign firms looking at Asia must now enter via a merger. Carl Hopkins, who helps US and UK firms establish offices in Asia as Hong Kong-based Managing Partner. Law Firm Group, Asia at Major, Lindsey & Africa (@MLAGlobal) sees things somewhat differently.
In an interview for this article, he told me that: “Only Reed Smith, Mayer Brown and Morgan Lewis have really entered Asia with a big merger or acquisition. Pretty much all the rest of the firms coming to the region hired laterally 1/2 partners to start things off. If you look at most market entries over the last 10 years, the majority have just hired laterals. Ropes, Proskauer, Dechert, Wilson Sonsini, Fenwick, Cooley, Sheppard Mullin, GT, Addleshaw, Dentons, Fangda, etc.”
Hopkins continued: “Whilst entering the market now with a merger might seem a good idea in abstract the challenges facing finding a suitable target and making an acquisition complete and successful post-completion might outweigh the benefits. Besides, most law firms do not want to make such big investments in Asia preferring to keep their offices manageable “
With China’s faltering economy, local regulatory burdens and legal market competition increasing in most Asia-Pacific region domestic markets. The Corrs (and now Chadbourne) method of remaining physically outside Asia while focusing on outbound foreign direct investment from Asia – may now find its place as another well-known credible alternative strategy for foreign law firms seeking to creatively capitalize on Asia’s growth.