The assembly line is still moving, filling bottles of cola and orange soda. The photos still hang on the wall marking the milestones: the signing ceremony in 1993 when Pepsi set up the joint-venture bottling factory in southwestern China; the arrival of Pepsi's president in 1998; the visiting delegation of Communist Party officials beaming at the model of free-market prosperity.

But the venture between one of America's most prominent brand names and an arm of the Sichuan provincial government has deteriorated from a symbol of the country's economic reforms into an embarrassing fiasco for both sides.

Pepsi has bluntly accused its partner of looting the company, tapping its funds for European vacations and expensive cars while covertly altering its ownership structure to give the local managers greater control. Factory officials have barred Pepsi's auditors from entering the grounds to inspect the books. They have accused Pepsi of practicing "commercial hegemonism."

Last month, Pepsi filed papers with an international arbitrator in Stockholm to dissolve the partnership, an extraordinary step that amounts to a public declaration of failure. The factory that was supposed to highlight the path to profit in the world's most populous country has instead become the latest cautionary tale of the pitfalls of investing here as an unprecedented amount of capital pours in after China's admission to the World Trade Organization, the body that sets the rules for most global trade. In the first half of this year, $44 billion in new foreign investment entered China, according to the government.

"Divorce is not a pleasant thing," Wah-Hui Chu, president of Pepsi's China subsidiary, said during an interview in Beijing. "You only go through it where there is no alternative. We have found them impossible to work with. They have totally destroyed any basis for cooperation."

The pending breakup of Pepsi and its partners at the Sichuan Pepsi-Cola Beverages Co. illustrates the difficulties that often arise when joint ventures are forged in pursuit of political favor from China's bureaucracy -- which continues to wield great powers over investment -- and not because of complementary business interests.

Pepsi created the joint venture with Sichuan Radio and Television Industrial Development Co., a subsidiary of the province's Bureau of Radio, Film and Television, which regulates media. The government agency was well versed in policing the airwaves against subversive content, but it had no experience in making or selling carbonated beverages.

What it did bring was a path into this city of nearly 10 million people, capital of Sichuan province. Foreign companies have been barred from entering China's beverage business without local partners. Joint ventures require the government's blessing.

"They came to us and said they could secure government approval to set up the business and off we went," Wah-Hui said. "It wasn't a pure commercial decision. You could call it an arranged marriage."

Some call it naive, a vivid example of how foreign companies' fascination with entering what is potentially the world's largest market can obscure basic business sense.

"The American partner often complains that it has been ripped off, but you have to ask yourself, 'Why on earth did Pepsi persuade itself that it should be doing business with a provincial ministry of broadcasting?' " said journalist Jim Mann, whose book, "Beijing Jeep," chronicled the travails of American Motors Corp. in China in the 1980s. "In the rush to get in, did they fail to exercise their usual good judgment?"

Since arriving in China more than two decades ago, Pepsi has invested more than $800 million here, establishing 14 joint-venture bottling plants in major cities. It licenses its brand to the factories and sells the concentrate used to make the soda. Pepsi shares the costs of local marketing but alone pays for an increasingly high-profile national advertising campaign featuring Chinese pop-music stars and athletes.

Though Pepsi is growing in stature in China, it continues to trail its global rival, Coca Cola, by a wide margin. Pepsi claims about 21 percent of China's carbonated beverage market, compared with Coke's 40 percent. Pepsi has yet to make money in China, though its country president said the company will become profitable next year.

The factory in Chengdu, however, is already profitable. Its managers claim that Pepsi outsells Coke by a hefty margin in Sichuan province. But from the beginning, the partnership has been colored by acrimony.

Pepsi invested $20 million in the factory and agreed to a partnership that was to last for 25 years. But Pepsi secured little influence over how the factory was run. Its investment gave it only a 27 percent stake in the company, while the province retained 73 percent. Pepsi does have the right to name half of the six members of the governing board of directors.

According to Pepsi China, the general manager of the joint venture, Hu Fengxian, has long sought to operate free of the company's influence. Under Pepsi's system, each of its joint-venture factories is supposed to restrict its sales to its own clearly defined market. That way, local franchises are protected against outsiders capturing sales, freeloading the benefits of their marketing. But under Hu's direction, the Sichuan plant has liberally violated that policy, trucking its products as far away as Harbin, in China's extreme northeast.

Hu declined repeated requests for an interview. But during a recent tour of the Chengdu factory, his deputy, Ye Shanghua, made no apologies for the company's aggressive pursuit of an expanded market. "We want the company to make more profit," he said. "Our bonuses are dependent on our profits."

Ye dismissed talk of improper use of company funds. He accused Pepsi of manufacturing charges and exaggerating long-resolved conflicts in hopes of replacing the factory's management with a more pliable team.

Ye said the real conflict centers on the fact that Pepsi wants to raise the price of its soda concentrate. That revenue is more important to Pepsi than its share of drink sales, said a former Pepsi executive. The Chengdu factory has resisted such increases.

Pepsi China maintains that it has not discussed raising the price of its concentrate since 1999. It insists that the issues it has raised at the factory are real and substantive. Factory managers have pilfered the marketing budget, 70 percent of which is paid by Pepsi, the company says.

Plant managers give Pepsi receipts for marketing expenses to seek reimbursement. Factory managers have routinely submitted multiple copies of the same receipts, according to Pepsi -- a fact confirmed by a recent provincial audit reviewed by The Washington Post. The province conducted the audit after Pepsi complained. The audit also found unauthorized housing subsidies for employees.

"We have found many, many instances over several years where improper and invalid advertising expenses were being booked," Wah-Hui said. "It wasn't once or twice. It was a pattern of behavior."

Relations became particularly strained in the past two years. First, Hu bought himself a Mercedes sedan and a Toyota Land Cruiser, using company money. The Mercedes alone cost $170,000, according to Pepsi. He was required to obtain board approval for such a large purchase, but he skipped that step. He also flies frequently to New York, where his wife and daughter live, and to Europe on vacation -- all at company expense.

This past December, Pepsi learned that Hu had, several months earlier, engineered the transfer of the joint venture out of the Sichuan broadcasting bureau and into another provincial government arm, the state-owned Asset Administration. According to Pepsi, the change clearly required shareholder approval, but Pepsi learned about it in a letter, after it was done. Moreover, the change altered the legal relationship of the joint-venture partners. Even though the company remains nominally under government control, the new legal status gives Hu a much freer hand to run things independently, Pepsi says.

"It's essentially a free agent," Wah-Hui said. "In the new setup, there is no recourse."

The change was criticized by the provincial bureau of broadcasting, the company's original parent. It sent a letter to Pepsi China confirming that the transfer "clearly violates government regulations."

The executive terms for Hu and the rest of the senior plant managers expired at the end of January, but the Sichuan board members have rebuffed Pepsi China's efforts to bring in a new team.

In March, according to the factory managers, Pepsi China's southern regional sales manager, Zhang Wei, called the telephone company to try to get a list of Hu's mobile telephone calls. The telephone company refused to provide one, and then alerted Hu. He called the police, complaining that the query amounted to corporate espionage. The police then detained Zhang for questioning.

Pepsi China's president denied that there was any attempt to use an employee to steal secrets. "A junior staffer member tried on his own to use his friends to obtain phone records," he said. "He was interviewed by the police, and he apologized. We determined it was wrong and the employee was reprimanded."

No new photos have gone up on the commemorative wall lately. At a meeting of Pepsi's Asian subsidiaries and joint-venture partners in Bangkok last week, Hu and the rest of the Chengdu plant's managers were summarily snubbed.

"They just were not invited," Wah-Hui said. "They have shown in the past disruptive behavior."

The Stockholm arbitration is likely to carry on for months. Meanwhile, Pepsi says it is open to negotiating a settlement. And if the divorce goes through without a deal, Pepsi plans to find a new partner in Chengdu or perhaps even set up its own factory -- something that may now be possible under rules being drafted to fulfill China's WTO obligations.

"We all know Sichuan province has over 70 million people," Wah-Hui said. "We want in."

A guard stands watch over the Pepsi bottling plant in Chengdu, China. Pepsi's Chinese subsidiary is trying to end its partnership in the plant with a provincial government agency, charging, among other things, improper use of company funds by managers. Plant officials, meanwhile, say Pepsi is trying to exercise authority inappropriate for a junior partner. The dispute is before an arbitrator in Sweden.