For most international law firms, mainland China has generally been a tale of two cities: Beijing and Shanghai. The others amount to the Chinese version of flyover country.
But a small number of firms has long seen opportunities in China’s second-tier cities—places like Chongqing, Dalian, Guangzhou, Shenzhen and Qingdao—and others are now starting to see the same thing.
Earlier this month, Clyde & Co announced it was launching in Chongqing, a city in southwestern China with a metropolitan population of around 30 million people, through a joint venture with local firm Westlink Partnership.
Shanghai partner Ik Wei Chong says Clyde, which has a large transportation and resources practice, is following the clients who have set up operations in Chongqing. In the past few years, he says, the city has emerged as a transport hub between China and Europe and it is also now the terminus of a newly completed China-Myanmar gas pipeline. Chong thinks Clyde’s presence in Chongqing will also give it an edge picking up outbound investment work from China’s resource-rich Southwest.
For international firms, better access to the companies and industries rising in China’s less well-known cities is the main rationale for opening offices there. Many of these companies are private, as opposed to state-owned, and some have been responsible for substantial transactions in the past couple of years, including Dalian Wanda Group’s $2.6 billion acquisition of the AMC movie theater chain last year.
“Local companies there will need help from international lawyers for outbound investments,” says Reed Smith Hong Kong partner Li Lianjun, “and incoming foreign companies who are unfamiliar with local firms will like to go to the names they already know.”
Brad Peck, the head of the Shanghai office for Silicon Valley firm Cooley, says he’s lately been pondering Shenzhen in China’s Guangdong province. Though he stresses that Cooley, which just opened in Shanghai in late 2011, currently has no concrete plans for a second China office, Peck says Shenzhen seems to tick a lot of boxes for a tech-oriented law firm. The city, which directly borders Hong Kong, was founded in the 1979 as one of China’s first experiments with the free market and is now home to several of the country’s leading tech companies, including Tencent Holdings Ltd., Huawei Technologies Co. Ltd. and ZTE Corp.
“Shenzhen strikes us as a city with many technology companies,” says Peck. “Longer- term, we might consider deploying our resources there if we could find similar clients.” Once source of such clients, he figures, could be start-ups launched by the alumni of successful technology companies such as Huawei.
But Li also notes there are risks in looking at China’s second-tier markets. “There is going to be cost if you will have somebody stationed there,” he says. “You have to make sure there is enough business there.” At the moment, says Li, Reed Smith has no plans to expand its presence in China beyond Beijing and Shanghai.
Chong says Clyde, which also has offices in Shanghai and Beijing, has no current plans for further China expansion. But down the road, he says, port cities like Dalian, Qingdao and Xiamen are all possibilities.
A number of firms took the plunge years before though. British firm Stephenson Harwood opened in Guangzhou back in 1994. The capital of Guangdong, the city was the first in China to be open to foreign trade in the 18th century and was again at the forefront of the country’s liberalization of the 1970s and 1980s. Stephenson Harwood made its move to target the wave of investment then flowing into Guangdong from neighboring Hong Kong, where the firm also had an office. It didn’t have a Shanghai office until 2002 and a Beijing one until last year.
For U.K. firm Wragge & Co., Guangzhou, where it opened an office in 2008, remains its one and only China office.
Wragge specializes in intellectual property enforcement actions in China, and director Tom Carver, who manages the firm’s Guangzhou office, says that city and the large surrounding manufacturing base is on the frontline of that battle. “A lot of the companies our [U.K.–based] clients are suing are based in Guangdong province,” he says.
Others foreign firms in Guangzhou include Germany’s Roedl & Partner and France’s Lefèvre Pelletier & Associés.
“You have to be with your clients,” says Sebastian Wiendieck, managing attorney of Roedl & Partner’s Guangzhou office, which opened in 2005. Wiendieck says the office allows the Nuremberg-based firm to understand how things operate on the local level, making it better able to advise its clients—mostly midsize German manufacturers—operating in the area. “All these things, you can really do when you are here. If our client has a problem here, they give us a call and we are right there to help.”
But Wiendieck’s remains a minority view. In 1992, Guangzhou became one of the first cities in China where international law firms were allowed to open offices. As of August, only eight had done so. That compares to 90 in Beijing and 121 in Shanghai.
International firms cannot just decide on a whim to open new offices in China. They must receive approval for each office from the Ministry of Justice, and the interval between approvals can be as long as three years. Given the hassles, many firms have focused first on Beijing and Shanghai.
The former Baker & Daniels had tried to launch in Beijing in the 1990s but found it couldn’t get a license at the time. Instead, it opened first in Qingdao in Shandong province, where it had previously worked with the local government to open a trade office for the city of Indianapolis. But Baker & Daniels, which became Faegre Baker & Daniels through a merger last year, ultimately did open in Beijing in 2003, shutting down its Qingdao office five years later.
Perhaps a bigger reason for international firms to hesitate about second-tier markets is the lower fees that lawyers tend to command there. Responding to criticism last spring within China’s National’s People Congress that the country’s lawyers were overpaid, Guangdong lawyer and NPC member Liao Xudong pointed to research showing that lawyers in smaller cities earned far less than their counterparts in Beijing and Shanghai. Beijing lawyers are the country’s highest-paid, earning an average of $42,700 per year, followed by those in Shanghai with $32,800. Meanwhile, lawyers in relatively wealthy Zhejiang and Jiangsu provinces (both of which neighbor Shanghai) average $11,500; those in Guangdong, a mere $8,200.
“Sure we are interested in the development [of provincial small and medium-sized enterprises] for the long run,” says John Leary, a Shanghai partner at White & Case, “but we also have pressure to show profits in Beijing and Shanghai. It’s hard to justify opening an office where there are only clients in a particular sector.”
Peck also says the economics of a Shenzhen office would have to make sense. “Law firms are in a human capital-intensive business,” he says. “Firms need to be as profitable as they can be to retain and attract new talent. This makes it hard for them to make long-term investment in markets that are slow to develop profitably.”
Though some operating costs would probably be much lower in second-tier cities compared to Beijing or Shanghai, Leary notes that foreign firms would probably not save much on labor costs. “If we target outbound investment there, presumably we need to have lawyers experienced in overseas markets,” he says. “In that case, we will probably have to fly people in, which means the salaries will be the same with Beijing and Shanghai.”
Many lawyers say the relative ease of flying lawyers in from Beijing or Shanghai obviates the need to open other offices in China.
“If you open an office, you don’t just cover the city, you also want to cover the region,” says Holman Fenwick Willan Hong Kong partner and chief Shanghai representative Henry Fung. “It’s easy to travel to Beijing from places like Dalian and Qingdao.”
Proximity is even less of a concern when it comes to Guangzhou and Shenzhen, which are both easily accessible by train from Hong Kong, where most international firms have their Asia headquarters
Lin Jiayu, a partner in Shenzhen with Chinese firm Jun He Law Offices, doesn’t see why an international firm would open an office there. “From a practical point of view, there is no need for an office because Hong Kong is right next to Shenzhen,” he says.
Of course, the same could once have been said about Silicon Valley and San Francisco. But that’s not how it worked out.
“If you look at our practices in the U.S., we started working with many of our Silicon Valley clients when they were start-ups, before they grew into successful companies,” says Peck. “We are interested in places where there are clusters of start-ups.”