I'm going to restrict my response to the latter part of your question--Franco's military competence.
It is true that the Germans (and Italians, for that matter) regarded Franco's military decisions with more than a little contempt. This largely stems from a basic disagreement in philosophy. It is absolutely true that Franco made a number of decisions that very likely prolonged the Spanish Civil War. He preferred grinding assaults on a broad front and did not like to take risks. He also preferred to consolidate his gains in order to "cleanse" his newly won territory (which consisted of executions and imprisonment of his political opponents). When the Republicans launched an offensive, Franco always had the option of going on the defensive on that front and using his superior numbers and equipment to make rapid advances elsewhere. Instead he chose to make his counterattack directly into the area that the Republicans were attacking--a costly method that had the sole merit of recovering lost ground. Basically, Franco saw that he could win a war of attrition and grinding assaults, and he chose to do just that so that he could focus on suppressing (and killing) his opponents as he advanced. This meant that the butcher bill for the Spanish Civil War was inflated, but it left Franco with fewer opponents both in his rear areas and in Spain as a whole once the war was won.
This frustrated German (and Italian) military members that were in Spain serving the Nationalist cause, and this was communicated up the chain back to Germany. Preston makes a good case for this in his one volume history of the war, and an even better argument for this in his Spanish Holocaust. I haven't read much regarding Hitler's motivations regarding Spain, but I do know that Franco kept making demands of Germany that Hitler did not want to meet. The exact motivation for Franco not wanting to join WWII I have most often seen ascribed to Spain's general exhaustion after the Spanish Civil War as well as Franco's cautious approach and Hitler viewing Franco's demands as a bad deal. How much all of that was influenced by Hitler's conclusions regarding Franco's military competence will have to be answered by someone else.
I can only answer your question regarding whether or not Hitler wanted Spain to join him in the war, I don't know much about Franco's military experience or Hitler's thoughts on them.
After it became clear that German air forces weren't going to win their battle against Britain in 1940, Hitler tried to find other countries who would lend their support to his war effort. He looked at the nearby Mediterranean countries Spain and Italy. Hitler met with Franco in October 1940, and while Franco thanked Hitler for his support during their civil war, he made no promises of support. He basically said he would enter the war when it suited him. He still wasn't sure which way the war would go, and he disagreed that Britain could be defeated so easily, saying that even if they conquered the mainland that Churchill would sail to Canada and continue the war from there, plus he thought it was very possible for America to enter the war (a month earlier President Roosevelt had sent Britain fifty destroyers). On top of his doubts regarding Hitler's plans for success, Hitler had little to nothing to offer Franco in return for entering the war, not wanting to part with any of their newly-controlled ex-french colonies in Northern Africa.
After the meeting, Franco declared to his foreign minister, "These people are intolerable. They want us to come into the war in exchange for nothing", while Hitler told Mussolini when he met with him a few days later that he would rather "have three or four teeth taken out" than go through another 9 hours of those negotiations.