Chinese companies have a growing appetite for overseas expansion. Will they bring their law firms with them? China's King & Wood doesn't plan on being left behind. Anthony Lin reports

Wang Junfeng does not come across as an empire builder. Chatting in an office strewn with Chinese antiques in Beijing's Guomao skyscraper district, the 48-year-old chairman of Chinese law firm King & Wood sounds modest about where his firm stands relative to the big names from UK and America.

"The legal society here really admires the US and UK professions," says Wang. "They have such a long history. And in the last 20 to 30 years, the foreign law firms here have really given a lot of support."

Indeed, when international firms first arrived in China in the 1980s to help foreign companies launch factories, offices and shops, a domestic legal profession barely existed. Wang became one of the country's earliest commercial practitioners in 1986, when he joined a state-run law firm set up to facilitate foreign investment. When China enacted a private partnership law in 1993, he co-founded King & Wood with four other partners, two of whom – Zhang Dongqing and Bai Yanchun – remain at the firm.

The firm, whose Western-sounding name was chosen to appeal to multinational clients, is now one of China's largest, with more than 800 lawyers and market-leading corporate, regulatory and disputes practices. A familiar player in the biggest capital markets transactions in the region, King & Wood recently advised American International Assurance, the Asian spin-off of American International Group (AIG), on Chinese law aspects of its $18bn (£11.6bn) Hong Kong listing. It also worked on the $22bn (£14.1bn) initial public offering (IPO) of Agricultural Bank of China, one of last year's largest. According to the firm, it had around $200m (£129m) in total revenue for 2009. Its profit picture varies widely by office, with partners in provincial cities like Xi'an and Chengdu earning much less than their counterparts in more central offices. King & Wood's profits per equity partner (PEP) in Beijing, Shanghai and Hong Kong, when those offices are considered separately, is roughly equivalent to the PEP of mid-range Am Law 100 firms like Squire Sanders & Dempsey ($795,000/£512,000) and Duane Morris ($755,000/£487,000).

But is King & Wood ready to go global? Wang thinks so. He has set a path of internationalisation for his firm that has both domestic rivals and top US and UK shops nervously pondering how far a Chinese firm can go on the global stage. In a few short years, King & Wood has established offices in Hong Kong, New York, Silicon Valley and Tokyo, as well as a close alliance with Australia's Gilbert & Tobin. The firm has also stepped up its recruitment of lawyers from international firms, recently adding partners from Clifford Chance (CC), Arnold & Porter and Pillsbury Winthrop Shaw Pittman.

"For the future, we hope King & Wood is not just a Chinese local firm," says Wang (pictured). "We hope we can establish an international legal firm."

Whether that is the right way forward, however, remains the subject of intense debate within the upper echelons of the Chinese legal profession. China's major domestic firms have significant advantages at home – low operating costs and a measure of protection from foreign competition – which they lack abroad. With their home market and profession still growing and developing, many Chinese lawyers, including some at King & Wood, question the wisdom of costly expansion overseas, where the top UK and US firms appear to have an insurmountable lead when it comes to resources and experience.

But Wang believes there are good reasons to move forward now. For one, he sees internationalisation as an integral part of ongoing efforts to transform King & Wood into a truly modern law firm along Western lines, hopefully setting it apart from other, more fractious Chinese firms and ensuring its institutional longevity.

Then there is the fact that Chinese companies are beginning to look abroad. Wang thinks there should be a Chinese firm to represent them. Of course, the big international firms have also pegged outbound China work as the key to their futures in Asia, so the ring into which King & Wood is throwing its hat will prove a tough arena indeed. But if a Chinese firm can become the leading international counsel to the world's next great multinationals, it will have claimed one of the 21st-century legal profession's biggest prizes.

Founded to meet a wave of foreign investment in China, King & Wood is no stranger to globalisation. For it and other leading Chinese firms, such as Jun He Law Offices and Zhong Lun Law Firm, advising multinationals on their China moves remains the mainstay practice: more than 50% of their revenue typically comes from foreign clients. They compete for this work against a host of international firms. Though foreign firms are currently banned from practising Chinese law, a loophole permits them to advise clients on the Chinese "legal environment". This grey area has been a source of tension with local lawyers in the past, but is no longer the hot button it once was.

That may be because the Chinese firms are now gaining the upper hand. Multinational clients have grown more comfortable working with Chinese lawyers, many of whom have studied abroad or worked at international firms, setting aside past concerns over work quality that might previously have led them to much more expensive international firms.

King & Wood advised Pfizer on Chinese antitrust issues relating to its 2009 merger with Wyeth and represented Waste Management in its first investment in China, the acquisition of a stake in a Shanghai garbage hauler. A recent string of high-level defections from international firms suggests many Western partners in China see a more secure future with local firms.

Wang says that Chinese firms such as King & Wood have grown with the Chinese economy and that he hopes the trend continues to the next stage of development.

International firms have been bracing for this outbound boom as well. So far, though, it has yet to really take off. Major overseas acquisitions by Chinese companies have been limited mainly to strategic assets like mines and oil fields, with scattered attempts to acquire technology and other intellectual property as well. But many lawyers in the region believe that it is only a matter of time before the deals start happening.

Wang wants King & Wood to be ready for that day. But the Chinese firm will have to take a different approach from that of the big international firms. Though the firm has opened offices in Japan and the US, it is still far from being a global one-stop shop.

"Those are only small offices," says Wang. (New York and Silicon Valley each have only two full-time partners.) "At present time, they're just window operations, so we can take care of clients when they make investments in foreign countries and do some PR and communications with [multinational] clients to let them know how to do business in China. These offices also help us learn about Western culture and the culture of the legal profession."

So King & Wood is not about to take on British and American law firms on their home turf. But it does aim to take them on for the lead role representing Chinese companies in major outbound deals.

Today, if a large state-owned enterprise (SOE) were to bid on a large US or European consumer company, that work would more likely than not go to one of the magic circle or leading New York firms, with a Chinese firm in a supporting role. If Wang has his way, that will be reversed; King & Wood would have the top role, co-ordinating the work of local counsel in the US, Europe or anywhere else Chinese business goes.

Wang points out that King & Wood's strategy would still produce a large amount of work for Western firms. "This is a win-win," he proclaims. But it is doubtful that many global law firm managing partners would agree.

Could King & Wood steal global firms' thunder when it comes to cross-border China work? No-one is dismissing the possibility.

"It's not going to happen tomorrow," says Peter Huang, a Beijing partner with Skadden Arps Slate Meagher & Flom. "But in five to 10 years, it could be a very different market." But it will not be easy, and Chinese firms do not even need to leave China to see how tough it will be.

Hong Kong is shaping up as the proving ground. The former British colony turned Chinese special administrative region has its own laws, financial regulations, stock market and pay scale. It is the Asian base for global financial institutions and mainland China's gateway to international capital. It is also arguably the most competitive legal market in the world today, with almost 100 foreign law firms maintaining offices there.

More even than in New York and London, the top Wall Street and City law firms vie with each other for choice assignments. There have been many of these of late; the Hong Kong Stock Exchange has led the world in IPOs in the last two years – around $31bn (£20bn) in 2009 and more than $40bn (£25.8bn) in 2010 at time of press – largely on the strength of listings by mainland SOEs such as the Agricultural Bank of China.

King & Wood has already made a substantial investment in Hong Kong talent. The firm merged in July 2009 with prominent 60-lawyer local firm Arculli Fong & Ng, becoming the first mainland Chinese firm qualified to practise Hong Kong law. In May the firm also recruited one of its most prominent laterals to date, veteran corporate partner Rupert Li, a member of CC's partnership council, to come on board in the newly-created position of international managing partner. The firm now has about 80 lawyers in Hong Kong.

Li has no illusions, though, about the challenge King & Wood faces. "Could we have done [the global offering for] Agricultural Bank of China?" he asks, referring to the Hong Kong IPO in which the state-owned issuer was chiefly advised by Davis Polk & Wardwell and Freshfields Bruckhaus Deringer. "Not for a long, long time. Those firms are doing deals that are way beyond us right now."

The prospect of facing such tough odds is one reason that King & Wood has pushed far ahead of its major domestic rivals in expanding in Hong Kong, where Jun He and Zhong Lun both maintain small offices of fewer than 10 lawyers each. Jun He partner Kirk Tong cites the level of competition, along with Hong Kong's sharply higher labour and real estate costs, in explaining his firm's hesitation.

"Can we afford to get the top people and compete for the top work in Hong Kong?" asks Tong. "If we cannot, it may not be worth it." He allows, though, that his firm will be watching King & Wood's progress closely.

Li (pictured) says King & Wood would be thrilled to have more of its Beijing brethren in Hong Kong. "We'd like to be part of a cluster of elite mainland firms doing cross-border deals," he says. "We need to set collective benchmarks. If Jun He comes and gets on the Hong Kong panel for Morgan Stanley, it's great for us too. It becomes part of the MO of Morgan Stanley to rely on a Chinese firm."

But doubts about expansion are not just about costs. Many Chinese lawyers question whether Chinese firms are really ready to go global, or if indeed China is.

"The relationships between lawyers and their clients, especially the SOEs, are very different from normal lawyer-client relationships in the West," says Liu Yulin, a partner and member of the management committee at Zhong Lun. "For American companies, if they want to go overseas, the first thing they do is talk to a lawyer and get their opinion," says Liu. "But for a Chinese SOE to have a business overseas, this is first a political decision. They don't need lawyers, and if they want an opinion from a lawyer, they might just hire a local firm, not a firm they have a longstanding relationship with."

SOEs – which include such prominent names as China Petroleum & Chemical Corporation (Sinopec), China Mobile, Aluminum Corporation of China (Chinalco) and Agricultural Bank – dominate the commanding heights of the Chinese economy and are the companies that are most likely to engage in largescale international transactions.

But the ways in which SOEs select outside counsel have long been a source of grumbling among both international and domestic lawyers in China. SOEs submit almost all of their legal work out for bidding, and the quality of work often seems to be of less importance than price, which – with new and eager entrants not infrequently willing to work for free – is squeezed relentlessly.

Anxiety about relying more heavily on this sector is one reason that Susan Ning, a top antitrust partner at King & Wood and head of its international affairs committee, counts herself among the firm's more conservative wing when it comes to overseas expansion.

She echoes Liu's concern that SOEs may not prove a reliable client base. "Whether they want to be accompanied by Chinese firms or just hire local counsel is unclear," she says. "We may only find out on a case-by-case basis."

But Ning's bigger worry is that King & Wood needs to get its own house in order before it thinks big about international expansion. The firm has doubled in size in the past five years, in large part through mergers with smaller regional firms, and she thinks the work of integrating the new lawyers is far from complete.

"If we have energy, we should focus maybe 80% on internal integration and then 20% on expansion," she says. "We need more work to fully integrate and improve our level of service."

Wang would hardly disagree. Integrating King & Wood has been a longstanding obsession for him. Chinese firms generally operate as collections of rainmakers who lead a self-contained, highly-leveraged practices; these partners pay a portion – approximately 20%-30% – of the revenue they generate to the firm, but they keep the larger portion to distribute among their team. Co-ordination among top partners can be scant. It is not unknown to have two lawyers from the same firm unknowingly pitch the same client or, worse, opposing sides.

But Wang has sought to excise that culture at King & Wood and remake the firm as a unified and cohesive partnership along the lines of top-tier US firms he admires. He brought aboard Handel Lee, then the China head for Vinson & Elkins, in 2004 largely to spearhead that effort.

The US-born Lee served as chairman of the firm for two years and became King & Wood's public face, helping to introduce reforms like a single profit centre and partial lockstep compensation system for partners. He has continued to head integration projects at the firm and is presently leading pilot programmes in the Shanghai office aimed at overhauling client management, timekeeping and billing systems with an eye toward firmwide standardisation. He is also looking to break down the barriers to co-operation among partners by re-examining how firm departments are structured and looking at ways to improve assignments and workflow.

The way he sees it, King & Wood has already tackled some big structural issues like the compensation system, but needs to work on myriad smaller factors that influence the firm's culture.

For Wang, internationalisation is not a distraction from this project – it could even be a boost. King & Wood's goal of recruiting more lawyers with experience abroad will no doubt introduce more awareness of international standards and norms within the firm. "We need to train all of our partners and associates more [in modern firm practices]," he says. "This is not a small project."

There is a specific category of recruits that Wang thinks could particularly help out. "It's easy to find Chinese who have worked for years in foreign countries or for international firms, but it's hard to find the right laowai," says Wang, using the Chinese expression for foreigner. "We need the real laowai. They bring not just the skills, but the culture."

Wang feels strongly that a larger contingent of lawyers at King & Wood steeped in Western legal culture will speed the firm's transformation into what he calls a "competitive legal platform for the future". The firm already counts a number of prominent Western lawyers on its staff, including former Pillsbury Winthrop Shanghai office head Meg Utterback, who joined in August. But many international lawyers still hesitate to join Chinese firms; to recruit Westerners in large enough numbers to transform its culture, King & Wood may need to, well, transform its culture.

One thing King & Wood seems to have going for it is time. For international firms, China seems a must-have right now, and resources are being lavished on building practices there.

But global firms' inbound practices now seem to be endangered, and, in the cross-border arena, the level of competition and fee-discounting is becoming unsustainable. Most partners in the region expect that there will be a shakeout at some point, with the weaker players packing up and going home.

Of course, that cannot happen with King & Wood. It is already home, and can therefore take a bit more time to get things right, whether it be perfecting its internal management, finding just the right partners or pushing into new practices. The firm can perhaps even wait for the Chinese corporate sector to mature into the types of clients that might actually appreciate having a domestic firm with international capacity.

"Our view is long-term," says Wang, who gives King & Wood a five-to-10-year timeframe to become truly international. "We follow the chain of the Chinese economy and the development of the legal and political system."

Even the conservative Ning thinks that the risks the firm is taking are not too great. And there is the thrill that comes from being a leader and pioneer. "We're doing something no other Chinese firm is doing," she says. "We are the ones daring to try. We still have the passion."

Given how far the firm has travelled in such a short time, that spirit shows little sign of waning. "We are still so young!" Ning marvels. "Still a teenager."

This article first appeared in The Asian Lawyer, a publication from Legal Week affiliate ALM.