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Pinning hopes on China

Pinning hopes on China

Clare Buttner looks at whether Australian firms are ready to service the next great superpowerALL OF Australia’s top-tier law firms predict success in Asia will be crucial to their future…

Clare Buttner looks at whether Australian firms are ready to service the next great superpower

ALL OF Australia’s top-tier law firms predict success in Asia will be crucial to their future growth. As mainland China liberalises its economy, firms will be looking to capitalise on its emerging markets, but are facing stiff competition from the same UK and US firms that managed to get a foothold in Hong Kong long before Australian firms did.

The latest Bloomberg M&A league tables for China (including Hong Kong) show Australian firms have slid down the list of top performers over the last 12 months. In fact, not a single Australian firm ranked within the top 20 performing firms by deal count or volume during the second quarter of 2007, despite dominating the Asia-Pacific (excluding Japan) and Australia/New Zealand tables.

In contrast, during the same period in 2006, Allens Arthur Robinson, Mallesons, Minter Ellison, Blake Dawson Waldron and Gilbert + Tobin all ranked among the top 20 performers by either volume or rank.

While these figures may tell us something about how Australian firms are performing in China as a whole, Jim Dunstan, executive partner, Asia, for Allens Arthur Robinson says these results aren’t particularly meaningful for assessing how Australian firms are performing in mainland China, which is viewed as a growth area.

“M&A means a lot in the Australian market but doesn’t mean a great deal in the China market. It’s not core business in China as it might be in Australia,” he said.

Dunstan says the Bloomberg results are driven by Hong Kong deals.

Firms are hoping that they will be more competitive in mainland China than they have been in Hong Kong, where UK firms have had an advantage due to Hong Kong being a British territory until 1997.

Their success will largely depend on Australian investment in mainland China, which has lagged compared with Australia-China trade. According to the Department of Foreign Affairs and Trade, only 0.3 per cent, or approximately $2 billion, of Australia’s total foreign investment (around $680 billion) in 2005 went to China, up from 0.2 per cent in 2002—04.

Ian McCubbin, a partner in Deacons’ Melbourne office, says the lack of Australian investment is the reason our firms aren’t getting to work on big deals such as those featured in the latest M&A tables.

“Australian companies have not generally embraced investment in China, compared to European and US companies. We’ve seen a few of the banks and insurance companies make some investments in China, but compared to the level of investment from the UK and Europe they are hardly on the radar. What that means is that European and US capital dominates M&A,” he says.

As a result of this limited capital investment, Australian law firms have modest resources compared to their US and UK counterparts, something McCubbin says makes it difficult to attract work from US and UK companies who are doing the big deals in the region.

The sheer size of the UK and US firms make them formidable competitors. For example, global firm Baker & McKenzie has 235 legal staff across China, while Freshfields Bruckhaus Deringer has 160 lawyers and Herbert Smith has 128. All of these firms dwarf Mallesons’ 70 lawyers — the largest presence in China of any Australian firm.

Fred Kinmonth, head of corporate for Minter Ellison in Hong Kong said Australian firms have a way to go before they will manage to compete with the major players at the moment.

“The straightforward fact is that even though these firms are very large in Australia, they are relative latecomers to the market [in China] and the number of Australian firms operating in Hong Kong is really very small,” Kinmonth says.

Kinmonth believes the trick to surviving and becoming competitive will be differentiation.

“The pie is very large. There is room for everybody and what the Australian firms have to do is make the most of their natural advantages to corner their share of the market. That doesn’t mean competing but exploiting the characteristics of Australian firms that make them different,” he says.

“At Minters we are doing a lot of project work, resources related project work, construction and infrastructure and the corporate and commercial aspects of that. We are also focusing on private equity because Australia is the largest market for private equity in Asia.”

Dunstan says AAR is focusing on foreign direct investment, banking, real estate and mining in mainland China — a move that is proving very profitable.

“We have about 30 lawyers in China working flat out, long hours, high production, and who are highly profitable — more profitable than the average Australian partner,” he says.

Australian investment in China is expected to pick up in the coming years as China opens up its banking and services sectors, while increasing Chinese investment in Australia will also lead to more work for Australian firms.

“We are beginning to see Chinese companies — mainly Chinese Government companies — investing in Australian capital markets. As China’s investments in Australia diversify away from resources we will see more China involvement in our capital markets which will lead to substantial work for firms here in Australia,” McCubbin says.

“I personally even heard talk in Chinese Government circles in Beijing of possible takeovers of some of the major global resources groups by Chinese Government companies, including some major Australian companies. There is no question that they have deep enough pockets to seriously contemplate that.”

Kinmonth agrees that the rapidly changing economics of Asia will benefit Australian firms.

“We are seeing economic flows in the reverse direction. The number of Chinese companies investing in Australia is increasing dramatically. I think you will see Australian firms increasing their share of the work in China and Hong Kong quite rapidly,” Kinmonth says.

At present, restrictions remain in place for foreign lawyers operating in China, but Dunstan is confident that when China relaxes these regulations Australian firms will be well positioned to take advantage of another growth stage.

“We are very confident that China will ease restrictions [on foreign lawyers] as the years go by. And then we would expect there to be another major growth phase, in terms of the size of practices, because of the access it gives to the domestic market,” he said.

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