We’re all familiar with the bromide that “all politics is local”–which may or may not be true; I wouldn’t know since I’m not a politician or particularly politically oriented–but a kissing cousin to it is “all rivalries are local,” which I endorse in spades.
This is human nature, isn’t it? We’re most rivalrous–envious and aggressively competitive–against local competitors. We don’t envy Malibu beach houses or Aspen chalets if we live in a Manhattan co-op; we envy grander co-ops. For that matter: Brooklyn vs. Manhattan, Harvard vs. Yale, Microsoft vs. Apple, but not Paris vs. Mumbai, and not Cartier vs. nose-rings.
Now, faithful readers also know that I’m a born-and-raised New Yorker and am no less immune than the next fellow to the temptation to root for the home town team–in this case the great and storied New York-based law firms (be they century-plus old blue chip stalwarts or relative arrivistes such as Skadden and Wachtell).
This does not make me blind, however.
And what I’m not blind to is New York’s relative decline as a capital markets center, particularly vis-a-vis Hong Kong. Indeed, our own Mayor Bloomberg is in Hong Kong as of this writing, attending the “C40” summit of major city leaders from around the world, and summed up that City’s competitive position in today’s WSJ with his characteristic brevity:
Bloomberg, whose past business experience frequently took him to Asia, spoke highly of prospects for Hong Kong, where the stock exchange has dominated the global market for initial public offerings for a second year.
“The future of Hong Kong as a financial center is not going to be challenged by anybody else in Asia,” he said. Going in its favor were widespread use of English; a family-friendly, low-crime environment that attracts workers; and ease of commuting.
“The only other city that has the potential of doing that, of course, is Singapore,” he added, but not Tokyo. “I love Tokyo, but unless you speak Japanese, you can’t survive.”
(He also had a few well-chosen words for the “provincialism and populism of the US Congress:” “If you look at the U.S., you look at who we’re electing to Congress, to the Senate–they can’t read. I’ll bet you a bunch of these people don’t have passports. We’re about to start a trade war with China if we’re not careful here,” he warned, “only because nobody knows where China is. Nobody knows what China is.”)
Don’t get me wrong; I’m not remotely an alarmist about the future of New York City: Indeed, I believe, as it appears Bloomberg believes about Hong Kong vis-a-vis Asia, that our future as the financial center for the Americas is secure. We have too much going for us–too many barriers to entry, as it were–for (say) Sao Paulo or San Francisco or Phoenix to take our place. What are those barriers to entry? They’re not unique, but I believe that cumulatively they are powerful:
- Universal English fluency;
- Common law tradition;
- A stable democratic culture;
- A tremendous infrastructure of talent in place, not just of lawyers and investment bankers, but also accountants, graphic designers, temp services, and a huge array of service providers from caterers to black car services;
- Great retail emporiums and boutiques in everything from apparel to food to antiques;
- A temperate climate;
- Great international and domestic air connections;
- Tremendously rich, broad, and deep cultural resources from museums to theater to art galleries to every imaginable variety of performing art [for example, the Metropolitan Opera’s annual budget exceeds that of all other opera companies in the country, put together];
- Extremely diverse and attractive housing stock (yes, of course it’s expensive, but that’s what happens when buyers come not just from Manhattan and adjacent zip codes but from Hong Kong, London, Brazil, etc., etc.);
- And, finally, incumbency: Never underestimate the power of being first in everyone’s mind when you say “financial capitals?”
Still in all, New York’s global market share of financial services is unequestionably in long-term secular decline.
Which brings us back to local rivalries. New York’s “local” rivals on the world financial stage are London and Hong Kong.
So if you’re a capital markets and financial-services-centric law firm based in New York, with 90% or so of your lawyers in New York, what exactly is the plan for the future as New York’s market share declines and, perhaps more importantly, as cross-border deal work takes an ever larger share of total global corporate finance?
The challenge to NYC-centric high-end law firms is simple: Can we afford to ignore London and Hong Kong? And for how long?
And if not, do we go there with (a) a “best friends” approach; (b) a merger/acquisition strategy; (c) an incrementally grow-your-own strategy; or (d) again,do we choose to ignore the whole phenomenon and staying comfortably ensconced on Sixth Avenue near Rockefeller Center?
In timely fashion, LegalWeek has a piece this week profiling Slaughter & May’s approach to Hong Kong and to the BRIC countries as well. Famously, Slaughters has not emulated the strategy of the four horsemen of the Magic Circle by expanding internationally and aggressively. Are four right and one wrong, or vice versa? Or is there, of course, room for different approaches? As LegalWeek puts it, the outcome “may settle once and for all the argument over whether the boutique model still has a place in the top end of global law.”
Brief background: Slaughters’ largest office outside London is Hong Kong. They’ve been there since 1974, now with eight partners and 32 associates, but after a brief dalliance with a New York outpost a decade and more ago, which they rather quickly shuttered, they’re not here and quite conspicuously will tell you they have no plans to return. The real question is how to deal with the BRIC countries.
Put Russia to one side for now: It remains too changeable a market environment. The real challenges are China and India.
And there, it’s not at all clear that the “best friends” strategy used in continental Europe has any application whatsoever.
- The pan-European union consolidation of the 1990’s has no parallel in India or China.
- Moreover, the individual national markets in the EU were small, meaning no local law firm could pretend to be dominant continent-wide.
China, India, and Brazil could not be more different on this score: Not only are their economies highly protected by regulation and tradition, which gives the local firms leverage against all US and UK comers, but the domestic markets are themselves enormous, meaning local firms of true scale and increasing sophistication are emerging. Finally, the longer the local firms can string along the foreign newcomers, the longer they have to determine which horses appear to be winning: There’s no incentive for them to strike alliances promptly, and every incentive for them to watch the competition sort itself out.
Lastly, for firms like Slaughters (with 126 partners), its own resources could be a constraint: It takes not just financial but superb human resources to seriously crack new markets. As Clifford Chance’s litigation head Jeremy Sandelson comments pointedly: “Magic Circle firms have the brand and the resources to allow them to open up offices in emerging and other markets, looking to the long term without having to generate a high level of profits straight away.”
We’ll give the last word to a partner from a firm many identify as “Slaughters/New York” (just as many might jocularly call Slaughters “Cravath/London”):
As one veteran partner at Cravath Swaine & Moore comments: “The jury is still out as to the success of Slaughters’ model. It works very well in the developed markets, but I honestly don’t know if it will work in the emerging markets too.”
The real question may be whether any firm can stand on one leg of what’s increasingly becoming a three-legged global stool.
If you look at our client base, they are doing no such thing.
