Luxembourg Hot, Beijing Not: In Today’s Cutthroat Market, Regions Need a Business Case

By the late 1970s and early 80s, offshoring to China had become an established financial imperative. Besides its cheap, military-grade workforce, white-collar jobs were being shuttled across too. It was on this tide of movement that global law firms saw their opportunity.

By the mid-80s Paul Weiss Rifkind Wharton & Garrison had an office in Beijing; Clifford Chance, Linklaters and Freshfields joined Slaughter and May in Hong Kong, serving both inbound and outbound investments.

But the economics and geopolitics of today have rattled them.

This week, Paul Weiss and Milbank became the 13th and 14th U.S.-headquartered firms to shut their Beijing offices.

As our Asia editor Jessica Seah writes, China “never quite bounced back from its draconian pandemic measures; its property market crashed and shook the nation’s confidence to its core.” It’s all playing out against tougher national security measures.

“America’s hostility towards the world’s second-largest economy means reconciliation is unlikely, especially as Donald Trump becomes President for the second time.”

In short, it’s becoming harder to form a business case for remaining in China. The risk is too high, potential benefits too low.

“We’re having a hard look at Asia,” the leader of one of the world’s biggest law firms told me this week. “As a team we decide, is the business case still strong. If it’s not, then we need to assess our position.”

What forms a law firm business case for being in a particular region nowadays is much more unsparing than it once was. Does a particular office make an immediate impact on the firm’s top line? Is it accretive in the short term? If dilutive, what’s the tolerance level, when do we bail?

On recent evidence—e.g. the mass withdrawal from China; the focus on U.S. growth; the rising scrutiny of bases in lower rates markets—the business case appears to be this: is being in this particular region in any way essential to our key markets? If the answer is ‘maybe’, is the business case strong enough? If ‘no’, we might need to ‘assess our position’.

We can almost see a list of regional priorities emerging, for better or worse, a Big Law list of ‘hot’ and ‘not’ nations, if you will.

“We obviously need to be in Luxembourg,” said a person at Herbert Smith Freehills which, like Simpson Thacher & Bartlett, launched an office in the tiny European nation this month. “It’s a hub for private capital.”

Yes, Luxembourg. You can spare us the lengthy PowerPoint, the business case is clear, as Herbert Smith Freehills and Simpson Thacher & Bartlett—both of whom opened there last week —very well know.

Luxembourg was one of the biggest buyers of U.K.-based legal services last year, outstripping other European nations by a margin. It comes down to three things: 1) the tiny nation’s favourable tax environment that attracts almost as much foreign direct investment as the U.S.—around $4 trillion; 2) the inexorable rise of private capital and 3) an urgent need for elite expertise in structuring funds—private equity clients like Apollo Global Management, Bain & Co and KKR are notable residents.

There are firms that will have a greater tolerance of ‘hot or not’ volatility.

For instance, A&O Shearman and Hogan Lovells pulled out of South Africa: two firms that have made little secret of their fervour to compete in New York and, on recent evidence, will do what they must to make that dream a reality. But it’s unlikely that, say DLA Piper or Baker McKenzie follow them out of Johannesburg. They, like, for example, Clifford Chance, were founded on global ideals. They want to be in multiple geographies; the decision to exit a region is more constitutional in nature.

As sources indicate, Clifford Chance’s decision in October to add O’Melveny & Myers partners David Schultz and Matthew Hinker in New York was hardly designed to bring the firm level with Manhattan deal kings Wachtell Lipton Rosen & Katz or Cravath Swaine & Moore, say, but is more a piece of the firm’s global strategy, like its Houston debut last year.

A law firm’s shifting tectonic plates tell you a lot about that firm: where it’s been, where it’s going, what drives it, why lower rate regions might fit into its wider geography, and both its exposure to and tolerance for volatility. But, whichever camp your firm falls into—broad-shouldered New York profitability or constitutionally global—now more than ever firm leaders are asking themselves: do we need to be here?