Hangzhou is bursting with tech potential, so what hurdles are preventing law firms from reaching their full potential? Frankie Wang reports
Hangzhou, in the Yangtze River Delta region, is a city perched on the cutting edge of the world’s digital revolution. With several high-tech giants including Alibaba sitting within its boundaries, Hangzhou achieved a GDP of RMB1.05 trillion (US$149.18 billion) in the first three quarters of this year. Technology and artificial intelligence has also turned this city into a top competitor for the title of “China’s Silicon Valley”, along with Shenzhen.
But while it is bursting with new waves of innovation within its infrastructure and planning, has the development of the legal industry been keeping pace?
Hangzhou is the provincial capital and the economic, cultural and political centre of Zhejiang province, which is fuelled by private enterprise as the main force in its economic development. According to Shen Tianfeng, the chairman of the Hangzhou Lawyers Association and managing partner in the Hangzhou office of Grandall Law Firm, Hangzhou has about 10 law firms that each boast more than 100 practising lawyers. At the end of June 2019, the city had 533 law firms and 8,607 lawyers (see table below).
Shen says that the services of Hangzhou lawyers also cover Zhejiang. “We feel that the development of the lawyer profession in Zhejiang is fast and stable, mainly due to the rigid demand for legal services by private enterprises in Zhejiang,” he says.
Zhang Zhenyu, a partner in the Hangzhou office of Zhong Lun Law Firm, says Zhejiang, especially Hangzhou, has a relatively developed private economy different from that of Shanghai and Beijing. “Shanghai has a lot of foreign-related business involving many multinational clients,” says Zhang. “Most clients in Beijing are from state-owned enterprises, central enterprises and government departments. Zhejiang’s private economy, especially private listed companies, are the focus of our services.”
Internet in Hangzhou
There are two centres in the internet industry in Hangzhou. One is the Alibaba-related enterprises, including Alibaba and a group of enterprises established around Alibaba. The other is Zhejiang University-related enterprises, including the science and technology enterprises under Zhejiang University and the entrepreneurial groups of graduates from Zhejiang University.
The first internet court of China was set up in Hangzhou in 2017, under the influence of the internet to focus on trials of network-related cases. Peng Jianxin, a partner at the Hangzhou office of East & Concord, has undertaken a series of cases in the internet court, which he believes can save time and money for parties in dispute. “The parties in the internet court can directly submit the evidence in electronic form, which not only saves costs, but also retains all the data to better guarantee the traceability of the cases,” he says.
However, availing of the technologies that have made such new methods of trial is also posing new challenges for lawyers. “Most lawyers are accustomed to face-to-face communication with people, and making detailed arrangements for the ideas and facts that they want to express based on feedback from the onsite judge and agent of the opposing party,” he says.
New technologies can be resisted by those who prefer older, tried and true methods. “It’s hard to get feedback from others in the internet court,” says Peng. “They usually feel like they are talking to themselves. For example, I acted as the defendant’s attorney in a recent trial. The judge asked us to submit written defence opinions, because when my defence opinions were half completed what I had said was not heard by the judge due to network problems. This is also what the lawyers need to get used to.”
Hangzhou municipal government has been committed to the creation of the “internet ecology” since the establishment of the internet court. Based on the internet thinking of “online trading and online processing”, the Hangzhou Internet Court of Arbitration was established in July this year.
Zhao Liang, deputy secretary-general of the Hangzhou Arbitration Commission, says that because of the fast processing and high efficiency of trials, Hangzhou Internet Court of Arbitration also handles some disputes arising from offline trading. For the current situation of accepting cases for trial, it takes only 70 minutes to the maximum 11 days from filing to closing a case.
“In contrast to the format of video trials in other local internet courts of arbitration, Hangzhou Internet Court of Arbitration has launched a full-process electronic written trial model,” he says. “In addition, this court has independent IP rights for the China Hangzhou Smart Arbitration Platform, an online arbitration platform, to guarantee its neutrality,” he says.
Zhao Liang says that the courts were facing a situation of “a few personnel dealing with massive cases”. Arbitration mechanisms and rules are more flexible than litigation. In order to better serve its clients, Hangzhou has vigorously developed the Online Dispute Resolution Mechanism (ODR) platform in recent years. It integrates the internet court, the arbitration court and notary offices. The platform will divert users to the court or the arbitration court based on user needs and dispute characteristics.
Jack Ma, the chairman of Alibaba Group, proposed the concept of an “eWTP” (Electronic World Trade Platform) in 2016, which was incorporated into the communique of the G20 Summit held in September of the same year.
Talking about future development direction, Zhao says: “The gradual establishment of online eWTP rules, based on the traditional offline WTO rules, will contribute to building a new economic order for the world. With the growth of cross-border e-commerce volume, online international arbitration will be our continued development direction in the future.”
Where are foreign law firms?
So, with all this new technology and international potential, you would expect an influx of foreign firms, but that’s not the case yet. Shen Tianfeng at Grandall says the main driver of Hangzhou’s economy is local enterprises, and the service capabilities of Shanghai’s foreign law firms mean they can radiate for the short distance to Hangzhou, forming a phenomenon of “a bright moon with a few stars”.
“The main challenges faced by Hangzhou lawyers doing foreign-related business include the performance advantages of some large law firms in Shanghai and Beijing, and the establishment of the China practice by many international law firms, which largely replaces some of the functions of foreign affairs-related lawyers in Chinese law firms,” adds Grace Shi, a partner at High Mark Law Firm.
“As Chinese clients go global, foreign law firms have done a lot to adapt to Chinese clients in recent years,” she says.
Osha Liang is an American-based law firm specializing in IP, and in 2012 it established a representative office in Hangzhou. According to the Announcement of the Ministry of Justice of China (No. 9), issued at the end of September 2019, Osha Liang is the only foreign law firm in Zhejiang that has been approved to establish a representative office in mainland China.
“In Hangzhou, our clients include local patent firms, state-owned enterprises [SOEs], publicly traded companies, and start-ups,” says Tso Han-mei, the chief representative at the firm’s Hangzhou office.
Having stayed in Hangzhou for three years, Tso says that Hangzhou is a unique city with a good combination of technology and culture, as well as the force of innovation and legacy of history. “The local government of Hangzhou has been quite open and proactive towards local business development,” she says. “Another important reason for us to set up our China office in Hangzhou is the quality of talent and steady workforce at a reasonable cost.
“The higher education institutions, such as Zhejiang University, provide excellent local talent. For example, our professional team members all graduated from Zhejiang University with a Master’s or PhD.”
So, despite the existence of foreign law firms in Hangzhou, there is no large international integrated law firm. The business of Hangzhou law firms is biased towards local enterprises, but local enterprises are not adequately developing foreign-related business.
According to Kevin Dai, head of international practice at Sunshine Law Firm in Hangzhou, many of the city’s private enterprises have insufficient overseas experience in the field of engineering contracting, which he focuses on. “Many private construction enterprises in Hangzhou do not have the capacity of large SOEs to be the general contractors,” says Dai. “They mainly serve as sub-contractors of construction and installation through SOEs, so as to realize their purpose of going global.
“Many private enterprises have insufficient overseas experience and business operation capability, and do not have a strong sense and ability of risk management, which may lead to problems such as harsh contract conditions, cost overruns and project delays.” In this regard, he says, it is crucial to strengthen internal training in enterprises.
“Zhejiang is an important province along the Belt and Road,” notes Zhang Jingzhong, the Hangzhou-based managing partner of T&C Law Firm. “Its OFDI [outward foreign direct investment] level is at the forefront of the country. I believe that with the promotion of the Belt and Road Initiative, Zhejiang will have more infrastructure projects and manufacturing projects. Also, some new internet business types will emerge.”
The demands of local merchants
Zhejiang companies’ realm of business was not built in a day. Zhejiang merchants are one of the largest business groups that have remained active in China since times past. With the call for reform and opening up, Zhejiang merchants became the business leaders in China. Jack Ma, the founder of Alibaba Group, and Guo Guangchang, the founder of Fosun International, are their top representatives.
“Enterprises may have taken a large legal risk for development in the early days of reform and opening up,” says Zhang Jingzhong. “However, after the enterprises reached a certain scale, they would instead think how to make their enterprises standardized and legal, and may be willing to pay high legal fees to seek better legal services and protection.”
Lori Yao, the Hangzhou-based general counsel of Cainiao Network Technology, a logistics company subsidiary of Alibaba, says: “It is very important for the team to keep the knowledge up to date in the face of innovation and global competition, knowledge such as expertise in intellectual property and competition, and relevant laws and regulations, and international treaties, involving cross-border trade. The new legal issues brought about by new economic growth points are also good learning opportunities.”
There are many small and medium-sized enterprises (SMEs)with light assets in Zhejiang, which are not covered by traditional financing channels such as bank credit. Chen Xiangyu, a partner in the Hangzhou office of East & Concord Partners, says that a shortage of funds in enterprises is obvious under the current situation of “credit tightening + deleveraging”. In addition, P2P lending collapses in Hangzhou have occurred frequently in the past two years, and the willingness of private investment has dropped sharply. SME financing is therefore more difficult and costly, resulting in large financial pressures.
“Compliance risks that were originally concealed or ignored are revealed or even magnified, causing many enterprises to be subject to administrative and even criminal punishments,” says Chen. “Enterprises, especially financial enterprises in such a context, will pay more attention to how to make up for loopholes through compliance means, manage risks and evade criminal responsibility, so as to remain stable.”
Shen Tianfeng of Grandall says that domestic operating costs and environmental protection requirements for enterprises have increased in recent years. Together with anti-dumping against Chinese products overseas, some Zhejiang enterprises have started investing or are seeking development overseas, which has created a demand for overseas legal services.
“Unlike the large enterprises headquartered in Beijing or Shanghai, the private enterprises in Zhejiang have adopted a ‘trotting’ approach in the process of ‘going global’, which means a large number and high frequency of enterprises going global, but the scale is not necessarily very big,” says Shen. “Zhejiang’s enterprises are mainly private enterprises. Relatively speaking, they are more cautious and conservative in foreign investment, and have higher sensitivity to risks.”
Localization of law firms
The needs of clients have a profound impact on the development strategy of the law firms. There are mainly two types of Chinese law firm in the city, apart from foreign firms. One is the local law firm grown in Zhejiang. The other is the outside law firm that has come to Hangzhou to set up branch offices. Regardless of this, most law firms interviewed say that local enterprises of Zhejiang are their main clients.
T&C Law Firm is one of the representatives of local law firms. It is headquartered in Hangzhou and has three branch offices in Shanghai, Ningbo and Beijing. The main business includes international investment and trade, finance and securities, mergers and acquisitions, real estate and construction, intellectual property, and commercial dispute resolution. “The basic idea of our development is to provide convenient legal services for Zhejiang merchants,” says Zhang Jingzhong. “We are not intending to become a fast-growing nationwide law firm, but a regional high-quality law firm.”
He says that T&C will open a branch office in Shenzhen in the second half of the year, mainly covering the Guangdong-Hong Kong-Macau Greater Bay Area (GBA), and providing services to Zhejiang merchants who seek development in the GBA.
Zeda Law firm has more than 10 branches in Zhejiang and is expanding its share of the Zhejiang market. Wang Xiaojun, the Hangzhou-based managing partner of Zeda, says the firm’s goal is to become big and strong in Zhejiang, and then cover the whole country.
In addition to local law firms, more law firms based in Beijing and Shanghai are expanding their footprints into Hangzhou, and Zhong Lun Law Firm, headquartered in Beijing, is one of them. “Zhong Lun has a very clear idea of setting up a branch office in Hangzhou,” says Zhang Shengjie, a partner in the Hangzhou office of Zhong Lun.
“From the perspective of layout, Hangzhou office is a link in the Zhong Lun family. From the perspective of professional fields, it is basically matched exactly with the headquarters of Zhong Lun.
“Although we cover a complete range of professional fields, Hangzhou office focuses on four major markets in Zhejiang including construction and real estate, capital markets, foreign-related business, and internet business,” he says.
East & Concord Partners, also headquartered in Beijing, arranged business in Hangzhou three years ago. Li Yanshan, the managing partner of the law firm’s Hangzhou office, says that the integrated management model is implemented between the headquarters and branch offices to manage business, finance and personnel in a unified manner, and to interconnect the headquarters and branch offices.
Is there competition between local and outside law firms? The answer is yes. Many lawyers interviewed say that the key to competition is whether the law firm is “localized”.
“Almost all influential law firms headquartered in Beijing and Shanghai have already established branch offices in Hangzhou, and they are more or less competing with us,” says Zhang Jingzhong of T&C. “Zhejiang is dominated by private enterprises. The needs of many clients are localized. Therefore, even if outside law firms come to Hangzhou, clients still need to hire local lawyers.
“Outside law firms may have their own brand advantages. Clients also certainly consider brands. However, they are definitely concerned about who can bring them more valuable services in the case of similar brands.”
Zhang Zhenyu of Zhong Lun says the Hangzhou office of Zhong Lun has combined well the advantages of Zhejiang local lawyers and the brand recognition of headquarters in the face of competition. “Our lawyers are all local lawyers in Zhejiang, who understand the Zhejiang market,” Zhang says.
“Together with the business support of the headquarters and our company-based operation mode, our business in all fields is improving rapidly.”
Grandall is one of the earliest outside law firms to set up in Hangzhou. Shen Tianfeng says that “relatively large-scale listed companies in Zhejiang have already hired different law firms to serve their legal demands”.
“Therefore, horizontal expansion is difficult,” he says. “Our next step is to dig deep into the needs of our existing clients and provide high-quality professional services to them through a wide range of professional lawyers, to meet the multi-faceted legal needs of our clients.”
Although local private enterprises prefer local lawyers, larger enterprises do not limit their focus when choosing a law firm. “We have close co-operation with outside lawyers in areas that are highly specialized and with commonality, such as investment and financing, intellectual property, cross-border trade, etc.,” says Lori Yao of Cainiao.
“We are not limited to geography in the choice of law firm, and mainly consider the experience and expertise of the law firm. We have a lot of co-operation with local law firms in Hangzhou, and law firms with rich legal service resources in Beijing, Shanghai, Shenzhen and other places. At the same time, for some cross-border business, we also have business co-operation with international law firms and the local offices of foreign law firms.”
He Jianwen, the managing partner in the Hangzhou office of Dentons China, believes it is a good thing that the legal service market is becoming more competitive, which can improve the legal service level of law firms. “Hangzhou had very little foreign-related business in the past two years, but now more enterprises are going global with the promotion of the Belt and Road Initiative, which generates more demand for legal services,” says He. “I think the legal service market of Hangzhou will still grow rapidly in the next two or three years.”
The internet has been penetrating into every corner of the city in the atmosphere of encouraging science and technology enterprises, and internet-related business have become the focus of development of various law firms. However, Zhang Jingzhong at T&C, points out that there are not many lawyers who are adept in this field.
“The internet industry in Zhejiang is developing very fast, including internet finance, smart logistics, blockchain, etc,” he says. “However, I think there are not many lawyers who are professional in these fields in Hangzhou. Instead, it is mainly corporate legal departments who are providing relevant legal services.
“The services provided by outside law firms are mainly investment and financing, M&A, and IP rights. The training of lawyers in [internet-related] fields may require more effort from the government and the law firms.”
Law firms may not only serve internet enterprises in the face of technology and the internet. Wang Xiaojun, at Zeda, has integrated technology into the development strategy of the law firm. “In terms of the development of the law firm, Zeda’s direction is to lead the third-party market independent in the future,” he says. “The third parties here include many business forms such as legal services, finance, insurance, consulting etc.
“I think the profession needs to be more open and inclusive. The integration of related industries may be the key to the development of the next stage of the profession. In the future development plan of Zeda, the centre of the entire third-party ecosystem will not be an industry, but platforms, data and technology.”
Although some law firms have sent lawyers into internet companies to learn by doing, it seems that in this high-tech city, law firms are still playing catch-up in their adoption of the systems needed to capitalize on the cutting edge.