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The Chinese economy, which now ranks as the third largest in the world, continues to grow at a rapid pace, fueling demand for legal services. In an effort to take advantage of the booming Chinese economy, foreign law firms are entering China at an unprecedented rate. The Chinese Ministry of Justice recently reported that more than 170 foreign law firms are licensed to operate in mainland China, of which about 40 are U.S. firms. Several firms, including ours, have opened multiple outposts on the mainland. With restrictions on foreign investment in China being lifted or relaxed as a result of China’s entrance into the World Trade Organization, the need for U.S. law firms will only increase. Nonetheless, many U.S.-based law firms have experienced mixed results in their attempts to expand into China. Indeed, several major firms have been forced recently to close their Chinese offices. We have been able to ride out the ups and downs in Asia, not by cutting costs and decreasing investment but by strategically adding new offices and legal talent. Here are some of the lessons we’ve learned along the way. � GO BIG OR GO HOME. Many firms that are interested, at least in theory, in expanding into China are often unwilling to commit time and resources on a large enough scale to ensure long-term success. One reason that firms have been forced to fold in China is not because their investment was too large but because it was not large enough. Law firms understandably have limited tolerance for large offices that are not immediately profitable. However, it is extremely difficult to be profitable on a small scale. Dipping a toe in the water or rushing in simply to have a presence is insufficient. Chinese companies — whether they are investment banks, financial institutions or industrial clients — know whether a firm has the capacity to serve them. The size of a firm’s presence in China and the Asia-Pacific region may be viewed as demonstrative of its commitment and capabilities in the Asian marketplace. Our own China strategy began with a joining of forces in 2002 with Koo & Partners, a Hong Kong firm known for its strong relations in the People’s Republic. (Founding partner Donald Koo has been an adviser to the Bank of China since 1986.) We have subsequently used our Hong Kong office as the launching pad for a successful Korea practice. Because of the groundwork laid by the lawyers in Hong Kong, Paul, Hastings is poised to become one of the first U.S.-based firms to open an office in Korea once current restrictions there are lifted. The combination with Koo & Partners also provided our firm with an office in Beijing. Though it is not currently a financial center, Beijing, as the seat of the Chinese government, is a vital outpost from which to confront the myriad regulatory challenges facing businesses operating or investing in China. In 2003 we opened our office in Shanghai, expecting that city to become a leading global financial center. � STAFF FOR THE LONG TERM. While the pool of senior attorneys qualified to open or manage an office in China is limited, the outlook is beginning to change. A decade ago, an attorney — who may not even have spoken Chinese — might typically have been dispatched to Asia for one or two years. Today, we look for attorneys who have vast experience in China, are committed to that market for the balance of their career and possess a native-level understanding of the Chinese language and culture. Fortunately, the pool of English-speaking Chinese lawyers (many of whom study in the United States and receive LL.M. degrees) is also increasing. We encourage the free flow of attorneys between China and our various other international outlets. We have used this tactic to strengthen many of our practice areas and to strengthen our claim in China. For example, we base our China trade and litigation practice in Washington, D.C., where we represent the Chinese government and industry in international trade disputes. � LOOK FOR CHINESE COMPANIES GOING GLOBAL. One challenge facing U.S. law firms looking to expand into China is resistance to cultural integration by Chinese companies. Many Chinese companies prefer using Chinese lawyers for several reasons, including a natural preference for a native Chinese-speaking lawyer but also because of expense. In the United States and in many markets internationally, high-quality legal services are valued but are also expensive. Chinese companies are generally less mature than European or U.S. companies and, in some instances, do not yet fully appreciate the value of these legal services — although that situation is beginning to change. Does that put American lawyers at a competitive disadvantage? Not really. While there is some resistance to cultural integration from Chinese companies that undertake only domestic transactions, an increasing number of Chinese companies are going global. As they mature and conduct business around the world, these companies will increasingly find value in the multi-jurisdictional and language capabilities of U.S. firms. For the law firms, this also means an increasing number of opportunities to represent Chinese companies in international transactions. Chinese companies from all sectors are expected to go public in 2004 and offer as much as $20 billion in shares on foreign markets. The M&A market in China has grown by approximately $30 billion in each of the last two years. And since its entrance into the WTO, there has been an enormous increase in Chinese interest in enforcing patents abroad. � DANCE WITH THE ONE WHO BROUGHT YOU. Seeking out emerging Chinese companies is not the only path to sustained financial success for any firm doing business in China. For many of our firm’s clients worldwide, the largest part of future growth will be in Asia. Taking advantage of existing client relationships in existing practice areas will lead to future work as U.S. companies expand in China. This is essential to our future success. Our growth strategy and resulting multi-jurisdictional services will allow us to better serve these clients. Though it is unclear whether the Chinese economy will be able to sustain its current level of unparalleled growth, all indications are that it will be strong and viable well into the future. Restrictions on foreign investment will be eased for WTO countries, consumption of raw materials will continue to grow and events like the 2008 Summer Olympics and the 2010 World Expo will fuel additional interest and investment in China. Only law firms that are fully committed to working through the challenges of the Chinese market will be able to successfully capture the remarkable opportunities offered by the Chinese economy over the next decade. Seth Zachary is the chairman of Paul, Hastings, Janofsky & Walker.

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