Great contacts, grind and patience – what it takes to open doors to key Chinese clients
There's no magic formula for winning China clients, writes Sofia Lind, but pragmatism and a full Rolodex don't hurt
November 23, 2011 at 07:03 PM
7 minute read
There's no magic formula for winning China clients, writes Sofia Lind, but pragmatism and a full Rolodex don't hurt
"Relationships are key" is a common and unsurprising refrain when asking how to gain access to China's much-coveted band of emerging corporate giants – both the privately-owned and the huge state-owned enterprises (SOEs). But from international lawyers' point of view the question remains: how do you gain access to the right decision-makers in a country with a population of 1.34 billion?
With international firms blocked from practising Chinese law, sourcing work is a challenge. Some firms, like Hogan Lovells, have made attempts to build up a China-wide law firm referral network to reach a wider pool of clients, while many firms also name the big four accountancy firms as a good route to gaining introductions. Even more important are Government links.
Building a contact base can be a painfully slow process even for the strongest Western law firms. Slaughter and May capital markets partner Benita Yu says: "SOEs are different to work with compared to privately-owned companies, which are far more similar to Western corporate entities – SOEs are more bureaucratic. Some are getting more nimble but often there are still a lot of decision-making stages to go through."
International firms have, for years, largely settled on the formula of establishing arms in Shanghai as the mainland's dominant commercial centre, Beijing for state links and Hong Kong for listings, securities work and inbound and outbound work.
But even for Asia veterans the scale of China and peculiarities of the local business culture make building and retaining the right client contacts difficult. For one, it is generally hard for external lawyers to get as much boardroom access as in Western markets. Increasingly, advisers find themselves being funnelled towards the expanding in-house legal teams of major Chinese corporates, though well established partners individually can have executive contacts.
Clyde & Co's David Smyth, who ran legacy Barlow Lyde & Gilbert's Asia practice pre-merger, says: "In most large Chinese corporations you have a dominant chief executive. You would be very unlikely to meet that person. There would be a lot of people you deal with in between, such as the general counsel or finance people. It is definitely easier to get to a GC than a chief executive."
On working on litigation cases, he adds: "From a disputes lawyer's point of view, the key cultural difference is that your client will not tell you what you need to know but what they want to tell you. Once you have recognised this you can avoid it becoming a problem."
Though most Chinese companies are not yet using Western-style legal panels, they appear to be slowly moving in that direction with increasingly sophisticated and prescriptive processes emerging in pitches. The SOEs are particularly cautious on fees as they need to show they have got the best deal, while private companies are sometimes willing to pay for a premium law firm brand.
And the interest in panel-style arrangements is increasing, although mainly among the larger, multinational companies. One major Chinese bank is said to be in the process of setting up a panel-like arrangement, although it is focusing more on who can provide the right range of services than on fees, for which the firms will still need to pitch on each individual transaction.
Yu comments: "[Chinese companies] have not got to the culture of panels but would have worked with a certain number of firms in the past that they are now more comfortable with. Long term personal relationships are key, but on top of that you may find yourself going through a process of tendering."
Key clients
Glancing at the ranks of China's largest state corporates it soon becomes clear why so many advisers head for Beijing. A 2010 report on the world's largest companies by Fortune magazine found that the 10 largest Chinese companies were all based in Beijing, as were 30 of the 46 national businesses featured within its ranking of the world's 500 largest firms.
Key China clients include China Petroleum & Chemical Corporation (Sinopec), State Grid, China National Petroleum, China Life Insurance and China Railway Construction. Other companies like the Aluminum Corporation of China (Chinalco) and China National Offshore Oil Corporation (CNOOC) have been part of a series of headline transactions over the past few years. Also coveted are institutions like the China Construction Bank, Industrial & Commercial Bank of China, Agricultural Bank of China and Bank of China.
Among the privately owned, up-and-coming brand Huawei Technologies makes telecom hardware while Baidu has been dubbed China's Google and Lenovo is a well-known brand since buying IBM's global PC business in 2005. In the automobile sector, Geely bought classic Swedish car brand Volvo from Ford in a $1.8bn (£1.1bn) deal in 2010 while Air China is making strides in the aviation sector and beer-maker Tsingtao is increasingly making a mark among globally distributed beverages.
Margin calls
Given the fierce competition for work and the resistance of clients to high legal fees, it is widely acknowledged that advisers need to carefully monitor their market position and how they are staffing work to remain profitable.
Despite the high profile equity capital markets (ECM) practice launches by a number of Wall Street firms over the last 12 months, Hong Kong listings can be notoriously unprofitable work. A complex deal such as the record-breaking initial public offering (IPO) for Agricultural Bank of China would still collect a decent fee due to the importance of the transaction, but in general terms an IPO under $500m (£316m) would collect a top-tier law firm between $1.3m-$1.5m (£822,000-£950,000) in capped fees.
That may not be much less than the fees for New York or London listing, but will come with a lot more work due to a long and hard regulatory process in Hong Kong. The fee also varies depending on the law firm, with the mid-tier reported to do the same listing at a price typically about 25% lower. Generally, well-chosen M&A or debt securities work comes with better margins. The same is true of cross-border disputes, a field in which there is less competition and firms like Clifford Chance and Herbert Smith have made a strong showing.
Kirkland & Ellis partner Dominic Tsun concedes that the leverage on your deals is especially important. He says: "If you have a high leverage without compromising on quality, you can do quite well from a Hong Kong IPO. You need the consistency in delivery and being able to control the cost in doing the routine work, but at the same time impress everyone to justify your fee. It is a cost control issue. You need a mix of deals. The high-profile listings may not necessarily represent the best pay day as issuers realise there is marketing value in it for the firm."
Such sentiments may undercut firms' lofty dreams of securing a string of lucrative Chinese clients. The reality is that, aside from a very select club of star partners with superb contacts, success in China means advisers having to grind away for years and carefully watch their margins.
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