Mind the dragon

I’ve written fairly extensively about India and its continuing and future impact on the legal services marketplace. I’ve not paid as much attention to China, but that country’s effect on the legal industry in the 21st century will be profound and could happen sooner than is widely expected. This is a brief note to acknowledge that fact and to suggest you keep a close eye on China’s developing role in the global legal marketplace.

We all know the basics: China is already an economic giant whose engine has kept the global economy from tanking completely over the last couple of years. It holds nearly $1 trillion in US currency, it’s gobbling up natural resources everywhere from Canada to Africa to feed its phenomenal growth, and it’s widely considered the odds-on favourite to dominate, or at least co-dominate, the world in the decades to come. But its legal industry doesn’t seem to be considered a global threat by its western counterparts, thanks in part to a paucity of English speakers, the lack of common-law fluency, and difficulties with the enforcement of the rule of law in China generally.

While all of that may be true, it’s no reason to dismiss or take lightly the opportunities and threats presented by China’s recent but substantial interest in the provision of legal services. Firms that look upon China solely as a source of clients, rather than of potential competition, could be making a mistake. Here are four quick reasons to take China’s legal industry seriously.

1. Growth. China’s legal profession is growing astonishingly fast, from a nearly zero baseline. Thirty years ago, the entire country had only 212 lawyers in 79 law firms; today, those numbers are 150,000 and 14,000, respectively, a huge jump but still proportionally well below the American lawyer-to-population ratio. And there are many more Chinese lawyers on the way: Sida Liu of the University of Wisconsin-Madison told the Georgetown Law Firm Evolution conference in March that China had opened a staggering 500 new law schools in the last ten years. That’s probably too many for anyone’s good, but the critical mass will be there.

2. Sophistication. Chinese law firms are acquiring business and management skills faster than their Western counterparts did at similar stages of development. Leading Chinese (and Indian) firms are moving from eat-what-you-kill arrangements to lockstep partnerships, seeking to establish long-term enterprises that prioritize the firm’s welfare above the individual’s (something that comes more easily in China, culturally speaking, than in the west). Devotees of David Maister’s one-firm firm will recognize this approach. And interestingly, some Chinese firms are already talking about merit-based pay for associates — something still not widespread among US or UK firms.

3. Talent. In China’s legal talent wars, Western lawyers and firms are more often emerging on the losing side. This is happening in law firms — one example that stunned the Magic Circle was the departure of a top Clifford Chance capital markets partner to Shanghai firm King & Wood. But it’s also happening, more importantly, among clients: homegrown in-house counsel are becoming far more common in the Chinese offices of global companies, particularly thanks to their skill at navigating difficult compliance issues in a still-developing business environment. These lawyers have often been trained in foreign firms and law departments, but they’re now flexing their muscles independently.

4. Power. China is working to minimize or overcome those features of its society and economy that limit its global capacities. While English is not nearly as common in China as in India, the Chinese government is busily teaching 200 million of its citizens the language. China needn’t depend heavily on American or English business, not when it’s cutting $60 billion gas deals with Australia or looking to increase $60 billion worth of annual trade with India. One scholar argues that the gap between Chinese law and that practised in the west is narrowing. And as my Edge colleague Rob Millard has pointed out, as economic power diffuses from west to east, the day may well come when Chinese law, not Anglo-American common-law, is the default system for business transactions.

These are all reasons why China’s law firms and legal professionals deserve serious pondering in any consideration of the future legal services marketplace. But here’s one more, and it might end up being the most significant: China’s government has no qualms about owning and directing corporate entities on a global basis. China boasts the world’s two biggest banks and five more in the top 50 worldwide, and the government is an extremely active stakeholder in those banks and their business decisions. Picture the law firm equivalent: a global legal services provider financed and directed by a Chinese state apparatus with pockets so deep it makes massive LPOs look like garage startups by comparison. If you think competing with privately funded service providers with billions at their disposal would be tough, think about competing with a law firm backed by about a trillion US dollars and an extremely persuasive board of directors. That’s a law firm business model no one is contemplating in the West, and it would be a game-changer of the highest order.

This is not, let me emphasize, yet another paean to China’s imminent and inevitable rise to mega-power status: this is a country with plenty of challenges and problems, many of which figure to cause significant trouble and misery inside its borders within the next decade. Nor does it pretend to be an in-depth examination of China’s legal profession, which has issues of its own to cope with. Many things can and likely will still happen to push China off its current trajectory and slow its progress — but these should be delays, not failures. Corporations and governments worldwide are thinking hard about what to do when China truly hits its stride; the legal sector should be doing the same.

1 Comment

  1. Robert Sawhney

    Great post Jordan. Being based in Hong Kong, we can see the growing influence of Chinese firms, particulalry on FDI into the mainland. They are real competition for the foreign firms and given the increasing investment in second tier cities, they have a significant advantage in terms of reach and local knowledge. Still, on the more complex cross border transactions, they are still lagging behind their international counterparts.

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