A reformation of law firms in China is occurring as older traditions fade in an environment of regional and global expansion. New models for legal services are being embraced, but will they work in a contracting global economy? Frankie Wang talks to some of the reform leaders
FORTY YEARS HAVE PASSED since the restoration of Chinese lawyers into its legal system, in 1979. According to statistics disclosed by the Ministry of Justice, at the end of 2018 there were more than 423,000 practising lawyers in China, of whom lawyers aged 30 to 49 accounted for 63.7%. The post-’70s and post-’80s groups that grew up with the reform and opening up of the sector have gradually become the mainstay of the legal services market.
Kangda Law Firm, founded more than three decades ago, is another such firm. Lian Yan, senior partner at the Beijing office of Kangda, says its current management committee has gathered leaders from three generations of the old, the middle-aged and the young, with the youngest committee member born after 1980.
While an increasing number of young lawyers are joining well-established firms, many more lawyers have left to set up on their own. As a growing number of Chinese companies follow the “going out” national policy to expand China’s international presence, legal services provided by Chinese law firms are no longer confined to the domestic market.
Landing Law Offices, as opposed to other Chinese firms developing international business from China, built its first office in India, standing as an “international firm” from the beginning.
David Li, senior partner at Landing’s Shanghai office, says the legal services market for foreign investment in China is fiercely competitive, and only the “going out” business is heading for blue ocean. “Landing’s development is based on a robust internationalization strategy,” he says.
“[We] have been widely spreading [our resources] in Southeast Asia in recent years. Landing, as a manager, leverages the power of local lawyers, aiming to provide a one-stop service for Chinese clients who grow their business abroad. The current business model is mainly to invest in our proprietary firms, or to co-operate with local counterparties.”
Li says many Chinese companies are accustomed to directly seeking services from foreign local firms when they go overseas. However, due to language issues and unfamiliarity with the way foreign law firms work, bills are often expensive but the outcome is not satisfactory. He says a better option is to manage legal affairs through Chinese lawyers and let them co-ordinate with the foreign local lawyers.
There are also new competitors joining the market. Shanghai CM Law Firm, launched in 2018, aims to provide enterprises with full-lifecycle capital market services including venture capital, private equity, listings, mergers and acquisitions (M&A), and related litigation and arbitration.
Wu Xiaoliang, the managing partner of CM Law Firm in Shanghai, says that she has been asked why she wanted to start a law firm, as it is easier to join an established one. She answered: “Along with the development of China’s economy, the legal services market has just entered full competition, and it is booming,” she says. “Everything has just started. We will definitely see more new brands. This is good timing for a competitive start-up boutique firm to take the stage.”
Scale v specialization
So, should a law firm develop in scale or specialize? It is undeniable that economies of scale will increase efficiency to a certain extent, but many experts say it is more important for a law firm to find specialized areas than to be big and comprehensive.
Simon Tsi, managing partner of Chang Tsi & Partners in Beijing, says a law firm should focus its efforts on one or a few core areas, and bigger does not necessarily means better. “The firm has advanced rapidly in recent years, but the expansion is based on controlled pace and scale,” says Tsi.
“We scale up naturally, driven by business progress. It is not necessary to reach a certain number of people at a certain point in time.”
As for his firm’s positioning, Tsi says Chang Tsi is a professional law firm with intellectual property (IP) as its core business. “[Specialization] is conducive to cultivating and gathering a professional team,” he says. “Because all the systems of the law firm are set up to provide quality intellectual property services, compared with firms covering multiple business areas we have more advantages.
“Since we have only focused on one thing for more than a decade, our capabilities will only become stronger. The quality of service will be better and the goodwill of the business will continue to strengthen.”
Established in 2011, Yuanhe Partners also chose to delve into niche markets, one of which is also IP. Xing Keke, managing partner of Yuanhe Partners based in Beijing, says that when the firm started, it positioned itself to become a small to medium-sized firm, with flatter internal management. But Xing says he doesn’t want to build a “small but comprehensive” firm. “Practice tells us that a small but comprehensive firm will lose in competition because it has no leverage in geography and business coverage,” he says.
Instead, his law firm targeted building one or two core businesses. IP was chosen because, “in the context of national strategy, the demand from corporates and individuals is on the rise, and customer loyalty is strong”.
Li says that Landing’s local branches have maintained high degrees of independence from its Shanghai headquarters, and their business has respective focuses. The Shanghai headquarters aims to become a comprehensive law firm, requiring lawyers to be
absolutely specialized, and to have one master and two supplementary areas of expertise. No lawyers should be jack of all trades and master of none.
This emphasis on specialization is not only at the level of law firms, but also at the government level. In 2017, the Ministry of Justice issued its Pilot Programme on Establishing a Professionalism Evaluation System and Evaluation Mechanism for Lawyers, which proposes to select a group of professional lawyers from nine law majors including: criminal, marriage and family, corporate, financial and insurance, construction and real estate, IP, labour, administrative, and foreign-related legal services. The group was selected to promote the specialization of lawyers, and the programme will be extended around the country this year.
Celebrating its 20th anniversary of establishment, Hui Ye Law Firm has chosen the parallel development of specialization and industrialization. “In recent years, Hui Ye has put great efforts into industrialization,” says Wu Dong, a senior partner at Hui Ye, based in Shanghai. “Different from the one-for-all service provided by existing artificial intelligence [AI], Hui Ye is committed to providing customized and comprehensive legal services to our clients.”
Partnership v corporation
According to provisions of the Law of China on Lawyers, Chinese law firms can be established in three ways, namely a partnership among all founding lawyers, through an individual lawyer, or through the state. The “corporation system” often referred to by the legal profession is actually a system that references the management of a law firm to the corporation management model. It is an entirely different concept from the term “law company” that is currently gaining attention.
Compared with the partnership system, the unified management model of a corporation seems to be favoured by growing numbers of law firms. The model currently adopted by Zhenghan Law Firm, one with a history of 25 years, is called an integrated corporation system.
Benny Xu, a partner of Zhenghan based in Shanghai, says that under a corporate management model, all clients of Zhenghan belong to the firm, and it is the firm that allocates resources according to client needs. “Clients will be provided the services of professional lawyers in different fields according to their actual needs, and will be fully supported by resources the firm possesses in all areas,” he says. “This effectively solves the problem of insufficient service capacity faced by some small teams under a commission system.”
Tsi says Chang Tsi has also embraced an absolute corporate management model. Compared with a pure partnership, it enables unified and efficient management, and is more conducive to the forming of the firm’s culture.
Landing, however, takes full advantage of the partnership, and has extended this concept from partners to all employees. In July this year, Landing’s Shanghai headquarters passed a profit-sharing mechanism for all employees, which includes lawyers, assistants and administrative staff, for profit distribution. Li says this practice aims to enhance everyone’s sense of belonging.
Aaron Qian, Shanghai-based managing partner of Lanbai Law Firm, which specializes in labour law, says that considering the differences in local policies and conditions for human resources, the firm has adopted an alliance development model by forging together with a few other law firms the China Labour Law Alliance, which is China’s first professional labour law firm coalition. “The firm is concentrating on serving the Yangtze River Delta region, and regional alliances provide services to local companies,” he says.
The blue ocean market
Many legal experts emphasize the importance of the specialized development of a law firm, but the choice of which field to concentrate on requires unique business vision.
Ding Zhenbo, a senior partner at HanSheng Law Offices based in Shanghai, says the legal services industry faces many challenges, as the global economy is showing a downward trend. “Especially for legal services for financial and M&A business, there is almost a fall off a cliff,” he says. “There are opportunities as well, mainly in dispute resolution, but opportunities are less than challenges.”
Ding says HanSheng’s main responses to this include increasing research in emerging fields, strengthening the development of dispute resolution, and continuing to attract talented people to join the team.
Vincent Sun, managing partner of Young-Ben Law Firm based in Shanghai, says that against the background of China’s economic downturn, expanding in-house legal teams with growing status, and the improvement of legal technology, the Chinese legal services market will experience a gradual decline and saturated competition in the medium to long term. In addition, as the supply side of legal services grows faster than the demand, law firms at the lower end of the market will face more challenges.
But Sun is optimistic about dispute resolution, saying: “We believe that high-end dispute resolution will be less affected by the advances of legal technology. Since high-end dispute resolution is the same as commercial negotiation, involving lots of psychological combat among people that can be hardly standardized, it is harder to be replaced by artificial intelligence.”
Sun says IP will also continue to be a promising market. “Despite the influence of the China-US trade war, to further open up China’s economy is an inevitable trend, which requires better IP protection,” he says. “Meanwhile, as China obtains some advantages in new technology, the country is gradually shifting from the authorized party of IP to the authorizing party. The IP market is bound to become more active.”
Tsi is also positive about the prospects of China’s IP market, and has begun to gradually upgrade the client structure of Chang Tsi. “Eighty percent of our clients are foreign clients,” he says. “But as Chinese companies have expanded business overseas in recent years, they have a pressing and enormous demand for IP services.
“We are also broadening the domestic market and adjusting client structure. Considering the impact of the Sino-US trade war, obtaining both local and international clients can increase the firm’s ability to resist risks in the market.”
Chen Feng, a senior partner at Hiways Law Firm based in Shanghai, says Chinese law firms “have begun to stand up to competition in the international legal service market. It is urgent for us to enhance professionalism, build core expertise areas, and establish differentiated edges.”
Chen says Hiways has targeted the strategic goal of specialization, branding, internationalization and scale, and launched the first law firm development index in China last year, namely the Hiways Development Index (HDI). This indicator aims to quantify, adjust and optimize the development of law firms through collection and statistical analysis of data.
The emerging demands in the market are gradually altering the development model of law firms, and even the ecosystem of the entire legal services industry. With the Big Four accounting firms exploring how to occupy space in the legal services market, Landing Law Offices did some exploring on its own terms.
At the end of June 2019, it merged with Landing Accounting Offices in India to become the first Chinese law firm to merge with an overseas accounting firm. Li says this step is mainly in response to the proxy bookkeeping and accounting needs of Chinese enterprises that operate overseas. Apart from India, Landing is also preparing to open accounting firms in China (Shanghai, Shenzhen), and Indonesia.
The Chinese legal market is still very young, but many law firms interviewed have their focus on being around for their centenaries. It will be interesting to see how these firms will continue to grow in a bigger ocean of competition.