Update, 1/4/12: This article has been revised to reflect the death of White & Case partner Robert Grondine in October 2011.
Talk to members of Tokyo’s international legal community these days, and you hear a common refrain: Life is elsewhere.
“We’re a backwater now,” says David Sneider, head of the Tokyo office for Simpson Thacher & Bartlett. “It’s really China that’s the story. In terms of actual, fee-paying, high-quality work, firms are really focused on China now.”
Michael Mies, Tokyo managing partner for Skadden, Arps, Slate, Meagher & Flom, agrees. “If you want excitement in Asia, it’s going to be China or Hong Kong,” he says. “The first thing on your mind is not going to be ‘I’m going to go to Japan because that’s where all the big deals are.’ “
Indeed, according to Dealogic, Chinese companies participated in initial public offerings worth $73 billion last year, compared to less than $15 billion for Japanese companies. The contrast became only starker this year. In the first half of 2011, China saw $24 billion in IPOs; Japan, less than $300 million. In mergers and acquisitions, the picture is similar. According to figures from Mergermarket, China and Hong Kong saw cross-border M&A deals worth a combined $119 billion in 2010, more than triple Japan’s $37 billion.
Does Japan still matter to international firms? Despite its economic travails, it remains the world’s third-largest economy and home to several corporations that are global household names. For that reason alone, several firms say, they are committed to having a presence in Japan. And for a handful of firms, that is no mere presence. With 125 lawyers in Tokyo, Morrison & Foerster has one of the largest overseas offices of any U.S. firm anywhere. Likewise, the Tokyo offices of White & Case and Baker & McKenzie, with a respective 100 and 150 lawyers, also dwarf the firms’ outposts elsewhere in Asia.
But Paul Hastings, once a market leader, has scaled back its Japan presence dramatically, and Skadden is one of several firms that has withdrawn partners from the market. New entrants are few and far between. The last major U.S. firm to open in Tokyo was K&L Gates at the beginning of 2010. Before that, you have to go back to 2007, when Ropes & Gray and the firm now known as Quinn Emanuel Urquhart & Sullivan arrived. In 2006 Cleary Gottlieb Steen & Hamilton actually closed its Tokyo office. By comparison, the past five years have seen no fewer than 20 Am Law 100 firms launch Hong Kong offices, with several more greatly expanding existing offices.
International lawyers in Tokyo say they still see potential in Japan. The country’s largest corporations have been ramping up overseas acquisitions, spurred in part by the strong yen, and they have also become active litigants in intellectual property cases, at least outside of Japan. Meanwhile, you don’t have to scan far down the Nikkei index to find a host of multibillion-dollar companies that do almost no business outside of Japan—yet. Some believe the globalization of corporate Japan’s second-tier players could ultimately prove an almost China-sized bonanza to international firms.
But it’s by no means certain that things will work out that way. A major concern for Tokyo-based lawyers is that many Japanese multinationals are moving responsibilities for outbound legal matters to overseas business units that liaise directly with local counsel. Simultaneously, the shortage of bilingual lawyers is expected to make servicing clients in Japan tougher for international firms in the years to come. The overriding fear, however, is that Japanese corporations, instead of seizing opportunities abroad, may turn inward, leaving lawyers who have dedicated their careers to Japan sitting on the sidelines as Asia booms, elsewhere.
The earthquake obviously hasn’t helped matters. In the quarter following the April earthquake and tsunami that killed almost 20,000 people, the already-slow Japanese economy shrank at an annualized rate of 2 percent.
“After the earthquake, many foreign lawyers left the country temporarily,” recalls Yoshiaki Muto, the Tokyo managing partner for Baker & McKenzie. “For me it seemed a change of momentum somehow in the business model of foreign law firms. Consciously or unconsciously, it has [also] shifted interest more clearly to China or other markets like Singapore.”
But, even before the earthquake, says Kenneth Siegel, the head of Morrison & Foerster’s Tokyo office, many firms were wondering what to do in Japan.
“I personally think [the earthquake] will accelerate that trend [toward focusing on other Asian markets],” he says. “Firms that really don’t have a really compelling reason to be here are going to shrink more.”
He doesn’t count Morrison & Foerster among those, though. Generally regarded as the paragon among international firms in Japan, the San Francisco firm has more lawyers in Tokyo than it has anywhere else outside America, serving a roster of loyal clients that includes Toshiba Corporation, Hitachi, Ltd., and Fujitsu Limited. Siegel thinks that retreats by other firms will only drive more work to Morrison & Foerster.
The global banks that so often fuel international firms’ practices abroad are less a factor in Japan, he adds. “There’s capital markets work, but it’s mostly domestic,” Siegel says. “The Goldman Sachses and Morgan Stanleys that spin off so much work elsewhere aren’t as big a deal here.”
And they have become less so. Indeed, much of the scaling back by firms can be attributed specifically to the collapse of the international market for Japanese real estate securities. Only a few years ago, U.S. institutional investors seemed to have an almost insatiable appetite for potentially high-performing securities based on nonperforming Japanese real estate loans. But the strengthening of the yen from late 2007 onward; superior yields in other Asian markets, like China; the global financial crisis; and then the earthquake all dealt hammer blows to that market.
As a result, Paul Hastings, which had a leading practice advising U.S. banks in real estate finance, has slashed its Tokyo office from almost 40 lawyers three years ago to fewer than 20 today. Several of its remaining partners are now dividing their time between Japan and other markets. Likewise, one Skadden partner who had focused on real estate finance, Paul Huff, Jr., has relocated to Chicago, while another, Audrey Sokoloff, is now dividing her time between Tokyo and New York.
Some firms are lean enough to weather a drought. New York firms like Simpson Thacher, Sullivan & Cromwell, and Davis Polk & Wardwell have fewer than a dozen lawyers on the ground and are mainly interested in the relatively small amount of U.S. capital markets work from major Japanese financial institutions like Mizuho Financial Group, Inc., or Sumitomo Mitsui Banking Corporation. Likewise, Quinn Emanuel has a small office focused solely on U.S. intellectual property litigation for clients such as Sony Corporation and Seiko Epson Corporation.
Other firms are tilting their practice away from expat lawyers, or gaiben, and more toward Japanese lawyers, or bengoshi. The latter are cheaper for international firms to employ, as they are generally paid less than foreigners and do not receive housing allowances and other typical expat benefits, no small expense in a city famous for its sky-high cost of living. On the other hand, bengoshi at foreign firms face more direct competition from Japanese firms, particularly the Tokyo-based Big Four of Nagashima Ohno & Tsunematsu, Nishimura & Asahi, Anderson Mori & Tomotsune, and Mori Hamada & Matsumoto, whose billing rates can be as much as 30 percent lower.
That rebalancing is no doubt helped by the fact that since the earthquake, more expats actually want to leave Japan. Though Tokyo was almost completely undamaged, the traumatic experience of the 8.9 temblor plus the lingering fear of radiation from the damaged Fukushima nuclear power plant has taken a toll on the expat community, most of whom evacuated Tokyo—or in many cases, Japan—in the immediate aftermath of the earthquake. Siegel says that one MoFo lawyer with children decided to move back to the United States permanently. Toshiyuki Arai, head of Paul Hastings’s Tokyo office, says that some lawyers at his firm returned to Japan alone, leaving their families overseas. Though no hard tally is available, foreign lawyers in the market say there are now noticeably fewer expats in Tokyo. In one sign of the times, the once-oversubscribed American School in Japan sent out an e-mail notice in October informing parents that the school had dozens of unfilled spots and would have to let some staff go.
Though he himself remains committed to the market, Sneider says the earthquake was probably the final push for some expats who were already working a great deal outside Japan. “Part of their job was here and part of it elsewhere, but they liked living in Japan,” he says. “After the earthquake, there was less incentive for them to stay.”
Such departures underline one lesson of the last few years for international firms: To make it in Japan, they cannot count solely on their base of international clients.
“Our focus has been singly on American clients, and that work has dropped off dramatically [over the past few years],” says Paul Hastings’s Arai. “We’re working on building a Japanese client base.”
Japan’s largest corporations are, of course, already highly sought-after clients, with the same reach and range of issues of any Western multinational. Major Japanese companies are frequent litigants in U.S. courts, and representing them has proven a boon to several American law firms in Japan, most notably Quinn Emanuel and Morrison & Foerster. Quinn has represented Sony in disputes with Korean rival LG Electronics Inc. and with Irvine, California–based VIZIO, Inc., over flat-panel display patents. MoFo has litigated for Hitachi and Fujitsu in similar cases.
Moreover, in the past year, Japan Inc. has been on a global acquisition spree. Outbound M&A is one area where Japan has recently been outpacing China. According to Mergermarket, in the first half of 2011, Japanese companies made $34 billion in acquisitions abroad, compared to $27 billion from China and Hong Kong. This spree has been fueled somewhat by the strong yen, which is making overseas assets bargains for Japanese companies. Siegel says Japanese companies have also become far more sophisticated in their approach to doing deals.
“They’re doing auctions, hostile takeover situations,” he says. “Japanese companies did not use to do that.” Morrison & Foerster represented Toshiba in a successful $2.3 billion competitive bid for Swiss power-meter maker Landis+GYR AG in May.
But the nature of outbound work is that much of it happens elsewhere, and some Japan-based lawyers say that the recent boom has meant less for them than might appear from the outside.
Mies, whose firm represented Landis+GYR in the Toshiba acquisition, says that most of the work was handled in Europe. Skadden’s Tokyo office only played a supporting role on several other outbound Japan deals the firm handled last year. The work that Skadden did for Tokyo-based toy company TOMY Company, Ltd., in its $640 million acquisition of U.S. miniature train maker RC2 Corporation was largely led out of the firm’s Chicago office. Likewise, Skadden lawyers in Palo Alto handled much of the deal when Advantest Corporation, a Japanese semiconductor testing equipment maker, agreed to acquire Verigy Ltd. for $1 billion this year. Large Japanese companies’ overseas subsidiaries in the U.S. and Europe often take the lead in deals occurring in their area of operations, Mies points out, and some Japanese companies, such as Kirin Brewery Co. Ltd., are now taking a similar approach in Asia by setting up business development teams in places such as Singapore.
“Some of it’s to get around the Japanese cultural issues—the culture of consensus, the risk-aversion,” Mies says. “You get enough of a team, a sophistication that you can go out and do these deals without the Tokyo nexus.”
Siegel disagrees that there’s a trend of Japanese companies devolving decision-making responsibilities; in his view, Japanese multinationals are still typically far more centralized than their American and European counterparts. He does note, though, that some Japanese companies like his client Toshiba do often leave overseas acquisitions intact as stand-alone entities that manage their own day-to-day affairs.
“I don’t view that as a diminution of the pie,” says Siegel. “It just shows that Japanese companies mainly acquire for market share and to increase their footprint, not to cut jobs and consolidate operations.”
Looking ahead, the most desirable Japa-nese clients for many international firms may not be the companies that are household names to Americans.
The second tier of corporate Japan is composed of companies that are often still quite large, with billions in revenue on their balance sheets, but that are far less adept at international dealmaking than the Sonys and Panasonics. Unlike the giants, these companies need a Tokyo-based, Japanese-speaking guide to the intricacies of globalization.
“For foreign firms, that’s the client group that’s most attractive,” says L. Mark Weeks, Tokyo managing partner of Orrick, Herrington & Sutcliffe. “That’s where the growth is.”
“They have cash now, and they need to spend this cash overseas,” says Baker & McKenzie’s Muto. “That’s one advantage the Japanese economy still has: There are lots of these companies.” Muto cites his client Murata Manufacturing Co., Ltd., as an example. The Kyoto-based electronic component manufacturer had $8 billion in sales last year but won’t be deploying global business development teams anytime soon. “They are a top-tier manufacturer, but they do not have much legal staff,” says Muto. Instead, they have relied on Baker & McKenzie for help on a series of overseas investments in the U.S. and Australia.
Likewise, in October, Davis Polk represented Toyo Seikan Kaisha Ltd., a Tokyo-based can and bottle manufacturer, on its $775 million acquisition of Colorado’s Stolle Machinery Company, Inc., a producer of the machinery to make cans and bottles. The same month, Skadden advised Japanese medical diagnostics company Miraca Holdings Inc. on a $725 million acquisition of the laboratory business of Dallas-based Caris Life Sciences, Inc.
Such medium-sized Japanese clients exhibit a trait that international law firms are finding to be increasingly rare elsewhere in the world: loyalty. “They’re used to dealing with a sensei, ” says White & Case Tokyo partner Brian Strawn, citing the Japanese word for “ master” or “teacher.” “From the client’s perspective, they are going to a partner, and they’re going to that partner with everything, whether a dispute or an acquisition. They want your advice.”
Unlike in the United States, most of the staff of Japanese corporate legal departments are not lawyers themselves. Strawn says that because of their lack of familiarity with the global profession, these legal managers are disinclined to shop around among firms. It’s also harder to impress them with a big name and reputation from abroad.
So how to win that loyalty in the first place is a challenge for international firms. “The reality is that [Japanese companies] often have relationships with Japanese firms,” says Orrick’s Weeks. “The Japanese firms have relationships with local counsel overseas, and they don’t want to refer work to firms overseas that compete with them in Japan.”
Winning over such clients is an incremental process. “You ask if they need a second opinion, have conflicts, or just want to discuss industry issues,” says Weeks. “It’s a time-consuming process, though. It’s not like China, where you can fly around and meet a bunch of fortysomething CEOs who are all ready to do an IPO.”
The international firms that are most successful in Japan have generally been led by partners with decades of experience in the country and who speak fluent Japanese, such as MoFo’s Siegel, Simpson’s Sneider, and the late Robert Grondine of White & Case. Former Cleary managing partner Mark Walker has attributed the failure of the firm’s Tokyo office to never having had experienced Japan hands leading its practice ["Flubbing Japan, Trying Again in China," Winter 2011].
Mies points out that numbers matter, too. “It’s hard to go into a Japanese client without really having a decent size here,” he says. “They’re used to the way it’s done here with very large teams.”
But finding the right people in any quantity is sure to become more and more difficult in the years to come. U.S. students are more likely to be practicing Mandarin than Japanese these days. And unlike China and Korea, Japan lacks a large overseas immigrant population to provide a steady supply of bilingual, bicultural professionals to the motherland. The ready availability of Chinese American lawyers is no doubt a factor in the much broader push into China by U.S. law firms. Not surprisingly, bengoshi who speak fluent English are in great demand. But there are not many. Even though Japanese students are required to study English for several years, very few learn to speak it well enough to communicate in a business context. “We hire very brilliant young lawyers, fresh graduates from the top Japanese law schools, who say they are really eager to be a good international business lawyer and work on cross-border matters,” says Muto. “So we believe them and hire them, and then they don’t speak English!”
Meanwhile, fewer Japanese students than ever are going to study abroad. An April 2010 Washington Post article caused a stir in Tokyo expat circles when it reported that only one Japanese student had entered Harvard University as an undergraduate the previous fall. According to the Institute of International Education, China, India, Korea, and Taiwan all have more students in the U.S. than Japan: China and India send more than 100,000 each, and Korea sends 72,000, compared to only 25,000 from Japan.
“Young people don’t feel they have to go abroad,” says Muto. “You can have a comfortable life in Japan speaking only Japanese and working only with Japanese clients. It’s easy, and you don’t have to deal with cultural differences.”
The lack of interest among young JapA-nese in studying or working abroad reflects a broader cultural insularity that remains a major worry for international lawyers servicing the Japan market. Muto says Japanese companies, like the country’s young people, are prone to thinking it’s easier and more comfortable to just stay in Japan, despite the low growth. “There’s good infrastructure and a stable environment here,” he says, “and they don’t have to deal with language and other issues.”
Some companies may have tried going overseas before, only to retreat. “There is a bit of a love-hate thing with China,” says Strawn, recalling several manufacturing joint ventures that fell apart. “I seem to have spent as much time getting Japanese companies out of China as in.” He notes, too, that over the last few years, Japanese corporations increasingly want their legal advice in Japanese, a preference that runs counter to the trend at many Asian and European companies of transacting most business in English.
Siegel says there are still “loads” of Japanese companies sitting on the sidelines. But he also sees many Japanese businesses that have been thinking harder about internationalization than they ever have before. In some ways, he’s more worried that so few outside of Japan are paying attention. “There are fewer international people focused on Japan as an opportunity,” says Siegel. “That’s a shame.”
Japan has become so identified with a notion of stately economic decline that even optimists shy away from predicting great things ahead. “I think the way it’s likely to work out is the offices here are going to remain the same size, and if there’s growth, it will probably be outside of Tokyo,” says Mies. But he can also imagine a scenario where Japan surprises everyone.
“Japanese companies might look at their huge balance sheets and the super-strong yen and just say, ‘Let’s go for it!’ ” says Mies. “ And next thing you know, everybody in Hong Kong will be looking up and saying, ‘I want to be there!’ ” •