Beijing renewed a rule this month that foreign automakers seeking to build vehicles in China must form joint ventures with local companies.
But allegations of rampant bribery at China FAW Group Corp.'s joint venture with Volkswagen should provide an urgent wake-up call to the government to abandon the rule.
The government had hoped state-owned automakers would learn from foreign partners how to be more competitive. But the rule has done more harm than good.
Many Chinese automakers, accustomed to easy profits from their joint ventures, have no incentive to work hard and build their own brands.
So it should come as no surprise that none of them make money from their own operations.
Tianjin FAW Xiali Automobile Co., the small-car unit of FAW Group, reported a major financial loss this year.
The company, listed on the domestic stock market, warned last month that it might have lost 730 million yuan ($120 million) in the first nine months. It attributed the red ink to its inability to improve products to meet evolving consumer preferences.
If this isn't enough to persuade Beijing to annul its joint venture requirement, here is something more: Investigators have discovered what they believe to be widespread corruption within the 60-40 partnership between FAW and Volkswagen.
China's state-owned companies, protected by the government from market competition, are poorly managed and lack the rigorous internal controls of public companies.
Thus it's relatively easy for corrupt executives at state-owned companies to evade the watchdogs. And as we've seen at FAW-Volkswagen, alleged corruption can spill over from a state-owned company to its joint ventures.
In September, a task force from the central government launched an investigation of An Dewu, a former vice chairman of China FAW Group Corp.
Likewise, probes have targeted several Chinese executives at the sales company of FAW-VW. As it turns out, most of them had been dispatched to the joint venture by FAW.
Last week, Chinese media reported that the task force has launched a probe of Lu Minjie, Audi China's public relations director. Lu is the sixth executive at the company to be investigated for corruption.
These executives are suspected of taking bribes from dealers and external partners, such as advertising and public relations companies.
In recent months, the government's anti-corruption team has summoned hundreds of managers at FAW and FAW-VW for questions. Dozens of arrests are likely, according to Chinese media.
The joint venture rule is not only loathed by foreign automakers, but also criticized by clear-eyed observers close to the Chinese government.
He Guangyuan, a former minister of China's machinery industry, once compared the joint venture rule to opium. He believes the partnerships have debilitated the country's state-owned companies.
The Ministry of Commerce's research institute also has urged abolishment of mandatory joint ventures. It's time for Beijing to listen to their opinions and rethink its decision to uphold the rule.