Australian law firms have been eyeing China for years, but the race to grab hold of the opportunities on offer has well and truly ramped up in 2012. Briana Everett talks to Australian firms in China about their growth strategies and the obstacles involved

The formation of King & Wood Mallesons (KWM) on 1 March this year signified just how serious Australian law firms are about China and gaining access to its blossoming legal services market.

While China’s willingness to engage with the rest of the world in terms of foreign investment is a relatively recent trend, there are myriad opportunities for Australian firms operating in China, despite restrictions on foreign firms and free trade agreement (FTA) negotiations, which remain incomplete.

China’s legal services market is relatively undeveloped compared to that of the United Kingdom or Australia having only re-established itself after the Cultural Revolution in the early 1990s. But while the relatively embryonic nature of the China market presents a number of issues for foreign firms, the opportunities are almost endless.

“Beijing is the most powerful city in the world now because unlike the US, government is here and major business is here,” says Minter Ellison partner Nigel Clark, who recently left the firm’s London office to head its office in Beijing. “In terms of global super powers, Beijing is really it … If you have any pretensions as a law firm to do work beyond your own national boundaries and with Chinese clients, you’ve got to be in Beijing.

“The scale of this market and this country is extraordinary … [China] has its challenges, but italso has incredibly opportunity.”

Minter Ellison opened its Beijing office in 2010, adding to its office in Shanghai which opened in 1999, and its office in Hong Kong which has operated since the late 80s. The firm also announced in February this year the opening of an office in Mongolia.

“In Beijing, it’s really an outbound office,” he says. “We opened here, like everybody else here, because the Chinese state-owned enterprises, government and Chinese companies want you to have presence in Beijing. I mean it’s silly not to and there are foreign law firms opening every day here.”

Hunt & Hunt partner Jim Harrowell, a former national managing partner and chairman of the firm and its current chief legal representative in its Shanghai office, has observed the development of the Chinese legal services market since the early days of China’s ‘Open Door’ policy to today’s ‘Go Out’ policy of encouraging Chinese businesses to engage in foreign investment.

“When we started [in China] a lot of the work related to trading … It’s moved away [from that] and a lot of [the work] is now about establishing businesses. Australian businesses establishing businesses in China,” says Harrowell, recalling his first trips to China in the late 1980s.

“That’s probably the biggest change. The foreign, direct investment, both inbound and outbound.”

Nurturing relationships
One of the biggest challenges Clark has come across in his short time in Beijing so far is the mismatched expectations regarding the pricing of legal services – a symptom, he says, of China’s immature legal market.

“The biggest challenge that I’ve seen … is pricing, and what a lawyer’s role is,” he says. “It’s only been in the last 10 years that [Chinese] businesses have recognised the need to use a lawyer to help them in terms of an acquisition or whatever it might be.”
Encouraging Chinese businesses to seek the help of a law firm early on in the piece – as well as pay for it – is a problem faced by Australian firms, according to Clark.

“For a start, it’s getting them to pick up the phone and say they want to buy a company in Australia, and then it’s actually talking to them about the fact that they need us and we can help facilitate the process. The next obstacle is to try and make them understand that they have to pay for us,” he says.

“The expectations in pricing, and I’m just saying this from my limited experience so far, are miles apart. So it’s just about working out how to price [our services].”
With the need to manage expectations comes the importance of establishing and nurturing relationships – a critical part of doing business in China.

Corrs Chambers Westgarth adviser and co-chair of its China practice Dr Geoff Raby, who was also the former Australian Ambassador to The People’s Republic of China between 2007 and 2011, emphasises the importance of relationships when doing business with China.

“The things that matter more in China that they do in the West is relationships,” he says.

“Relationships are the corner stone to doing business in China. Often western businesses think that once they sign a contract that’s the end of the process. Well, the reality is, in China … signing a contract is just the beginning of the process. Where we draw heavily on black-letter law in the West, in China relationships are necessary to underpin the business deals and to build the links throughout the system to enable you to do business.”

Similarly, the global managing partner of King & Wood Mallesons, Stuart Fuller, says establishing “the right contacts, connections and local know-how” are crucial to the facilitation of transactions and being successful in the Chinese market.

“China is one of the fastest growing legal markets and requires tremendous depth and breadth of capability on the ground to meet the demands of both Chinese and international clients,” he says.

According to Clarke, while relationships are extremely important, the Chinese are generally accepting of Australians and keen to do business with Australia.

“There is a lot of referral work [in China] … A lot of work comes out of our law firm relationships, rather than intermediaries. That’s important here,” says Clark.
“Having gone around the city of London for the last eight or nine years trying to talk about Australia, it’s quite difficult unless you’re talking purely about resources. But I’ve come [to Beijing] and the Chinese are genuinely interested and really want to do business in Australia.

They tell me Australia is their favourite Western trading partner. They love the Aussies here.

“So Australia is incredibly important for them and the level of potential outbound investment here is extraordinary.”

Grounded or flying high
The debate as to whether a physical presence in China is more beneficial than operating on a fly-in, fly-out basis is quickly dismissed by Fuller, who describes it as “night and day”.
“We believe the level of service and capability you can offer clients on the ground in China versus on a fly-in, fly-out basis is far superior,” he says. “Having a physical presence is essential to form the networks and individual relationships required to guide clients through the deal.”

Without dismissing a fly-in, fly-out strategy completely, Harrowell says while it’s still doable, it is much harder to forge the relationships that are vital to doing business in China, unless you’re on the ground.

“I think you can still do it but it’s harder to make those connections,” he says, adding that having a presence in Beijing, as opposed to just Shanghai, is not necessarily a must.

While a physical presence in China is seen as advantageous, there are still significant restrictions on access to the Chinese legal market for foreign lawyers and foreign firms, which present significant challenges for Australian firms operating in the region.

“There’s a regulatory environment which is, in many ways, much more restrictive than we would apply to Chinese law firms here,” says Harrowell, noting that foreign law firms cannot be involved in litigation, conveyancing and advise on Chinese law. “There’s always a tension because the foreign lawyers are not supposed to do Chinese law. Now, where do you draw the line in a joint venture between and Australian company and a Chinese company?

“Mallesons didn’t merge with King & Wood for nothing, but there are restrictions. There are also other requirements, such as the chief legal representative must have a certain period of residence in China [180 days] … We continually struggle over that.”
A key advantage of the merger with King & Wood, according to Fuller, is the ability to practise across all areas.

“International law firms are prohibited from advising directly on Chinese law. Through our combination with King & Wood we have market-leading Chinese law capability and we are the only firm that can practice Chinese, English, Hong Kong and Australian law, which is a huge advantage for our clients in the increasingly global market,” he says.

While he highlights a number of requirements which make operating in China’s legal market difficult, Harrowell concedes that Hunt & Hunt has in fact had a very good relationship with China’s Ministry of Justice since it started operating in Shanghai.

“I believe that all the Australian law firms – and there are only six of them who are licensed to practise in China – have all developed sound relationships with the justice bureau and whilst we all have to comply with reports and comply with directions, it’s been a constructive working relationship,” he says.

Harrowell adds that while there is room for change, there have recently been some encouraging developments with respect to foreign lawyers’ access to China’s legal market.

“It is now open for foreign law firms to join the Chinese law society. Now that’s a huge change,” he says. “[China] needs some time … We’ve had hundreds of years to entrench a private and independent legal profession and they’re feeling their way at the moment.”

Also taking time are the negotiations for an FTA between Australia and China which began back in 2005. The 17th round of negotiations were held in Beijing in November last year.

The one thing that’s absolutely critical is for the government to get back on this FTA thing,”says Harrowell, who’s been part of the Attorney-General’s China Working Group for some time and involved in the group that put together Australia’s negotiating position on legal services for the FTA.

“It’s no good saying the FTA is too hard, just work around it … I do hope Foreign Minister Carr will take up the burden … The legal profession will be greatly assisted if the Federal Government was able to bring in an FTA with China. If not, they can help us negotiate a bilateral arrangement for legal services as a precursor to that. That’s where we need help.”

Mallesons’ ‘brave move’

King & Wood Mallesons (KWM) are inevitably going to lose staff, according to Clark.

“Mallesons is a high-quality Australian firm. They have very clever people there. They’re not going to do something without giving it a lot of thought. But the general view here is, from the Chinese lawyers I’ve talked to, that it’s a very brave move,” he says.

“[The Chinese lawyers] don’t see it really affecting the Chinese market at all. King & Wood is still King & Wood … Culturally, in my view, it’s going to be very, very hard, primarily because law firms are only a few years old. From what I’ve seen so far they’re run very differently to the traditional western model.”

Clark points out how centrally-managed Western firms are, compared to Chinese firms such as King & Wood, and pinpoints this as a contributing factor to potential integration issues for the combining of King & Wood with Mallesons.

“In China and Australia, there are some huge differences in culture in everyday life, let alone business,” he says. “If [KWM] can pull it off, good for them.”

As to the concerns regarding cultural differences and the challenge of integrating both firms, Fuller says the two firms have more in common than they do differences.

“Cultural integration is a key priority and we recognise that there will be different cultures as well as languages in different parts of the combined firm – as there are in any international organisation,” he says. “As part of our integration initiatives there are a whole set of programmes, including language training, business etiquette instruction and ‘getting to know you’ sessions.”

As to KWM’s impact on the Chinese legal market, Clark believes the merger has little meaning for the rest of the world given the lack of recognition, worldwide, of the King & Wood and Mallesons brand as well as their inability to advise on UK, US, Africa or European law.

“What I think will make people sit up and think, ‘Okay this is getting serious’, is if they have a follow-on merger or they tie up with a US firm or a UK firm,” he says. “Then they really will be trying to challenge the global elite.”

Whether the combination of a Chinese firm with an Australian firm poses any threat to Australian firms already operating in China, Clark says the immediate impact will be that Minter Ellison no longer works with King & Wood.

“Obviously we’ve got to be careful that our Australian clients aren’t persuaded to go straight to King & Wood Mallesons,” he says.
But Clark doesn’t see any other “significant-sized” Chinese firms rushing to tie-up with other firms.

“The Chinese firms that we’ve spoken to in the last few weeks are very interested in what happens, but they don’t have any great desire to do anything,” he says. “They’re very happy … and they’re growing.”

While Harrowell sees KWM as the first “truly global law firm”, he says Australian firms already in China cannot “whinge about one or two competitors” given there is so much legal work in China.

“Shanghai is a city which has the population of the whole size of Australia, there’s plenty to go around.”