The Hong Kong Report: Alluring, prestigious … viable?

TRYING TO muscle your way into China's most expensive and competitive city, finding a place among some of the world's largest law firms, and scooping enough work to cover your costs, is harder…

Promoted by Lawyers Weekly 13 June 2008 Big Law
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TRYING TO muscle your way into China's most expensive and competitive city, finding a place among some of the world's largest law firms, and scooping enough work to cover your costs, is harder than most Australian law firms would like to know. So difficult is it to actually open an office in Hong Kong, only four Australian law firms have succeeded.

"Competition is just awesome," says Clayton Utz international services partner Stuart Clark. Even this firm, one of Australia's top five, admits it can't compete in such a market.

"Our view was that the cost associated with it, in terms of not just the immediate outlays, but opportunity costs in moving into what is a very competitive and crowded market internationally, just didn't make sense," Clark tells Lawyers Weekly.

In the glorious cityscape of Hong Kong - among landmark buildings such as International Finance Centre One, the Bank of China Tower and HSBC's Sir Norman Foster-designer headquarters - are just four Australian law firms' offices: Minter Ellison, Mallesons Stephen Jaques, Allens Arthur Robinson and Deacons.

Australian firms have long touted the importance of Asia in their expansion strategies. Freehills has offices in Singapore and correspondent offices in Ho Chi Minh City, Hanoi and Jakarta. Gadens has an office in Port Moresby, while Hunt & Hunt has had an office in Shanghai since 1998. But most Australian firms view Hong Kong as a place to fly into when work appears and fly out of when there is none.

For Clayton Utz, one rationale of having no international offices, and particularly none in Hong Kong, is the competition. Clark says the firm congratulates those who have made a success of going up against the top UK and US firms, but it has chosen an alternative path "that has proven to be very successful".

Established competition

The risks and competition, according to this top Australian firm, are just too high. "There are the British firms that have been there for a very long time, there are strong Hong Kong local firms, the Americans are there; it's a competitive market," says Clark.

This Clayton Utz partner argues few firms have a chance of success there considering what they're up against. "You've got to wonder, going into a very mature, very competitive market like that, how many firms can go into it and compete successfully?

"And if you look at the competition they're up against, in terms of the size of partnerships and in terms of the financial strength of US and European firms, I think there is a limit to how many Australian firms will be able to compete in that space," he says.

Clark says Clayton Utz clients have questioned the value of "plonking a couple of Australian lawyers into an office in a city outside Australia in circumstances where they are trying to deliver the same level of service as the locals". He says that because they are not part of the community, have not gone to the same law school as the people they are working with, and are without those connections, Australian lawyers working on a permanent basis in the city will not be able to offer the same value. If the firm can't offer the same value it can to its clients in Australia, there is no point doing it at all, suggests Clark.

Allens Arthur Robinson, which has offices in Hong Kong, as well as Bangkok, Beijing, Hanoi, Ho Chi Minh City, Jakarta, Phnom Penh, Port Moresby, Shanghai and Singapore, claims to have one of the most comprehensive legal networks in Asia.

Jim Dunstan, executive partner of Asia at Allens, agrees the competition in Hong Kong is palpable. While the firm is about to celebrate 20 years in the city, Dunstan says Australian firms are "all too well aware of the fact that it's a highly competitive market."

Dunstan suggests there is little space for more Australian firms in Hong Kong, arguing you need to have an Asian stranglehold before you cut the ribbon on a new office there. "I think it would be very difficult for a firm that did not have a substantial client base in Asia before they started to set up in Hong Kong. Smaller firms have set up there over the years and haven't really survived," he says.

As well as being highly competitive, all firms agree Hong Kong is one of the more expensive cities in which to operate.

Excessive overheads

Another firm with no international offices, Corrs Chambers Westgarth, has assessed the costs of what it would take to open an office in Hong Kong and quickly shied away from the idea. Chairman of international strategy at the firm, John Slattery, says the firm has no intention of developing offices outside Australia and that Hong Kong is too expensive to efficiently operate.

"We've looked at the costs, but it's a huge multiple of what the costs are in terms of a budget, and frankly we'd prefer to spend the money on travel when we need to. Rent in Hong Kong is horrendous and you're in it for the long term," Slattery says.

Corrs has been watching competitors flounder in this market, where talent is hard to keep. "People are expensive. We see with our competitors the number of exchanges in staff they have, because whenever anyone else opens an office there they go around and raid the other firms, offering the staff more money. It's an expensive merry-go-round," he says.

Clayton Utz partner Clark says the opportunity cost is also too high, and involves losing top partners and lawyers who are then unavailable elsewhere. He argues there is no point going there with anything less than a top-flight team.

He gives the example of the firm's infrastructure team, which he says is world class. "Now we see no advantage in moving a part of that team to Hong Kong on a permanent basis. We can move members of the team around the world, getting them in to do projects with their international expertise.

When we're pitching for work on a power station in Asia, or a rail system or similar, the fact that you can offer a team that has experience in a range of jurisdictions gives you an enormous advantage," says Clark.

A question of timing

Corrs, for one, questions whether Hong Kong is the gateway to China it once was. Whether it's a result of the expense, the high competition, or the opportunity costs, firms are ready to open offices in other parts of China.

Corrs' Slattery says companies and their firms are more and more moving to mainland China. "Hong Kong is not the gateway it once was. If I were to open one office in the region it would be either Shanghai or Beijing in preference to Hong Kong. People see it as the gateway but, frankly, there is no substitute for being on the ground," he says.

While they dismiss the value of adding a Hong Kong office to their empires, most Australian firms that Lawyers Weekly has interviewed say there is no question the Hong Kong and China markets generally are valuable. Corrs, Clayton Utz and other Australian firms with no Hong Kong offices do have Asian strategies, they just don't involve impressive reception areas and their lawyers being paid in

Hong Kong currency

Both Corrs and Clayton Utz utilise their relationships with local Hong Kong firms, banks, larger clients and international firms based out of London or New York. While Corrs' strategy doesn't include international offices, Slattery says it compensates by making huge investments into developing relationships in various countries where its clients are doing business.

Corrs uses a two-pronged approach for its China strategy. First, for Australian clients doing work in the region, the firm partners with local firms in servicing them. "Often there is not a huge role for us, but we place them with firms that we have good relationships with and we know that we can trust them to do the right thing by our clients," says Slattery.

Second is a strategy that Slattery says is developing as the most significant for the firm. That is, the inbound work to Australia from Chinese companies. "Frankly, we've been blown over with the work that is coming out of China in the past 18 months to 2 years," he says.

The firm has work flowing out of a number of the State-owned enterprises in China, which include resources, chemicals, oil and gas, petroleum manufacturing and real estate. To scope for the work the firm travels extensively, moving its people through China all the time. "It's been a long process of getting to know these companies and it's paying dividends," says Slattery.

Joining forces

Clayton Utz agrees "it's dead simple" to get someone on the ground in Hong Kong when they're needed. The firm finds its most successful strategy is working with others to service clients. "We've done this very successfully in Asia," Clark says.

"The firm undertakes] joint ventures with another firm, and it doesn't have to be an Asian firm, for a specific project or a specific range of projects," he says. "But in each case we do this without the overheads, management expense and time trying to justify and financially carry an office in Hong Kong," says Clark.

Mallesons Stephen Jaques, which has an office of 105 lawyers in its Hong Kong office, disagrees with the feasibility of such an arrangement. Managing partner international, Nicola Wakefield Evans, told Lawyers Weekly the firm finds the fly-in, fly-out arrangement unsuitable.

"We don't think you can do that effectively in terms of building a longstanding client relationship and also it's costly to do that. Clients don't like you charging all that travel and accommodation. If you do fly-in, fly-out work you tend to have to absorb those costs," she says.

For most Australian law firms, Hong Kong is only viable via this fly-in, fly-out option, in which relationships are sustained and built from the various Australian offices.

- Kate Gibbs