Shanghai and Dubai top office openings survey

Author: | Published: 1 Dec 2005
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When Allen & Overy decided in 2004 that it wanted to hand over its office in Albania, it could have expected a long wait for takers. Not so: Austrian firm Wolf Theiss snapped up the chance, and has since acquired offices in Bucharest and Sarajevo. The irony is that six years ago a firm such as Wolf Theiss would have been a merger target for Allen & Overy, but now that Anglo-Saxon firms are retreating from jurisdictions that do not meet their profit needs, firms such as Wolf Theiss are undertaking their own international expansion thanks to lower cost bases.

Reasons to open an office in:

Shanghai: Chinese centre for private listings, as well as the country's trade hub. Rapid growth, plenty of opportunities in finance and capital markets

Beijing: Still the place to be in China for restructurings, energy or infrastructure work

Dubai: A new financial centre and stock exchange, booming real estate sector, good logistical base for international energy transactions in Gulf Region

Munich: The private equity hub of Germany, thriving technology sectors, IP centre, easy to recruit young lawyers

Taipei: Transit point for multinationals entering Asia, IP counsel needed for Taiwanese technology companies, potential opportunities in antitrust and M&A work

This is just one trend that emerges in IFLR's survey of office openings, which reveals that over the last two years, some 74 new offices were opened in 32 countries, from China to the Cayman Islands. There is little overall consistency: while Slaughter and May has closed two international offices in this period and opened none, Orrick Herrington & Sutcliffe has branched into Italy, Russia and Taiwan. The disparities say much about the contrasting strategies of firms' managing partners.

Despite the variations, four cities in particular stand out as today's hotspots: Shanghai, with at least eight new offices in the past two years, Dubai, with seven, Munich, with six and Taipei, with four. Each has a different reason for its popularity, based on specific areas of economic growth and new business opportunities.

Shanghai's appeal, for example, stems from its rapid expansion as a financial and commercial centre in one of the fastest-growing economies in the world. The city's estimated growth rate, at 10.8%, outstrips that of China overall, where GDP is expected to rise by 9.3% in 2005. The Shanghai authorities' encouragement of Western investment has spurred growth, as has the Chinese government's efforts to transform Shanghai into China's financial hub and trading centre.

So far the results have been spectacular. Shanghai has less than 2% of China's population, but now contributes more than 11% of China's total income. Its service trades (such as finance, insurance and real estate) account for over half of the city's gross output, while the Shanghai Stock Exchange, established in 1990, is now mainland China's most important in terms of shares listed and total market value, with over 37 million investor accounts. The city also has the busiest ports in the world, with over a quarter of all commodities in China passing through them. Three railways and two airports also serve the city. Multinationals and investment banks, aware of the growing prospects for business in Shanghai, are moving in. Among law firms, Latham & Watkins and Vinson & Elkins have opened offices this year, with Weil Gotshal having opened for business in 2004.

The combination of an expanding client base, plus Shanghai's position as the Chinese centre for private listings, has lured corporate and commercial law firms to the city en masse. This is in sharp contrast to a decade ago, when the Chinese Ministry of Justice only permitted a single office licence for foreign firms, and Shanghai was virtually ignored in favour of Beijing. Since most of the initial work concerned the restructuring of state-owned companies, it made sense to be where those companies – and the government, who authorized the approvals – were located.

Some of those firms might now regret that decision. Beijing is still the sensible location for a firm specializing in energy or infrastructure counsel, but the capital city has experienced a slowdown in investment structure because of the government's new macroeconomic reforms. A lot of foreign investment is moving out of Beijing and into Shanghai as a consequence. Nevertheless, Cleary Gottlieb Steen & Hamilton has picked Beijing to open its office, due to begin advising clients by early 2006.

"We decided on Beijing because of the type of work Cleary Gottlieb does and because we asked our clients where they would like to see us," says Mark Walker, the firm's managing partner.

A hotspot in more ways than one

The only other city in the world that can rival Shanghai's popularity at the moment is Dubai. This year alone, five firms have opened a new office there: Baker Botts, Maples and Calder, Simmons & Simmons, Ashurst and Freshfields Bruckhaus Deringer. Considering that Dubai's oil reserves are considerably lower than in other areas of the Gulf Region, this might seem illogical. But firms are being drawn by two sectors Dubai is promoting to provide alternatives to its oil economy: property development and finance.

Real estate investment has soared after Arab capital (as much as $200 billion) was drawn out of the US and reinvested in the Gulf Region in the wake of the 9/11 terrorist attacks. This influx of capital has led to a growth in real estate projects – the most celebrated being the Burj Dubai, which will be the world's tallest building when completed in 2009 at an estimated cost of $8 billion. Burj Dubai will be a mixed-use development that will include commercial, residential and leisure facilities.

For investment banks and firms advising on financial law, the big draw of Dubai is the Dubai International Financial Centre (DIFC), an onshore capital market focused on banking services, capital markets, asset management, reinsurance, Islamic finance and back-office operations. The DIFC offers benefits to financial institutions such as zero tax on income and profits, complete foreign ownership and no restrictions on foreign exchange or capital repatriation.

The DIFC also contains the Dubai International Finance Exchange (DIFX), a new regional stock exchange that began trading securities using the US dollar on September 26 this year. The DFIX will not feature the stock purchase or listing restrictions investors face on the local stock exchange in Dubai. Partly because of this, the Dubai financial market has more than tripled its value in the past 12 months.

But Jennifer Bibbings, corporate partner at Trowers & Hamlins, which has been in Dubai since 1991 and the Middle East for 25 years, says that Dubai's popularity is as a regional centre rather than a city. "The DFIC is a piece in the jigsaw, but not the sole reason firms are coming to Dubai," she says. Indeed, Dubai's financial centre is not unique. The Qatar Financial Centre, which deals in all currencies rather than just the US dollar, opened on May 1, and the first phase of the construction of Bahrain's Financial Harbour should be completed by the end of 2006.

Another part of Dubai's attraction is its excellent logistical connections with the rest of the Gulf Region, which makes it an obvious base for those firms moving into the region for the first time. In particular, firms specializing in international energy transactions are putting teams on the ground in Dubai to give them the capacity to advise on the largest projects in the region, many of which are in Qatar. Since Qatar has the world's second-largest proven gas reserves in the world (after Russia) at over 900 trillion cubic feet, firms are eager to participate in the upcoming gas projects in the country. Perhaps the best known of these is the Dolphin Project, the first phase of which, valued at $3.5 billion, involves piping gas exports at the rate of two billion cubic feet of gas each day.

The market in Dubai for law firms is far from saturated, given the diverse economic growth in the region. But certain factors might limit the rush of firms over the next few years. International firms that have had a base in Dubai for many years warn newcomers to do a thorough feasibility assessment, identify their market and develop their contacts and local business understanding patiently. And Dubai is not getting any cheaper: fuel prices rose by a third in the first week of September and rents are increasing. These factors might restrict opportunistic ventures into the city.

Munich's secret

Munich, on the other hand, is reaching a saturation point. The firm has experienced two waves of office openings: European firms started arriving in the 1990s, while most US firms have established themselves in the city since 2000. In the last two years, new entrants have been almost exclusively US firms: Kirkland & Ellis, Reed Smith, Skadden Arps Slate Meagher & Flom, Hogan & Hartson and Weil Gotshal & Manges among them.

The main reason these firms are coming to Munich is because the city is the private equity hub of Germany, and Europe's second-biggest market for equity investment after the UK. Several private equity companies have bases in Munich - such as Bain Capital, Apex, Barclays Capital and EQT - and private equity firms like to have their lawyers in the same city.

The German government has also tried to encourage the growth of various technology sectors in Bavaria to stimulate the economy. The growth of the aerospace, IT and biotech industries has been so successful that the Bavarian economy is now outperforming that of northern Germany. In addition, Munich is home to the European Patent Office, the German Patent and Trademark Office and the German Federal Patent Court, which makes it the only realistic choice for intellectual property (IP) firms opening a German office.

There is also the issue of quality of life. Munich-based law firms say that it is much easier to bring young lawyers into a Munich office than one in Frankfurt or Dusseldorf, as the city is more attractive and dynamic. The Munich Intellectual Property Law Center also provides a pool of international IP graduates who are already based in the city.

US firms have tended to enter Munich cautiously, with small offices of between five and 20 lawyers. As an example, Kirkland & Ellis opened a Munich office with eight lawyers in January 2005, plans to expand to 15 lawyers by the end of the year, and is aiming for 25-30 lawyers by the end of 2007, according to lead partners Volker Kullmann and Thomas Verhoeven.

Bernd Mayer: US firms are right to expand cautiously in Munich

Bernd Mayer, a partner in Skadden Arps's Munich office, sees the conservative approach of the US firms as a sensible policy. "It's an investment, so of course you do it carefully," he says.

Restructuring work might also become a growth area for law firms in Munich. At present it is still a new field in a market dominated by receivership, but some firms are looking to form restructuring teams to manage the anticipated volume of work. Middle-market European firms might look to partner with their German peers to advise on the high-end, high-margin side of this market.

The other China

Taiwan has become a popular destination for US firms who provide IP litigation counsel to Taiwanese clients in the booming high-tech industry, a sector that accounts for over 70% of the country's export trade. Taiwan's location at the commercial heart of south-east Asia, plus its skilled research and development personnel and advanced manufacturing techniques, make it one of the most dynamic technology centres. The capital, Taipei, is a hub of corporate activity and has many semiconductor manufacturers, which are increasingly involved in IP-based litigation suits all over the world.

With Taiwanese technology firms prepared to pay top rates in order to protect their trademarks, international firms are discovering that there is a considerable amount of profitable IP work to do in Taiwan. Pillsbury Winthrop even describes Taiwan as "the latest and most significant intellectual property battleground".

Two new arrivals in Taiwan – Orrick Herrington & Sutcliffe and Finnegan Henderson Farabow Garrett & Dunner – were drawn to Taiwan by Taiwanese clients seeking US IP legal services including litigation, portfolio management, licensing and prosecution of US trademarks. According to Kai Tseng, a partner in Orrick's Taipei and Silicon Valley offices, Orrick needed a base in Taipei "to show commitment to our clients and to expand our practice. Other firms were going in to Taiwan, and we needed to stay competitive".

Both firms provide counsel to a similar base of clients. Finnegan Henderson advises companies involved in semiconductor manufacturing, electronics and biotechnology. Orrick advises clients from two particular technology sectors: computer products, including subcomponents and notebooks; and semi-conductors and associated products, such as controller chips and memory devices.

The number of US-based IP firms opening in Taiwan is likely to level off over the next few years, however, for several reasons. Firstly, it is becoming difficult for firms without experience of the Taiwanese market to broach the market, and so many would-be entrants are shifting their attention to mainland China, where IP cases are set to skyrocket. Second, many of the Taiwanese technology companies are now facing more lawsuits in Japan and Korea than the US, so there is less demand for US firms to open in Taiwan.

But Taiwan's high-technology industry will provide plenty of opportunities for firms providing advice in sectors other than IP. Antitrust, equity capital markets, M&A and general commercial work all look like fertile practice areas for the future. Asked if any international firms are likely to start corporate practices in Taiwan in the next few years, one US lawyer based in Taipei says: "I know lots of firms are looking at it. But they'll need to consider carefully the history of those US firms who tried it before to assess whether they can make it long-term."

New offices of leading firms in Europe and Asia*
* Data is based on IFLR research and do not purport to be exhaustive