The bugle of a legal retreat sounded across Asia in 2004 - particularly for certain foreign firms that came, originally to conquer, but left defeated by the vagaries of the Asian markets.

In 2004, Denton Wilde Sapte waved goodbye to all of Asia's shores, Freshfields Bruckhaus Deringer bowed out of Bangkok, while Slaughter and May sloped out of Singapore.

Canadian firm, Stikeman Elliot, and Wall Street regular Cravath Swaine & Moore high-tailed it out of Hong Kong while US firm, Bryan Cave, put its Asian strategy under review.

And while each firm may have attributed its departure to long-term strategic goals, there is no doubt that the main driver for each retrenchment was one thing: profit.

As every Asian managing partner from a UK firm could tell you, it is hard to withstand London lawyers moaning from their Surrey mansions about the costs of an overseas network when you're working in a jurisdiction where increasingly sophisticated local lawyers charge half your rates. Their only consolation must be that they are not alone - their US and Australian counterparts face the same battle.

The real growth in the region was in China, where the top five increased their combined fee-earner numbers by 32% over last  year's ALB50 results, and in Japan where the top five firms added over 200 lawyers to their combined numbers. And don't think the foreign firms were too distracted by retrenchments to not notice this. "Everyone knows that China is the great honey pot," notes Phillip Crowley, the managing partner of Deacon's Singapore office.

Beating a retreat
Bottom line, it's just too expensive for some to play in the Asian market - particularly as local firms have started to offer the same skilled expertise at a lower price.

At Deacons Hong Kong, managing partner, Lindsay Esler, claims that his firm is now pitching for capital markets work - traditionally the exclusive preserve of the bigger international firms. "We used to not even consider doing capital markets, however now we nibble at the work and that drives prices down," he says.

He also points to the rise of the in-house lawyer in Asia as creating extra pressure on law firms. "As the legal market has developed in Hong Kong then there are more in-house lawyers," Esler notes. Ironically, that 's been fed by firms laying off partners and associates who then look for a new home.

"Often those in-house lawyers started off in private practice," Esler continues. "Now they've ended up in a bank and your former associate is now instructing you - and they will only give out the work that they can't do themselves."

As a local firm with lower costs and strong ties in the region, Deacon's Hong Kong office has been on the up and Esler can't help dropping into conversation that "we've just taken on an extra floor [in Alexandra House], which used to be occupied by Linklaters and we're looking to recruit more lawyers".

We haven't seen the end of legal withdrawals from the region, although the general consensus is that the big players - Clifford Chance, Allen & Overy and Freshfields Bruckhaus Deringer - are here to stay. All three posted strong increases in numbers in the region.

Australian firms remained brave and unflinching in the face of a tight market in Asia. With all of the major firms (with the notable exception of Clayton Utz) having a sizeable network and investment on the ground in Asia, no-one is prepared to back down despite the well-known difficulty of making a profit in Asia.

Don Boyd, chief executive partner at Deacons, says: "We are seeing the return from Asia - there's not a single partner here who doesn't think that it is worthwhile."

However, Boyd does admit the firm has had a shake-up across Asia, with the number of partners in Bangkok dropping from 10 to seven, and the firm has ended its association in Singapore with Kelvin Chia and now operates with only one partner on the ground. "We manage it carefully, we don't have enormous offices," says Boyd.

Local firms probably had the strongest performance as a group, with most of the bigger firms remaining stable in terms of size and reporting a strong year.

At Allen & Gledhill numbers have stabilized at 184, down one from last year. Lucien Wong, managing partner of Allen & Gledhill, says: "In line with the economy we are pleased that all our practice areas experienced an element of growth last year, compared to the previous year." He predicts next year to be more of the same sorts of results, stating that: "We expect our numbers of lawyers to be stable."

Similarly, Johnson Stokes & Master posted a small increase in numbers, up to 217 from 211 last year. JSM partner and director of operations, David Ellis, says: "In the commercial department we've had a very strong rebound from the SARS period, and this has continued throughout 2004 and into the first quarter of 2005. We expect this to continue into 2005."

Sounding an advance
For firms that posted a strong upgrade in their numbers, the growth is more likely to have come from China or Japan than from their traditional strongholds in Hong Kong or Singapore.

Nearly every firm contacted by ALB had the same story: Both growth for 2004 and projected growth is being driven by the near-insatiable demand in the PRC for legal advice.

"China is the place where we see the fastest growth," confirmed Jim Dunstan, executive partner for Allens Arthur Robinson's ten offices and two associated offices across Asia. "In fact it's been growing really fast so that the biggest challenge is getting enough partners to man the work."

The firm's Shanghai office - 11 years old with four partners and 14 other lawyers - has recently been joined by a new Beijing office, with Dunstan claiming there is a pent up demand for legal services in the city.

"Our Australian clients have been moving into Beijing and were calling up and saying: 'Why can't you come to this meeting?'"

Martin Kudnig, partner at Blake Dawson Waldron, has a similar story: "Our main concentration in Asia is in China in terms of in-bound and out-bound investment. We don't find Hong Kong massively important for what we want to do."

But although international firms are racing to set up offices in the PRC, it seems that the local market is maturing at an even faster rate. All of the local firms that reported back their numbers to the ALB50 demonstrated considerable growth, with leading firms King & Wood and Jun He increasing their numbers by 82 and 49 lawyers respectively.

David Liu, a senior banking and finance partner at the Shanghai office of Jun He, has noticed the proliferation of overseas firms. He says that there are around 70 foreign firms active in Shanghai and only slightly fewer in Beijing. But the local firms are bringing the battle to the foreign firms as, protected from real competition by the prohibition against foreign law firms practising PRC law, local lawyers have instead started to compete for the big-ticket international instructions.

Their entrance to big-ticket deals has been assisted, says Liu, by the localisation of global clients. "More clients are using local people who have studied or worked abroad. All this helps with a better understanding by global clients of the local system."

What also helps is the pricing structure. With Liu - a senior partner at Jun He - charging $300 per hour, he's half the cost of a senior Clifford Chance or Shearman partner.

However, Liu knows that this fortunate state of affairs for local firms will only last as long as the prohibition on foreign lawyers holding a local license. "It's a hot topic," he agrees.

In the meantime, his firm and other local firms are trying to capitalise on the state of affairs as much as possible by hiring local lawyers with overseas experience. Of Jun He's 40-odd partners, 15 are licensed to practise in US states and the firm has a two-partner office in New York to help with those cross-border transactions with the US.

Firms in Japan also had strong growth last year, the pace of change picking up as local firms consolidated. Anderson Mori - the fourth largest firm in last year's ALB50 - jumped up the tables with a merger with Tomotsune & Kimura, morphing into Anderson Mori & Tomotsune with 193 lawyers. "This merger will propel our firm to be the top leader in capital markets, international finance and securities work in Japan," predicts partner Kenichi Nakano. ALB