After a decade of economic turmoil, Asia buzzing.

While some law firms are cautious about having a presence there, many want to take advantage of rising investment, says Lucy Hickman

Economically speaking, Asia has had a hard time over the past few years.

Deep recession lasting nearly a decade for most Asian countries - including former linchpins Hong Kong and Japan - political unrest for many, and then the SARS virus provided the poisoned icing on the cake.

All of this, of course, has affected lawyers.

Most international law firms with Asian offices have dug in deep to weather the storm, often redeploying fee-earners when the worst-struck practice areas - finance and corporate - hit rock bottom.

As Don Kelly, Lovells' regional managing partner for Asia, says: 'Staffing issues are an ongoing challenge.

We do the best we can.

Fortunately, our people tend to be pretty flexible.

'Our Vietnam office - which we have had for ten years - is a good example of this.

In the early years, there was lots of intellectual property and project work in the region, so we kept it staffed up all the time.

Then things went a bit quiet, so we ran the office on a fly-in, fly-out basis.

There's a sense of revival again now and we make sure there's always a Lovells lawyer sitting in that office.

It just won't always be the same lawyer or from the same practice area.'

With the economy and therefore the legal work in Japan and Hong Kong showing definite signs of improvement, and China positively booming, it seems the law firms' patience may be paying off.

Paul Browne, a Tokyo-based finance partner with Simmons & Simmons, says: 'Japan is the world's second biggest economy but it's been suffering in recession for ten years or so.

However, there are definitely signs of improvement in Japan - and in other parts of Asia too - and people are generally cautiously optimistic.

We're seeing increasing investment, which has a knock-on effect on the requirement for lawyers.'

A strange time then, perhaps, for Denton Wilde Sapte (DWS) to disband its Asian practice, closing offices in Hong Kong, Beijing, Tokyo and Singapore, in a move affecting 12 partners and around 100 staff in total.

The withdrawal follows on from the firm's strategy review, which was launched 18 months ago in a bid to bolster profits (see [2004] Gazette, 16 April, 6).

DWS declined to be interviewed by the Gazette, but on announcing the closures last month, chairman James Dallas said the Asian practice was not strategically necessary for the sector groups on which the firm now wants to focus: energy, infrastructure and transport; financial services; real estate; and technology, media and telecommunications.

'We have concluded that we should withdraw from Asia and direct more resources to areas with stronger client demand, including Europe, the Middle East, and elsewhere,' he said in a statement.

Meanwhile, Freshfields Bruckhaus Deringer is also poised to close its three-partner Bangkok office, which has a total staff of 81.

It has already downsized its operations in Singapore, not replacing staff when they leave.

Mr Kelly says that DWS's withdrawal from Asia was on the cards, with numerous CVs from DWS lawyers flying around before the announcement.

However, he finds Freshfields' retreat from Bangkok more puzzling.

'It's a strange time to be pulling out of Asia.

It's been very tough over the last three years, but recently we have seen definite signs of improvement.

Firms that have been here throughout the hard period will have spent a lot of time, money and effort, and now is the time they may be seeing some return on that investment.'

Most agree though that south-east Asia is a hard market to crack.

As Ashurst's Japanese group head, Alan Kitchin, says: 'South-east Asia is very difficult.

It's very competitive on fees.

You tend to be acting more for the [local] law firms than for the banks in that region, so it's hard to keep the rates up.

Firms in there are really struggling.'

Wong Kien Keong, Baker & McKenzie's Asia-Pacific chairman, adds: 'Well-known firms have folded up their operations in some major money-centre jurisdictions like Hong Kong and Singapore, while larger domestic firms are getting some cross-border work which eats into the pie of the international firms.

The quality of domestic firms is also improving, particularly in Hong Kong, China, Bangkok and Singapore.

'The least lucrative market continues to be Manila among the countries which receive significant foreign direct investment.

Other countries on the fringe in Asia will continue to suffer, like Myanmar, Laos and Cambodia,' he predicts.

These are all countries where no UK firm has set up.

Perry Noble, Freshfields' managing partner in Asia, says: 'The economic conditions in south-east Asia have been pretty tough.

There was the economic crisis at the end of the 1990s, then the technology boom died out and there has been a lot of political unrest.

'We have taken the decision to withdraw from the Bangkok market, or we are at least considering it in principle.

From my point of view, no one makes any money in that part of Asia and I have a responsibility to the partners to get the best return on their investment.'

He says the economic conditions recently have made the decision about where to invest more difficult.

'It's not necessarily that I believe there will be no growth in south-east Asia - it probably is improving - but the prospects don't justify that level of investment.'

Since 1997, Lovells has had an office in Singapore which acts as a hub, handling work throughout south-east Asia.

Mr Kelly says his firm is considering a series of strategic alliances in the regions, which should open up the local markets without the financial risk of opening offices in jurisdictions such as Thailand and Indonesia.

'It may well be that we will be looking to do more with local firms.

We would like to have more presence there but short of opening a new office.

It remains difficult around there,' he says.

Lovells' director of international projects, Marc Bartel, adds: 'There is a buzz about some parts of the region, but you might have a flavour of the month with people looking to revive deals in one place, then, because of a bit of political instability, the focus changes.

We are keeping our ears to the ground on this one.'

Ashurst, which has offices in Singapore and Tokyo, has no intention of pulling out of Asia.

Mr Kitchin explains that, as the Asian market generates an enormous amount of work for its other offices, including London, and that at least three of Ashurst's top 20 clients are Japanese, the firm is planning to expand its Asian operations.

He says: 'We are looking at China.

We have never merged; we like to do things ourselves and every year we open a new office.

We don't want to compromise our quality by being all over the place for the sake of it, but China is a difficult market not to be in because so many clients want to do business there.'

Since its 2001 entry to the World Trade Organisation, China has become one of the world's fastest-moving economies, with year-on-year growth of gross domestic product at 8%, foreign direct investment (FDI) at 57%, foreign trade at 40% and industrial output at 17%.

Law firms not yet established there want to be, and those already there are looking to expand - with the obvious exception of DWS.

With the opening up of international trade, and massive inward investment, foreign investors are attracted to what they see as a largely untapped market and a low manufacturing cost base.

The Chinese government's push to transform the energy markets has rejuvenated the sector, while the liberalisation of the Chinese banking system allows foreign banks to provide local currency business to Chinese clients.

And since the business and regulatory environment is not as developed as in more sophisticated markets, there is also a need for lawyers to advise not just on expansion and investment but also on restructuring and reorganisation.

Mr Keong says: 'The most lucrative Asian legal market remains China.

It has the highest amount of FDI in the world.

The Chinese legal market is possibly one of the largest in the world, because it requires a great deal of financial and legal skills to lift its economic standard to a level closer to the developed world.'

Michael Liu, head of Allen & Overy's Asian corporate group, says that to gain a firm foothold in the Chinese market, one must not look at China as being independent from Hong Kong - sovereignty of which was handed back to the Chinese by the British seven years ago.

'We need to think of our Chinese practice as one team in three locations.

Beijing is the government seat, and Shanghai and Hong Kong are the major commercial centres.

You need full service capability in all three cities to cover the Chinese market effectively.

'Hong Kong remains a key world financial and business centre, but it is now just one piece of a bigger jigsaw.'

The firm's head of Asia practice, Brian Harrison, says: 'As our clients are stepping up their presence in the Chinese mainland market, we will follow suit and further expand our presence there.

On the other hand, there are also business opportunities to serve the needs of Chinese companies which are revitalising in preparation for further market competition.

So the timing is ripe for us.'

Freshfields has had offices in Beijing and Shanghai since 1993, and Mr Noble says China is an important part of the firm's plans.

He says that 75% of the work done by the firm's 18-partner Hong Kong office has a Chinese connection.

'China has been important for all businesses in Hong Kong.

SARS didn't help and Hong Kong has been dire for a long time, but the work coming from China has been a real relief for everybody.

'Hong Kong is a small market and ever since its return to China, the economic conditions have been poor.

Combine that with the fact the area is massively over-lawyered and you get everyone cutting each other's throats on the price of work.

It has been very tough.'

What could escalate the Asian legal market's revival are plans by the Japanese and South Korean governments to allow foreign law firms to form full partnerships with - and also employ - local lawyers.

It is expected that the restrictions will be lifted next year, says Mr Browne.

'Deregulation will improve things.

We have a joint venture with a big Japanese law firm and to them the prospect of deregulation is an exciting one because they are very international in their outlook.

At the moment though, we are not considering a full partnership.

We are very happy with the model we have got,' he says.

Mr Kelly says rumours are rife of plans by English law firms to merge with Japanese firms - although he declines to name names.

For Lovells though, a full merger is not on the cards, with the firm preferring to introduce local talent on a lateral-hire basis.

'We want Japanese law capability but cherry-picking individuals is certainly where we would like to start.

Then we will see how it goes.'

In south-east Asia, the cautious approach of retreating firms like DWS has yet to be weighed against the go-getting strategies of others.

But given the speed of developments in the region, it should not be too long before the winning strategy reveals itself.

Lucy Hickman is a freelance journalist