For an indication of what’s driving U.S. law firms’ China practices, consider dueling strategies recently announced by two law firms.
Winston & Strawn acknowledged this week that it shuttered its office in Beijing, as well as in Taipei, and is moving some of those lawyers into its Shanghai and Hong Kong offices. The closures took place in late 2016, and were first reported by The Lawyer.
“I would not consider it closing an office, we consolidated our offices,” said Tom Fitzgerald, chairman of Winston & Strawn, who is based in Chicago. “The cost to keep those offices up and running, [given] the revenue we were looking at, just didn’t make sense. So what we said was let’s consolidate into bigger offices.”
And earlier this Spring, Dorsey & Whitney announced the launch of a U.S.-China practice, which was notable because the vast majority of the lawyers are scattered not in China, but across the U.S. The strategy is to keep a small presence in China to interface with clients and help steer work to the firm, advising Chinese companies that want to invest in the U.S., according to the practice co-chair Lanier Saperstein.
“I do think the days of having big China offices are behind us,” said Saperstein, a litigator based in New York. “The competition has increased. And the direction of the investment is shifting. It used to be FDI [foreign direct investment] into China; now we’re seeing FDI into the U.S.”
So, Winston & Strawn is looking to grow its work on transactions involving Chinese companies through fewer, bigger offices in China, while Dorsey & Whitney is planting most of its lawyers in the U.S., hoping to capture more advisory work as Chinese companies invest in the U.S. What the two strategies share is a nod to the fact that operating a law firm in China has become more expensive in recent years, and the market there more crowded and competitive.
The expense factor in China has led others out of the region: In January 2015, Fried Frank Harris Shriver & Jacobsonclosed its Hong Kong and Shanghai offices, citing insufficient “growth potential" and in July of that year, Chadbourne & Parke closed its Beijing office, leaving it with no presence in Asia. Last year,Cadwalader closed its Hong Kong and Beijing offices, laying off 25 lawyers and citing the need to focus on its core practices.
The increasing direct investment in the U.S. from China is creating work at both Winston and Dorsey, lawyers from the firms said. In 2016, the economic research firm the Rhodium Groupreported that Chinese direct investment in the U.S. reached $45.6 billion, triple the $15 billion invested in 2015. The majority of this investment occurred in the form of acquisitions, such as Qingdao Haier’s $5.4 billion purchase of G.E.'s appliance business, and Anbang’s $6.5 billion purchase of Strategic Hotels % Resorts.
At Winston, Fitzgerald said the move was a “two-fold factor” decision: It’s not only expensive to operate in the region, but the competition is also significant.
“The Chinese firms operate at a much lower price point than we do,” he said. “And it’s significant.If you’ve got significant fee competition, your expenses have to be significantly managed or your margin gets smaller.”
That’s why it no longer made sense to keep the Beijing and Taipei offices, which together had about seven attorneys, Fitzgerald said. Each office needed to make enough revenue to cover technology costs, rent, staff and other expenses, and it wasn’t happening. So the firm has several dozen attorneys, mainly in Hong Kong, but a little more than half-dozen in Shanghai, he said.
According to Saperstein, his practice group is taking a different tack to fighting the same market conditions that Fitzgerald identified: Keep a small office in Beijing — one partner, one counsel plus two associates — to work with clients. The firm also has four lawyers in Shanghai, two partners and two associates, and about a dozen lawyers in Hong Kong. But most of the attorneys in his U.S.-China practice group are based in the U.S.
“Our model is based on representing Chinese clients in the U.S., or U.S. clients interfacing with Chinese companies coming into the U.S.,” said Saperstein. “The offices [in China]... provide real time service to clients.”
He added, “I think you’ve certainly seen the rise of many Chinese law firms ... some U.S. firms have tried to compete with them .... That’s not been our approach.”