It's not easy being global. ALB China talks to some international firms about the hardships - and rewards - of setting up shop in Mainland China.

While most of us know that a flotilla of international firms rode into China last year on a wave of optimism and a strong economy, some underestimate the magnitude of the investment they have made. Indeed, since that first brave handful of foreign companies entered the market there in the late 1980s, establishing a mainland office has almost become a rite of passage.

Focus
David Olsson, partner at Mallesons Stephen Jaques in Beijing, says that each international firm brings a different strategy to its China operations. "There are specialist firms such as IP and infrastructure firms, and then you might find Australian and UK firms doing broader corporate work, while US firms are often focused on capital flows and US IPOs. Every one is different, but those are the broad trends."

Lin Song, partner and co-head of KhattarWong's international China practice group, says that the size of the firm often dictates the most appropriate way for it to enter the market. "For well established firms with an existing China practice, it is easy to enter China as an independent firm, while for boutique or mid-size firms, it is easier to start with an alliance," says Song. "They can then cooperate with local Chinese law firms to refer work and share clients. Active participation in business trips, including joining delegations and visiting specific and existing clients, also helps."

Outlook
There is no doubt that China is intimately linked to the global economy, a fact demonstrated by a recent slowing of GDP. However, Olsson points out that the current growth rate of 9% is evidence of strong activity and he remains optimistic about the prospects for Mallesons' China practice. "Inbound investment will continue because there is still an urgent need to develop China's infrastructure," he says. But he believes there may be a period of reflection as China reassesses its priorities, not just in light of the global economy but also of social imperatives. "There is a strong interest in environmentally sound infrastructure and minimising pollution. Also, infrastructure priorities may be redirected towards development in rural areas and sector specific regional investment," he adds.

James Chapman, partner at Nixon Peabody, is also confident about the future of inbound China investment. "There is a lot of capital sitting in venture capital and private equity funds waiting to be deployed and China seems to be one of the few places that they can generate positive returns. In addition, the investments - especially by venture capital funds - tend to be with later-stage, revenue-producing companies. Although these companies will be affected, they are financially stronger than early-stage companies in the US."

Peter Neumann of Greenberg Traurig is predicting an upturn in deals in the latter half of next year. "The fact that China's economy remains very dynamic means that pent-up demand for domestic Chinese market share continues to grow. We expect this pent-up demand to mean very active inbound strategic M&A deal flow in the second half of 2009. This plays to our strengths in the middle market - by US standards - M&A strategic space in China, particularly representing US and European public companies."

Similarly, no-one is predicting a major slump in outbound investment: "This is expected to remain strong. While the current economic situation may hold back investment in the resources sector in the short term, there is much interest in the financial sector, IT and manufacturing - in fact anywhere the Chinese government believes that a strategic or commercial opportunity exists," says David Olsson.

KhattarWong, which has cornered a substantial share of work from Chinese companies wanting to list on the Singapore Stock Exchange, is cautious about the effect of the economic downturn on IPOs, direct foreign investment and cross-border financing. However, Lin Song says that M&A and private equity investment remains active. "While some companies may hold back plans for investment due to the tight credit market, others may find many target companies cheap to buy. We would say we are conservatively optimistic about KhattarWong Shanghai's performance in the coming year," he adds.

David Fleming, managing partner of Baker & McKenzie's offices in China, Hong Kong and Vietnam, says that the mood of his firm is optimistic but cautious. "Our strategy is to consolidate the relationships we have with our existing clients and to continue our plans for incremental growth around our specialist practice areas. We're well established in this market with a broad base of practice areas. We are not complacent, but we don't need to do anything dramatic."

Marketing
Like many firms, Mallesons followed its clients into China and was thus able to establish its China presence with some heavyweight clients, such as BHP Billiton, Telstra and NAB, already on board. But how does an international firm go about picking up new clients in China? The key, says Olsson, is to be known as a premier firm in the broader region.

"In the situation where there is a Chinese business that doesn't have existing relationships with international firms, they want to find out who the top firms are." Olsson gives the firm's recent work on the Chinalco stake acquisition in Rio Tinto as an example. "They [Chinalco] made enquiries through investment banks and did their own research as to who the top firms were and we were retained as a result of that."

The challenge is not dissimilar to that in other markets, says David Fleming. "We win work through a number of channels, such as legal panels, pitches, client referrals, speaking at seminars and building relationships with regulatory authorities - relationships are very important in this market. Reputation is also critical and that's something that comes from being involved in - for example - high-profile transactional deals."

Competition
In an era when phrases like 'China boom' and 'China expansion' are becoming clich‚s and law firms seem to announce new China offices every week, it's easy to become cynical and wonder whether the market may quickly become saturated. But this is an argument that Olsson rejects. "The market is huge, the body of legislation is expanding, the transactions are becoming more complex and there's an increased need for specialised advice," he states. "And, from a regulatory point of view, it's not easy to start an operation here - a fact that is slowing the rate of firms entering the market."

David Fleming says that competition among international firms in the PRC is getting tougher and that he would not be surprised if some end up withdrawing as a result. He adds, however, that local Chinese firms are very much a part of that competition. "The local firms are growing and becoming increasingly sophisticated," he says. "At the moment, their main focus is on domestic work but it would seem a natural progression that they begin to take on outbound work. They're not at that stage yet, but it's a distinct possibility."

There would certainly be some irony in local firms eventually competing with international firms, given the close relationship currently enjoyed by the two groupsas a result of the ban on international firms providing advice on PRC law. Good relationships are critical and international firms frequently have these with multiple local ones. Mallesons for one has them with a number of firms, including JunZeJun, Deheng & Associates, Jun He and King & Wood.

The inevitable question is if, indeed, local firms do encroach further on the space traditionally the preserve of international firms, will they ever be permitted to compete with local firms for domestic law work? Not a likely outcome in the immediate future, says James Chapman. "I don't see these restrictions being eased in the short to medium-term. A couple of years ago the Shanghai Bar Association filed a complaint with the Ministry of Justice contending that international firms were violating the prohibition on practising domestic law. Although the decision of the Ministry of Justice did not have a negative impact on the international firms, the Chinese government is aware that they are pushing the boundaries."

Employment Market

Firms are now, generally, more cautious in their hiring and more likely to hire because of a particular need, rather than stocking up on talent for future growth, says Olsson. "That said, there continues to be strong employment opportunities for Chinese nationals with international experience and also Mandarin-speaking foreigners. The Hong Kong market, in fact, would be more suitable for lawyers who don't speak Mandarin."

Lin Song agrees that the demand for lawyers tends to be confined to those with international experience and that there is not a general shortage of them. "On one hand there is a great number of law graduates and practising lawyers. On the other hand, as is the case in many law firms, it is a challenge to find quality lawyers who are well versed in cross-border transactions."

Location
Beijing is a very important location for practices focusing on certain restricted industries such as internet and other telecommunications services, says Peter Neumann. "Practices focusing on large-scale energy and infrastructure projects requiring extensive government interaction also tend to benefit from a presence in Beijing. The majority high-profile IP practices also appear to be based there. On the whole, there is a much higher volume of commercial, investment and financing activity in Shanghai. It is interesting to note that although the biggest, most prominent PRC domestic firms were founded in Beijing for historical reasons, they have generally developed large Shanghai offices."

David Fleming makes the point that while Shanghai and Beijing may have different client bases, the nature of the work does not differ necessarily. "I'm not sure that there's a significant difference for international firms as we are subject to the same regulations in either location," he says.

When it comes to pursing opportunities with emerging Chinese businesses and venture capital firms, James Chapman believes that Beijing and Shanghai have their respective advantages. "Beijing has the advantage that two of the top universities, Tsinghua and Bei Da, which are graduating some of the best students in the country and have become a hotbed of entrepreneurialism. "On the other hand, the Chinese Government has elected to locate the National Center for Knowledge and Innovation in Shanghai. This centre is going to be the focus for innovation in China and undoubtedly a large number of new companies will spin off it. In addition, much of the venture capital community is located in Shanghai." Not that firms should necessarily ignore other cities, however! "Other regional cities such as Shenzhen, Tianjin and Dalian are showing great potential, and there is a lot of opportunity there, too."