Last fall, Akiko Mikumo, the head of Weil, Gotshal & Manges‘s Hong Kong office, was contacted by a local company the firm had been pitching to represent on an investment transaction. The company informed her it was going with a competitor, a well-known U.K. firm, that was willing to work for a capped fee far lower than Weil had pitched.

"Their bid was one-third of ours," recalls Mikumo. "We just couldn’t do that."

As international firms rush to expand in Asia, one uncomfortable fact is often quietly pushed aside: Rampant fee discounting means it can be hard to make a buck in the region.

Most international firm partners in the region acknowledge that discounting is fairly routine and that their firms engage in it. They are not so willing to discuss the size of their own discounts, frequently citing confidentiality agreements with clients. But anecdotes about firms willing to work for a small fraction of their normal fees or even for free are widely circulated.

Discounting in Asia has been a vexing problem for firms for some time. Way back in 2003, when elite New York firm Cravath, Swaine & Moore shut down its Hong Kong office, it cited the pressure to cut fees as the main reason it was leaving.

In the near-decade since then, the economic rise of Asia, especially China, has shifted into high gear, and the volume and sophistication of legal work in the region has grown enormously. But the culture of discounting has remain unchanged.

"There is a bit of disconnect between demand and pricing out here," says Matthew Bersani, the Hong Kong-based Asia managing partner for Shearman & Sterling. "Demand for legal services has boomed but pricing hasn’t improved."

James Lin, a Hong Kong partner with Davis Polk & Wardwell, blames the extreme levels of competition in the region. Hong Kong’s emergence as the preferred destination of Chinese companies seeking international capital has made Hong Kong one of the biggest battlegrounds of the global legal profession, with dozens of firms from New York, London, Los Angeles, Chicago, Sydney and elsewhere all competing for the same work. And more firms keep coming.

"One thing a lot of people don’t appreciate about this market is how you have to compete with everyone, not just a small set of peer firms," says Lin. "Clients won’t hesitate to use a quote to try to beat down your quote."

Some of the lowball quotes come from new market entrants eager to build a track record in certain kinds of transactions. High-profile capital markets deals, such as initial public offerings for large Chinese state-owned enterprises, will typically draw offers of discounts from firms, says Shearman’s Bersani, as will relatively novel areas where firms hope to gain an early advantage in terms of experience.

"People talk a lot about the [Renminbi] bond market but there haven’t been a lot of deals," he says. "That’s an example of an area where you’re likely to see firms discount."

Of course, the fact that clients continue to take the lowball offers, even in more developed practice areas, is the bigger long-term problem for firms.

International lawyers cast much blame at the bureaucratic procedures of the state-owned-enterprises (SOEs) that dominate large swathes of the Chinese economy, including banking, energy, telecommunications and automotive. Such SOEs, whose ranks include giants like Bank of China, PetroChina and China Mobile, submit most of their legal work for bidding, frustrating partners accustomed to thinking themselves as strategic advisors and confidants to top executives.

"Sometimes law firms find themselves dealing with the procurement departments," notes Victor Ho, a partner in the Shanghai office of Allen & Overy, "like the company was buying office supplies or toilet paper."

Davis Polk’s Lin sees some reasons for hope, noting that deep discounts don’t always win the day. "There is a danger with really low bids that the client worries that you’re not that good," he says. When there is really big money at stake, he notes, even SOEs look for the safest choice.

"There is significant political risk for SOEs if the deal falls apart," points out Lin. "The savings on legal fees are small by comparison."
E-mail: alin@alm.com