The internationalisation of China's legal market has seen the country's law firms prosper both locally and abroad. Can they continue to dominate their market as other global firms move in? Alice Gartland reports

King & Wood Mallesons officially opened its doors for business on 1 March 2012, creating an 1,800 lawyer firm. The deal creates the largest law firm in Asia whose "fundamental drive" is to become a top-tier "global law firm", says Handel Lee, senior partner and member of the management committee at the new firm.

Since 2000, the People's Republic of China (PRC) Government has been encouraging Chinese investment abroad under its 'go-out' policy. "What King & Wood Mallesons is doing is an outbound project," explains Lee. "Chinese companies are going abroad and we, as lawyers, need to be with our clients."

According to China's Ministry of Commerce (MOFCOM), in 2011 the country's direct investment overseas amounted to $60bn (£37bn), up by 1.8% year on year. The nature of that investment is increasingly sophisticated, and just as Chinese companies are "moving up the value chain, so are its law firms", says Jack Yu, managing director of Beijing-based Yingke Law Firm's London office. King & Wood Mallesons "should be taken very seriously", says Lord Timothy Clement-Jones, DLA Piper's London office managing partner and chair of the All Party Parliamentary China Group.

In February Zhong Lun Law Firm opened its new London office and, already in 2012, Yingke has added offices in New York, Sao Paolo, Warsaw and Istanbul to its network. Although these offices are relatively small in size, "the fact that these firms have seen the need to open overseas shows the massive opportunities related to the China market", says Jonathan Reardon, a partner at Pinsent Masons' Shanghai office.

The year 1979 is often cited as the starting point for the reinstitution of the Chinese legal profession; however, it wasn't until 1993 that private Chinese law firms were permitted. That was the year that firms such as Zhong Lun and legacy King & Wood were established. To say the development of China's legal services has been rapid is an understatement. China's firms acknowledge they have a fair way to go to catch up with their foreign counterparts, but the gap is closing quickly. These firms are consolidating their positions in market segments that international firms do not reach and beginning to encroach on areas where they do.

Location, location, location

Yingke was established in 2001 and already has 10 offices overseas. The location of these offices is driven by their clients, says Yu. The firm is "following clients into Southern and Eastern Europe", hence its offices in Budapest, Warsaw and Verona.

The second element guiding decisions "is strategy". The "strength and dominance of English and New York law" in international transactions, as well as their dominance as financial centres, meant it was important to have a presence there, says Yu.

Although such expansion is impressive, some China practitioners have raised concerns about the overall strategy of some of the firms, believing that there is a risk that a 'big is beautiful' mentality may overshadow quality of service. However, a number of examples suggest the contrary.

James Zhu, a partner at Jun He Law Offices, established its Silicon Valley office in 2010. Jun He was founded in 1989, and Zhu describes how it "grew based on people" and "only expands when the business need really arises". He emphasises the importance of getting the match of people and location right. "It's all about quality. You have to understand the business in the local area of that office," he says.

The opening of the Silicon Valley office is a good example of that. US-qualified Zhu in 2010 moved to Jun He from Perkins Coie, where he was managing partner of the firm's Beijing office. Zhu had identified a growing trend of investment from China into the US and vice versa. There are restrictions on the ability of international firms to practise Chinese law and Zhu could see the potential to develop a practice from a PRC law firm platform. As an intellectual property specialist, his skills also aligned well with the needs of technology-focused clients in the Silicon Valley.

Similarly, Zhong Lun's choice to open an office in Tokyo in 2006 reflected "the longstanding strength of the firm's Japan-related practice. We have a dedicated team that has studied in Japan and spent many years there. It is also a very important client base", explains Robert Lewis, Zhong Lun's international managing partner.

The firm opened its London office in February this year. The primary driver for this was "the pre-eminent position of London in the legal services market" and that London would be a platform from which they could work "reasonably effectively with clients and partner law firms across the continent".

Zhong Lun's London team moved across from the City office of rival firm Zhonglun W&D Law Firm. "We can tell our Chinese outbound clients that we have on the ground capability and the partners in the office are all from China and all English-qualified," explains Lewis.

Like Jun He, the approach to expansion is somewhat restrained. "We don't need to be excessively large," says Lewis. And while the US is clearly a "desirable destination" for Zhong Lun, an office there will only happen when the "right people" are in place, says Haibin Xue, managing partner at Zhong Lun's London office.

So, as Robert Ashworth, Freshfields Bruckhaus Deringer's Asia managing partner, observes: "While relatively few PRC firms have a sizeable overseas operation, the trend will continue, and we should expect to see further office openings."

Building the right team

Overseas offices are the most visible sign of the internationalisation process, but there have been more subtle changes going on for some time. Foreign-trained lawyers have been recruited in increasing numbers from international to PRC firms in the last five to 10 years. "Sixty-five to 70% of our lawyers have studied abroad or worked at foreign law firms," says Lee.

High-profile examples of this trend include Lewis' own move to Zhong Lun as international managing partner in February 2011. Lewis is fluent in Mandarin and began working as a lawyer in China in 1993. Before joining Zhong Lun, he was the managing partner at Hogan Lovells' Beijing office. Lewis says that many other lawyers with "similar" backgrounds are "expressing interest" in the opportunities that a PRC law firm platform represents. Jun He's Zhu is another example of this trend.

Programmes such as Irish firm A&L Goodbody's Chinese Lawyers' Internship Programme, officially launched in Beijing on 28 March 2012, are also a part of that process. A&L Goodbody has signed agreements with 12 Chinese law firms, including King & Wood Mallesons, Jun He, Dacheng Law Offices, Yingke and Fangda Partners, to provide placement work experience to their lawyers.

These placements give Chinese lawyers "experience of working in a common law, English language environment", and working with A&L Goodbody's "multinational corporate clients" helps them when they assist their own Chinese clients going abroad, explains John Given, head of A&L Goodbody's China Group.

Building a China team with the right mix of skills is something that is also very much on the mind of foreign firms. On 25 April, Zhonglun W&D and City firm DKLM will officially launch a "formal association and strategic alliance", says DKLM partner Philip Li. "We're not going to be a satellite office in London. DKLM is fully functioning and dealing with the UK market anyway." But by teaming up with Zhonglun W&D, DKLM is going to be able to "build bridges" between London and China. "It's about co-operation and accessibility," says Li.

In light of their strategic alliance, DKLM is building up its China team, which already includes a small number of UK-qualified Cantonese and Mandarin speakers.

"The difficulty in London is the strict immigration criteria and visa requirements. There aren't that many Chinese lawyers to pick from. That's going to be a problem for a lot of law firms in London trying to do business with China," adds Li.

Lord Clement-Jones (pictured) believes the investment required for Chinese firms to become viable full service firms is considerable. "Trying to get people of the right standard" is key for the development of any firms' offices abroad. Chinese outbound investors will be looking for teams that have Mandarin speakers as well as, for example, UK and US-qualified lawyers, he says. "Competition to get the right people with the right skills is going to be intense."

Building bridges

Mergers between PRC law firms and foreign firms are forbidden under Chinese law, but a variety of alignment agreements between Chinese and foreign law firms are sprouting up.

The biggest sees King & Wood Mallesons operating under a common brand with a "common path for development" and "common client services" while the Australian, Mainland and Hong Kong offices remain financially independent. "Certain back-office systems are going to be aligned and then integrated," says Lee.

"Essentially what they've done is just shut down the Mallesons offices in China and moved their people into the King & Wood offices," says one lawyer. However, as Lee describes, this is all just the "first step in a bigger strategy". The firms are working through a "well-thought-out integration programme" which includes having co-heads from the two legacy firms for each practice area to co-ordinate industry sector and client development. They have been working on "35 joint pitches and proposals and have already won 15. Others are pending", says Lee. The hope is to achieve full financial integration in the future.

While Sino-Australian trade has been one of the driving factors for the deal, it is clear that one major attraction is what the 19-years-young King & Wood is likely to gain from Mallesons' 180 years of experience. "Mallesons is one of the best managed, most productive and profitable law firms out there," says Lee. "We [King & Wood] were impressed by their business services" and this partnership will "significantly increase our ability to service clients and increase profitability".

"Competition within China is intensifying" and combining "makes us even stronger", says Lee.

The King & Wood Mallesons deal runs counter to the view that not a lot of the top Chinese firms are playing at a level where foreign law firms would have the comfort to work "side by side with a Chinese law firm" and trust "their clients with them", says Lewis. It is a step "much further ahead of the rest of the market" that has certainly "got everyone's attention".

It seems unlikely there will be a sudden rush of alliances like King & Wood Mallesons'. Along with the regulatory hurdles, Dennis Deng, senior partner and director of the international practice division at Dacheng says: "Culture [also poses] an overwhelming obstacle."

Many law firms see the benefits of a close working relationship. Peter Corne, managing partner at Dorsey & Whitney's Shanghai office, describes how his firm has a special counsel agreement with Martin Hu & Partners, which is situated across the corridor from Dorsey's Shanghai office. "It's like King & Wood Mallesons, but on a smaller scale," says Corne.

"Internationalisation will not be for every PRC firm. And just as there are national champions in the US and Europe, some PRC firms will elect to stay focused on the PRC market," says Ashworth.

Fangda will be opening its Hong Kong office later in the year, but as partner Jonathan Zhou (pictured) explains, the firm views Hong Kong as "part of the China market" and they "have no plans to go beyond China".

"We have very good market recognition in China and we also acknowledge we have a long way to go to overtake a lot of foreign firms," says Zhou. "It makes more sense to put resources into a market where we have strengths and to grow in that market and be the premium firm in that market. That's our strategy."

International firms are focused on China's first tier cities, like Shanghai and Beijing. However, China's second and third tier cities like Suzhou (population roughly six million) and Wuxi (population roughly four-and-a-half million) provide an important backbone to China's economic growth and are areas that China's premium law firms are beginning to tap.

Lord Clement-Jones says: "Friendly and close relationships between Western law firms and Chinese law firms, despite the opening up of these offices abroad, would seem to me to add the most value to both sides."

Similarly, Zhou observes: "There are a lot of synergies between China's top-tier firms and international firms."

"'Best friend' relationships may well be a more powerful business model – particularly because of the sheer coverage that is increasingly going to be needed in China," says Lord Clement-Jones.

Reaching into tier two and three cities may "not be something a Western law firm would be as keen on doing, but being back to back with a Chinese law firm could be very useful". In this way having "two offices side by side" could be an effective model, says Lord Clement-Jones.

Competition or co-operation?

With the internationalisation process of China's law firms well underway, are they now going head-to-head with international firms to compete for work?

Generally, internationalisation is viewed as "a win-win situation" that will foster "good co-operative relationships between Chinese firms and international firms", says Deng. Zhonglun W&D partner Chen Wen agrees. "The development of China's law firms in the international market is not a threat to foreign firms, it's about co-operation."

Zhu says Jun He's Silicon Valley office acts as a "conduit" with US firms for Chinese and US investors. It's a small office that helps "ease communication" and "adds value to US counsel as well as our clients, and vice versa". "The office is not [there to] compete with US law firms. It's very complementary."

On the inbound side, "large local firms are moving up the value chain for significant inbound M&A", says Lewis. Reardon also sees the potential for "greater competition" on the inbound side.

Corne observes that in parts of the US, such as the Silicon Valley, Chinese firms are "capturing" work on the inbound side. This is partly because PRC firms are "not labouring under the restrictions" of foreign law firms in China, since they are not allowed to practise Chinese law. Therefore, Chinese firms "are able to provide a one-stop full-service solution in China".

This can be "very attractive", particularly when "the emphasis has shifted" from simply doing M&A to "managing all the different aspects of compliance of a business", says Corne.

On the outbound side, Li says the state-owned enterprises will always use the larger firms, "but there is a lack of support for Chinese entrepreneurs and mid-end companies" and "that's the hole we're [DKLM and Zhong Lun W&D] plugging."

Outbound investment is "critically important" says Lewis, and he describes how Chinese firms are able to service parts of the outbound market that large international firms are not well positioned to address either, "because it's more mid-cap, or its going to a part of the world where international firms do not have offices". In those circumstances, "Chinese clients may feel more comfortable having Chinese counsel working with local counsel in the target jurisdiction".

The international firms that are in China are "A-list firms" says Lewis, which are "geared to super-premium quality work."

Many of the Chinese companies going abroad are targeting market segments in industries that are outside of the interest of such A-list firms. Lewis gives the example of working with Chinese solar panel manufacturers and helping them set up their processes for how to manage international sales and transactions.

"The fact is, the nature of this work is not going to be in the super-premium category, and yet we see that it is important in order to build relationships with clients that are going to be important and are going to grow. We are probably able to better address those more modest requirements for Chinese clients going out." However, there is going to be some overlap. "We are starting from the lower end and reaching up to the higher end. They are starting from the super-premium and reaching down," says Lewis.

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