On the last day of 2015 the leaders of the 10 Association of Southeast Asian Nations (ASEAN) launched the ASEAN Economic Community (AEC), an EU-inspired economic bloc. It has been widely hailed as an historic move to form a single market across states with a combined GDP of $2.6trn (£1.8trn) and a population of more than 622 million.

Integrating 10 markets that are far from homogeneous and are uneven in both their stage of development and their legal and regulatory frameworks will be a decade-long project. But a tremendous amount of opportunities can be expected in the process.

The promise has attracted a considerable number of international firms to set up bases, mostly in Singapore.

Asia Pacific firm King & Wood Mallesons, US firm Butler Snow and offshore Carey Olsen were among the arrivals in Singapore in 2015. On a wider scale, Dentons and Morgan Lewis & Bockius re-entered the market by striking a deal with established Singaporean firms Rodyk & Davidson and Stamford Law respectively.

For the 150 or so foreign firms that already have a presence on the ground the region provides a good business case for further investment and expansion. The region’s growth is even more appealing considering China’s economic slowdown – that country’s growth is now at its lowest rate for 25 years.

There has been a notable recruitment effort among international firms in Singapore. One major development that has defined the region’s legal landscape is the joining of forces between international and established Singaporean firms

Apart from Dentons and Morgan Lewis, UK-headquartered Withers has linked up with Singaporean firm KhattarWong through a formal law alliance (FLA) structure. These recent moves have not only signalled the growing importance of Singapore as a base to service clients in the ASEAN, but also highlight the increased use of Singapore law as governing law in regional transactions. This trend is also prompted by Singapore firms’ need and, indeed, eagerness to become part of something global.

At the same time, firms’ expansion is moving beyond the regional hub model, a trend that is developing slowly but surely. 2015 saw a number of firms broaden their footprints into other key jurisdictions such as Indonesia, Myanmar and Vietnam.

With all these important changes in mind, The Lawyer’s second edition of the Southeast Asia Elite report turns its focus on the firms that have been establishing themselves as regional service providers, the approaches they are taking and their performances in 2015.

Beyond Singapore

Looking at a survey conducted by The Lawyer in November and December 2015, which polled over 100 international and independent firms in the ASEAN region, the findings are somewhat bleak, but not without a glimmer of potential.

While firms unanimously agree the ASEAN region is critically important and offers growth opportunities, 2015 was widely seen as a challenging year due to patchy market conditions, political instability, the plunge in oil and commodities prices and the generally weak global economic environment.

International firms have been active in the market for more than 30 years. The ASEAN markets have long been known as volatile and a challenging environment for business development. There is no lack of examples of firms deciding to close offices. Morgan Lewis exited Jakarta and Singapore in 2000, Freshfields Bruckhaus Deringer closed its doors in Singapore in 2006 but returned in 2012, Clifford Chance shut its practices in Hanoi and Ho Chi Minh City in 2000, and White & Case pulled out of Thailand in 2008.

But the ASEAN markets have changed significantly since the early 2000s, and the opportunities promised by the AEC have engendered renewed enthusiasm among some international firms and regional firms, which have started seeking growth again. And more firms now see it as critical to offer ‘one-stop shop’ multi-jurisdiction services for clients across the region instead of servicing them from Singapore.

Although the average size of the 30 largest international firms in the region by lawyer headcount is only 88, 20 are present in more than one jurisdiction and, of these, 15 have a base in three or more countries (including association firms in Indonesia).

Of the top 30 firms, 29 have offices in Singapore. US firm Hunton & Williams is the only exception – it has a 30-lawyer office in Bangkok and no office in Singapore.

Outside Singapore, Indonesia houses the largest number of international firms. Among the top 30, 15 have an on-the-ground team via their associated local firms. As Indonesia still prohibits foreign firms to open offices, the only way for them to access the market is to form an association with an established local firm.

Vietnam and Thailand, which have a more relaxed regulatory framework for foreign lawyers, are also popular locations for international firms. Eleven of the 30 largest firms have one or two offices in Vietnam and 10 have set up shop in Thailand’s capital city Bangkok.

Myanmar is a fast-emerging market and has attracted strong interest from international players. Six international firms have opened there since 2014 following the country’s political reforms. More are expected to enter as the newly elected government settles in.

Big guns

Among the 30 largest firms Baker & McKenzie and Allen & Overy (A&O) have the widest spread regional footprints, with eight and six offices respectively. Both expanded their regional reach further in 2014 by opening in Myanmar.

By number of lawyers in the region Bakers continues to hold the top spot, with 456 – a 6.8 per cent increase over 2014’s figure. Of these lawyers, 141 are partners, 11 more than the previous year. A&O is fifth-largest by lawyer numbers, with 143 lawyers, of whom 22 are partners.

RHTLaw Taylor Wessing, the Singaporean member of the Taylor Wessing group, comes out as the second-largest firm by lawyer headcount in the region, mainly due to the launch of its ASEAN Plus group in August 2015. The group now consists of six firms from Singapore, Indonesia, Vietnam, the Philippines, Thailand and Malaysia, and a further two from South Korea and Taiwan. The group of ASEAN firms has a combined lawyer headcount of 337, including 86 partners.

Forming alliances or associations has been a popular way for international firms to expand, either to gain local law capability under regulatory requirements or in less developed jurisdictions where barriers to entry are higher and profit margins are lower. Among the top 30 firms, six have expanded by joining forces with a local firm in the past year.

A tough year

The words most used to describe market conditions in 2015 during this year’s research are ‘patchy’ and ‘choppy’. Revenue, therefore, was generally flat for most of the 30 largest international firms in the region.

Certain practices, such as M&A, restructuring and arbitration, saw a high level of demand. In contracts, project finance and capital markets work – the two main focuses and revenue sources of many international firms – experienced a considerable slowdown.

Political instability in key jurisdictions such as Indonesia, Malaysia and Thailand, as well as Myanmar’s recent general election, are mentioned as contributors to the slowdown in new infrastructure projects, deterring business activity and foreign investment. Volatility in commodity prices and China’s cooling economic growth and flatter demand for resources are also said to have adversely affected projects and instructions in ASEAN’s energy and resources sector, particularly in Indonesia – a major market for international firms.

“The region as a whole offers great long-term opportunities, but it’s not booming,” says Jeff Smith, head of Southeast Asia at Norton Rose Fulbright. “We’re busy in certain sectors, such as aviation and offshore floating production, as well as in the technology sector. M&A has been busy in certain areas and less so in the energy sector. Capital markets are quiet across the board. There’s no uniform trend.”

“The words most used to describe market conditions in 2015 during this year’s research are ‘patchy’ and ‘choppy’”

Although firms have different ideas on the sectors and work they want to target in the region, this year’s survey finds that energy and natural resources is the single biggest source of income for international firms. In fact, 72 per cent of the surveyed firms cite it as in their top three sectors.

Banking and finance comes second, with 57 per cent of firms putting it in the top three, followed by real estate and infrastructure.

As the region’s energy and natural resources sector has been hit by lower oil and commodities prices combined with a slow pipeline of infrastructure projects due to political instability in large economies such as Indonesia and Malaysia, it is hardly surprising that international firms’ businesses in the region are having a tough time.

Many firms expect 2016 to be more or less the same, with slow dealflow prompting them to seek new growth areas.

“The market has been slow and that is consistent in a number of jurisdictions,” says Stephanie Keen, Hogan Lovells’ Singapore managing partner. “We’ve not been as busy as we’d have liked. For us, it’s about looking for opportunities for new practices areas.”

Regional expansion

The challenging business environment for firms in 2015 might have blunted their motivation to expand in the short term, but the longer term trajectory suggests a need for firms to have on-the-ground capability in multiple jurisdictions.

With intra-ASEAN investment accounting for 18 per cent of total FDI in the region, ASEAN is now the second-largest investor in its own region, meaning greater interest from the business community in having a stronger regional presence in light of the establishment of the AEC, which came into effect on 31 December 2015.

“One of the bright lights is that more companies from the emerging economies such as Laos, Cambodia, the Philippines and Myanmar are making outbound investments regionally and globally,” says Simon Makinson, chairman of A&O’s ASEAN group and head of Myanmar. “That’s been a change in the market and intra-ASEAN business is becoming more of our business.”

Bakers reports a high level of productivity in the region, saying the AEC has propelled many companies from Japan, China or Southeast Asia to establish a strong presence in the AEC, particularly in the financial services sector.

The diversity in the region, as well as the surging amount of FDI and intra-ASEAN investment, means the need for international firms to have a wider regional reach is pressing. Firms are pushed to think seriously about whether and how to build up their capabilities in multiple jurisdictions such as Indonesia, Myanmar, the Philippines and Vietnam, either by opening their own offices if permitted or forming associations with local firms.

“From my perspective, deeper penetration and wider reach in the region will be increasingly important,” says Martin Green, Singapore managing partner of Stephenson Harwood. “The market is getting more competitive and clients are looking for more from one place. Having local capability also brings new opportunities.”

With that in mind, Stephenson Harwood entered into an association with Indonesian firm Christian Teo Purwono & Partners in 2011 and Myanmar firm U Tin Yu & Associates in 2013. In Singapore, the firm also formed an FLA with local firm Virtus Law in 2013, adding the important Singaporean law piece to its regional practice.

“As integration within ASEAN advances, legal services will see a more integrated market over time – that will offer lots of opportunities compared with fractured individual markets,” Green says. “But it’s at the beginning. Firms in Asia need look far into the future. It’s not a region one comes to for a short while and hopes to make a killing.”

Having local resource and capacity is only halfway to success. For firms that already have an extensive network of offices in the region it is more important to ensure resources are fully utilised and work is done efficiently to drive up profitability, particularly in a market as volatile and price-sensitive as the ASEAN region.

A&O has been putting more emphasis on better utilisation of existing lawyers than growing headcount. As a result, its number of lawyers at the end of 2015 remained static at 143. Makinson was appointed to the newly created ASEAN chair role in May 2014, aiming to drive the firm’s six offices towards a more flexible resourcing model.

“The markets in ASEAN are developing ones and there tend to be ups and downs, so you can never guarantee anywhere to be busy consistently,” says Makinson. “The volume of deals in any particular market is not great so we don’t have to have everyone in every specialisation on the ground in one office.”

Partners and lawyers work together on deals across the region when needed.

Undoubtedly, until ASEAN has reached its potential, global players with a focus on the higher end of the market will have to adopt a similar approach.

Home-grown regional networks

As their domestic clients start to consider utilising the opportunities provided by the AEC, independent firms from Southeast Asia have good reasons to build up their own regional networks.

Singaporean firms have traditionally been the leading group in following clients around the region. Three of the big four Singaporean firms have established themselves as regional players. Rajah & Tann, which kick-started its regional expansion in 2010, has the largest and widest regional coverage among the home-grown regional players. Its R&T Asia network boasts 569 lawyers in eight ASEAN jurisdictions. The firm has achieved fast expansion mainly through adding established local firms to its R&T Asia network in recent years.

Allen & Gledhill and WongPartnership are two other active regional advisers headquartered in Singapore, each having three offices or associated firms outside the home market.

Allen & Gledhill has two single-partner offices in Laos and Myanmar and a close association with 61-lawyer Malaysian firm Rahmat Lim & Partners.

WongPartnership, although a pioneer in the trend of expanding overseas (it has had a longstanding presence in China and Dubai), only started to increase its ASEAN footprint in 2013. It has forged a strategic alliance with Malaysian boutique firm Foong & Partners and an association with Indonesian firm Makes & Partners since that time.

Outside Singapore, major corporates from larger economies such as Indonesia, Malaysia and Thailand have also become active regional investors and their domestic advisers are considering ways to facilitate them when it comes to their ASEAN ambitions.

ZicoLaw is a network of 15 offices in eight ASEAN countries founded and led by Malaysian firm Zaid Ibrahim & Co. The network encompasses 279 lawyers, including 71 partners.

Bangkok-headquartered Tilleke & Gibbins and LS Horizon are emerging as regional players. Tilleke & Gibbins has six offices while LS Horizon has three plus an alliance arrangement in Singapore and Cambodia.

Another point of recent interest for investors and law firms alike are the so-called CLMV countries, consisting of Cambodia, Laos, Myanmar and Vietnam. These countries are less developed and have smaller economies than other regional powers, but the bloc forms the main recipient of FDI into the ASEAN, and investment from richer ASEAN member states. The countries boast a tremendous amount of opportunities, particularly in the fields of infrastructure, energy projects and manufacturing.

DFDL, headquartered in Cambodia, has been servicing the wider Mekong region for decades and has deep roots in the CLMV countries. Last year, it expanded its network to include the Philippines by forming a collaboration relationship with boutique firm Ocampo & Suralvo, marking the eighth ASEAN jurisdictions it covers. Apart from 69 lawyers, the firm also has a large team of tax advisers.

However, competition in the bloc is hotting up fast, as most of the regional firms are focusing their future growth on these emerging countries.

While the three Singapore-led networks are the largest by lawyer numbers, the networks of ZicoLaw and DFDL cover most jurisdictions – eight, the same as Singaporean rival Rajah & Tann.

Entrepreneurial spirit

Like many of their clients, a number of law firms in the ASEAN region have a strong entrepreneurial spirit. Rajah & Tann, for example, has set up a new practice group labelled Business Fundamentals, to serve start-ups and small and medium-sized enterprises (SMEs), and has launched a new business unit, R&T Asia Resources, to offer contractual lawyers to in-house legal departments and clients for high-demand periods or projects where specialist skills are needed.

ZicoLaw has also taken an innovative approach to enhance its financial sway and market position. In a ground-breaking move its affiliated group of companies, branded as Zico Holdings, went public on the Catalist board of Singapore’s stock exchange, raising $14.4m from the capital markets. Most of the proceeds will fund the network’s expansion in the ASEAN region.

The listing was hailed as a novel way for legal services providers to tap into capital markets while abiding by local rules that prohibit non-lawyers from owning and investing in law firms.

Due to the limited penetration and on-the-ground presence of international firms in the region, the competition is mostly among the home-grown regional players.

International links

Most international firms, even the likes of A&O and Clifford Chance, frequently refer work to these local networks and co-counsel with them on regional matters. The innovation and entrepreneurship of their regional friends is good news for them, at least for now.

DFDL, for example, has enjoyed referrals from more than 50 foreign law firms, ranging from the top-tier UK and US firms to emerging players including Chinese and Japanese firms.

“There’s less appetite for big international firms to expand into the smaller markets in the region – ASEAN as a whole is a large economy but Cambodia, for example, is more difficult for international firms to sustain an office,” says DFDL managing partner Martin Desautels. “Most of them focus on strengthening their teams in the core financial centres where they can make real profits, and use us to service clients in the more difficult markets, where we’re best at.

Singapore: The main battleground

Singapore has established itself as Southeast Asia’s financial and legal services centre. The city-state plays host to the largest number of foreign firms amongst the 10 ASEAN – around 140.

Of the international firms that responded to The Lawyer’s Southeast Asia Elite 2016 survey, 62% say they have an ASEAN regional headquarters in Singapore compared with 35 per cent that do not have a regional headquarters. Among the 30 largest international firms in the region that are either from the US or the UK, 29 have most of their partners and lawyers based in Singapore (excluding Indonesian association firms).

While Singapore has become a strategic location for servicing the region it is also increasingly important for international firms to have Singaporean law capability to thrive.

In the past year a number of firms have taken action to bridge the gap.

Twenty-three of the region’s 30 largest international firms already have the capability to offer Singaporean law advice either through a qualifying foreign law practice (QFLP) licence or a joint law venture (JLV) or an FLA in Singapore.

Cifford Chance, the sixth-largest international firm by number of lawyers in Singapore, is the only international firm that has both a QFLP and an FLA.

“The QFLP already allowed us to work on the Singapore law element of any corporate work; the FLA focuses more on litigation,” says Nish Shetty, partner of Clifford Chance’s Singapore office who leads the firm’s Southeast Asia dispute resolution practice.

In 2012, when Singapore’s Ministry of Law invited applications for the second round of QFLP licences, 23 firms applied. Only four were successful.

Ashurst, Berwin Leighton Paisner, DLA Piper, K&L Gates, Olswang, Shearman & Sterling and Stephenson Harwood are among those that applied for the licence in 2012 but did not receive one. Some have since moved on and found an alternative way to bridge the gap, and others are in the process of doing so.

Herbert Smith Freehills’ decision to swap its QFLP to an FLA is a strong indication of where the market is heading. It was one of the six firms granted a QFLP in the first round of applications in 2009, but in 2014, it decided not to renew it. Instead HSF opted to enter into a ‘best friend’ relationship with local firm Prolegis, and in November 2015, the two formalised the tie-up by entering into an FLA.

“Clients need good streamlined Singapore law capability – we saw that back when we applied for the QFLP,” says Alastair Henderson, HSF Southeast Asia managing partner. “But the regulations subsequently changed and the new FLA scheme was brought in. We looked at both and decided the FLA offers greater business flexibility in a changing market. It’s more permissive and has fewer restrictions than the QFLP.”

Simmons & Simmons and Reed Smith are two other firms that are in the process of launching an integrated Singapore law capability through either a FLA or a JLV. UK firm RPC is the most recent firm to have secured a JLV, with local outfit Premier Law.

Singapore firms go global

As international firms seek a bigger presence in the region and a Singapore law offering, equally apparent is the desire of local firms to be part of a global organisation.

Morgan Lewis & Bockius’ merger with Singaporean firm Stamford Law, which created Morgan Lewis Stamford in April 2015, is the latest example.

The firm’s Singapore managing partner Lee Suet Fern, explains why: “The market is bipolarising; the more high-end and interesting work is now going to the global players, which was not the case in the past. It’s happening today as demand for cross-border and multi-jurisdiction capability soars. Remaining domestic and regional will result in those firms moving further down the legal market food chain. The reality is that we will see local and international combinations continue, but likely with smaller local firms.”

The country’s fifth-largest independent firm Rodyk & Davidson, with 188 lawyers and 86 partners, will soon join this group of local firms forging international alliances. It has signed a deal to join Dentons, effective early this year.

“As Singapore is becoming a more important regional hub, international firms need a substantial presence here,” says Philip Jeyaretnam, managing partner of Rodyk & Davidson. “Equally, Singapore firms are eager to reach out because so much work we do now is not directly connected to Singapore because of its hub role.

“In the commercial space, I don’t think any practice has not been touched by globalisation, even the real estate practice which is traditionally regarded as very domestic.

“Certainly for us, it’s something we’ve been thinking about and looking to do for a number of years. What made it finally happen was the opportunity coming up with Dentons to do something on this scale.”

With Singapore and the ASEAN region forecast to continue evolving rapidly in the next decade, the existing pecking order will be disrupted and the lines between local and global legal services providers become increasingly blurred. The government’s decision to form a single regulatory body for both foreign and Singaporean lawyers and firms in November 2015 is in itself a manifestation of the internationalisation of Singapore’s legal sector.

Changes are inevitable in the next a few years for everyone in the market, but one thing is certain: the future leaders in the ASEAN legal market will be the ones that can best combine international and regional reach with Singapore expertise.