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Tencent on the dollar

The legal chiefs of two of China’s largest public companies, Tencent and Xiaomi, discuss growth and the challenges of lawyering in Asia’s much-fêted tech sector

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When Brent Irvin joined Tencent as group general counsel nine years ago, the Chinese upstart was already a tech wunderkind, boasting revenue close to RMB20bn. But few foresaw the trajectory it would take from there: with dramatic growth in 2017, the company is now valued at more than $477bn.

red_colour_burst‘We have always been about combining social and content, but in the beginning we were more games-focused,’ notes Irvin.

‘It’s still a huge part of the business but over time we’ve expanded into movies, video, music and other forms of entertainment. We’ve added online finance and payments to our bow.’

The story of Tencent’s startling growth is often-cited in China’s tech community. The country now has nine of the world’s top 20 tech companies. Only the US is better represented. Among them is electronics group Xiaomi, the world’s fourth-largest seller of smartphones.

‘We’ve grown very quickly from a start-up to become a Fortune 500 company within eight years. It’s like working in a different company every half year,’ says Bin Sun, GC at Xiaomi.

Originally an online-only retailer, Xiaomi, which in July floated on the Hong Kong Stock Exchange, raising over $3bn in the process, opened its first bricks and mortar store two years ago in a bid to compete with companies such as Huawei, Oppo, and Vivo, which began selling smartphone devices offline, increasing competition in the market. This brought a new set of challenges for Xiaomi’s in-house legal team.

‘Our retail stores have grown very quickly. We started out with just one attorney; six months later I had to add a whole team. Our lawyers have to learn different business skills all the time.’

The legal team has grown ten-fold since Bin Sun joined almost three years ago – Xiaomi now has around 80 lawyers based in its Beijing headquarters, with teams outside China based in India, Indonesia and Spain, with plans for other EU countries in the near future. The company, which employs over 15,000 staff across Asia, is one of the world’s top ten most valuable technology companies. However, the team is still relatively small compared to other Fortune 500 companies, which is a challenge when trying to keep up with the growth of the business.

Such challenges are mirrored at Tencent. Under Irvin’s management, Tencent’s legal team has increased from 20 to 350 lawyers, with many new specialities required to service the rapidly-expanding business offerings.

‘Different businesses require different lawyers. Online finance has become an important part of our business. We were lacking experts in banking regulation. We talk about IP and technology a lot more now, which also requires more weight,’ notes Irvin.

‘One of the differences between us and other big Chinese firms is that we do a lot more overseas deals. We have a need for deal lawyers globally – we do a lot of deals in London, New York and California – and it’s not just regulatory work.’

‘When it comes to hiring external lawyers, knowing the Tencent way is very valuable. We put a high premium on lawyers who understand our business well. We often end up with relationships based on a lot of volume (in terms of deals), so we want to build long-term relationships and try to be innovative when it comes to billing, rather than just maximising on price.’

Uniquely China?

China is a notoriously tough market to operate in. While President Xi Jinping has pronounced that China is open for business on the international stage, there are still unique roadblocks to building a successful business in China. Between an intellectual property regime that is still finding its feet and the complex regulatory environment, doing business in China can be opaque to say the least. However, according to Irvin, the challenges for most companies operating in the tech sector are largely comparable to foreign markets.

‘I’m American and have worked across various countries, I know a fair number of GCs, and you find a lot of the issues are the same. You worry about competition laws whether you’re at Google or Facebook or Tencent – when you make products that improve people’s lives, there’s a certain amount of increased regulatory scrutiny and that is the biggest challenge we are facing.’

Providing strong leadership is crucial to overcoming such challenges; a skill that Irvin says he has needed to develop quickly.

‘I’m not a big fan of one-size-fits-all management. A very important part of leadership is judgement and that’s often very contextual: how to handle certain cases or people or teams. You’ve got to hire good people and empower them; there’s no way you can do it yourself once you reach a certain scale. A fair amount of my time is spent making sure we have the right teams and leaders in place.’

This approach to management might be well-suited to the unpredictable life of an in-house counsel in China. Still, the core concerns for counsel stay the same, according to Irvin.

‘The most important thing for me as GC is to understand your business needs and to build a team with strong execution that is highly adaptive. We tend to focus on people’s ability to learn and motivation rather than past experience.’

Leveraging intellect

Bin Sun took over as GC during a turbulent time for Xiaomi. In 2016, sales had plummeted and the company fell from first to fifth place in China’s smartphone market. The reasons are varied, with reported organisational problems through the supply chain – but one of the main problems was a reliance on online sales, which plummeted between 2015 and 2016 from 70 million devices down to a reported 41 million.

To turn things around, Xiaomi rapidly rolled out physical retail operations. In addition to its own products, Xiaomi would fill its stores with products developed and produced by start-ups, hand-picked and funded by Xiaomi. The hope was these start-ups would complement the company’s established products to create an ecosystem of digital tech goods to lure customers in. This strategy, together with a concerted push into overseas markets such as India, was designed to pull Xiaomi back to the top of the leaderboard.

International expansion, however, brought its own headaches, and invited patent lawsuits in new markets – even some in its home country. In one case in India, Xiaomi and its distributor, Flipkart, were blocked from importing, marketing and selling smartphones that were infringing eight patents held by Ericsson. It was one of the biggest lawsuits that Xiaomi faced from a major company.

By the time Bin Sun was brought in, Xiaomi had drawn heavy criticism for its IP woes – making her previous role as head of IP at China’s BOE Technology Group a definite advantage.

‘Being able to speak the same language as IP professionals means I can make confident decisions on high-stake matters. IP law, especially the patent law for tech, is basically the same as the one designed more than 100 years ago when tech was not integrated,’ she says.

The government has played a big role in improving digital copyright to a point where I don’t believe there is now wide-scale piracy in China.
Brent Irvin, Tencent

‘There is no way you can get complete freedom to operate in hi-tech. Even Apple and Samsung, who have been in the field for so long, are still facing tonnes of litigation every year. This will continue in the future.’

Belonging exclusively to the digital space means this is less of an issue for Tencent.

‘In our business, we are talking mostly about individual copyrights. Tencent Music and Tencent Video – the second largest in China – would not exist if there was wide-scale piracy,’ says Irvin.

‘In the past four or five years, the government and other companies have played a big role in significantly improving digital copyright to a point where I don’t believe there is now wide-scale piracy, and the IP system is good enough to support us.’

Behind this has been Chinese courts taking a much more robust stance on enforcing copyright owners’ rights. Nearly 87,000 copyright-related cases were filed in China last year, according to data compiled by China’s Supreme People’s Court – a 15-fold increase from 2006.

Last year, a Beijing court awarded Tencent more than $1m in damages in a copyright infringement case. The defendant, streaming site and hardware manufacturer BaoFeng, was found to have streamed episodes of The Voice of China without permission from Tencent, which had exclusive streaming rights.

Irvin’s IP experience proves invaluable when it comes to advising other companies within the Tencent ecosystem too – he sits on the board of music-streaming companies including Tencent Music and Gaana in India.

‘You want a diversity of opinions on a board, so for highly-regulated businesses, having a lawyer on board can have benefits. By itself, just being a GC won’t help you on a board – I had already been a commercially-driven deal lawyer, so I have a good business sense.’

Designing the tools

When it comes to legal innovation, both Tencent and Xiaomi are well positioned. ‘We are fortunate. Being a tech company, our attorneys will design the kind of tools we want and our engineers will put them together,’ says Bin Sun.

For larger, more complicated work, the legal team usually buys IT systems from the outside market, which tends to be a one-size-fits-all approach. ‘Tech has much more impact on project management and documentation. We are starting to see artificial intelligence penetrate into legal, but it is yet to become a competent tool that we can use to support daily work.’

At Tencent, the company has recently been asked to work with Chinese courts to use its mobile messaging and social media app, WeChat, as a tool to help litigation. Parties can now submit documents, verify identification and pay legal fees through the service.

‘It’s a great opportunity for us to build a product innovation where the client or end users are judges,’ says Irvin.

When it comes to implementing legal tech in-house, the company has other challenges.

‘One of the issues we faced as a Chinese company is that there aren’t a lot of good off-the-shelf solutions for IP management software. You can buy them here, but they are in English not Chinese,’ says Irvin.

‘We have developed our own IP management software and set up a litigation system in-house. Solving complex legal issues in new ways or coming up with a framework to address various new regulations are the main two innovations I’m seeing.’

Going public

For Bin Sun and her legal team, Xiaomi’s public debut this summer – the world’s biggest technology float in almost four years – was a steep learning curve.

The team played a key role in influencing the listing terms of the Hong Kong Stock Market, which historically has not been accessible for tech companies. This changed in April 2018, when the exchange implemented the largest shake-up of rules in decades. The new regime allows the listing of biotech companies that do not meet any of the financial eligibility tests of the main board, high-growth and innovative companies with weighted voting rights structures, and issuers seeking a secondary listing in Hong Kong. The amended law will allow Hong Kong to capitalise on opportunities from up-and-coming biotech companies, which make up a large share of companies seeking a listing. As of June 2018, 26 Chinese tech companies have offered to sell their shares through public offerings.

‘We are lucky that the Hong Kong market is becoming more open and realising the importance of having hi-tech businesses,’ says Bin Sun.

‘It’s very important for a tech company not to be short-sighted – we don’t want our operation to be heavily influenced by the stock market, we want to focus on our long-term goal and continuously grow to become a great company.’

Despite the company’s lower-than-expected valuation – Xiaomi settled on $54bn despite media reports suggesting it had hoped for $100bn – the listing was a milestone for the company.

‘We actively participated in the new amendment to the listing rules in Hong Kong. We were involved in the amendment to that of China mainland – neither had accepted dual-class corporate governance before. We prepared our own IPO project at the same time as working with government officials on the law amendment. It was a very intense time and has made a remarkable memory for the legal team.’

alex.speirs@legalease.co.uk

anna.reynolds@legalease.co.uk

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