China: Battle for talent

By Robert Sawhney, Managing Director, SRC Associates

While the legal profession in China is still relatively young, the growth and influence of Chinese domestic law firms is now beginning to be felt in the international arena. For example, both Jun He Law Offices and King & Wood have opened offices in the US and can practice in Hong Kong following associations with local law firms.

It was only 20-odd years ago that all law firms in China were state owned. With the guidance of the government, the Ministry of Justice (MOJ) has been on a mission to change the legal industry in line with the overall economic needs of China. There are now over 13,000 law firms on the mainland and over 130,000 lawyers. There are also close to 200 international law firms with representative offices, mainly in the key economic centres of Shanghai and Beijing.

Some of the more prominent PRC law firms (such as Jun He, King & Wood, Allbright Law Offices, Dacheng Law Offices and Lehman Lee & Xu) are now becoming more competitive in international business transactions. This is in large part due to the return of Chinese nationals with experience in Western legal markets who have decided to join a local law firm instead. This expertise has also been acquired through the contact the local firms have had when working together with international law firms. The Chinese firms are now taking larger slices of the work on inbound foreign direct investment (FDI), although they still lack the skill set needed on more complex cross-border transactions. 

Stealing talent

It seems one way Chinese firms intend to overcome this deficit is through the recruitment of senior partners from international firms.

Notable catches include Robert Lewis, the Beijing managing partner of Lovells (now Hogan Lovells). He joined Chinese firm Allbright as a senior international legal consultant (as foreign lawyers cannot become partners). Lewis believes that inbound work in China is tilting in favour of domestic firms. In addition, much of that work is going to where foreign firms don’t have offices.

Another notable example is Rupert Li, a former partner at Clifford Chance, who joined King & Wood as international managing partner. Jun He also recently hired three intellectual property partners from US law firms (two from Perkins Coie and one from Jones Day) for its Silicon Valley office.

These are clear signs that Chinese firms take building international capability very seriously, and they are not afraid to seek out top talent from the best international firms.

Another factor in favour of domestic firms with a comprehensive office network is the changing shape of investment in China (both inbound and cross-province investment by subsidiaries of multinationals). The amount of FDI into the central and western parts of China has literally doubled in percentage terms in the last 10 years, with a reduction of about 10% in the big eastern markets such as Shanghai and Guangdong, when looking at FDI in China as a whole.

Aside from the expertise the local firms are building and their superior office networks across China, another reason an increasing number of multinationals are using Chinese firms for inbound work is fees. The hourly rates of domestic firms are substantially lower than those of the international firms. For example, Allbright’s Lewis has reportedly dropped his charge-out rate by 45% compared to when he was at Lovells, at approximately Rmb3,200 (approx £320) per hour.

Troubled growth

There are still challenges to be faced by mainland law firms in China. The variability in lawyer and practice group quality within the same firm can still be significant. Even within the largest local firms, there is still an ‘eat what you kill’ mentality, meaning firms do not always function well on an organisation-wide level. Certainly some of these firms are moving towards more western styles of management and structures, but whether this is truly accepted and understood by the partners at a cultural level is hard to say.

Foreign law firms have also been relatively aggressive in their China operations. They have hired top Chinese talent away from local firms, even though foreign firms are not allowed to hire Chinese lawyers. The Shanghai Lawyers Association has condemned this behaviour as illegal, but the MOJ has taken little action. One way firms can avoid such sanction is to stop registering their local lawyers’ licenses.

Communication skills can also be problematic for PRC law firms, not only in terms of the English language, but also in terms of their lawyers’ ability to understand and meet the needs of international clients, and provide the level of service to which they are accustomed.