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Why the Electric Car Is Doomed to Fail

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Auto sales for the month of February rocked.

Despite rising gasoline prices, consumers bought more cars last month than in any month since 2008. Estimates for total 2012 car sales rose from 14.1 million in January to 15 million in February.

Chrysler's sales were up 40% for the month, while Ford (F) reported a 14% increase and GM (GM) a 1.1% increase, which is comparably small, but better-than-expected.

The rise in sales comes as drivers are buying more fuel-efficient vehicles. Sales of the Ford Focus more than doubled month-over-month and truck sales for GM, Ford and Chrysler jumped more than 20% as consumers traded up for more models with better gas mileage.

With gasoline prices on the rise, it is no surprise that consumers are looking for ways to save on gas.

But for many Americans the answer currently does not mean buying an electric car. These automobiles cost at least $30,000 due to their batteries, which typically account for half the cost of the car. On top of that, there is also the factor of "range anxiety," or not knowing if your car will get you to your destination, not knowing if there will be a place to charge the battery once you arrive at the destination, says Ron Adner who is a professor of strategy at Dartmouth University.

Many of those issues are currently being addressed but consumers still are not buying electric cars in droves.

In February, sales of electric and hybrid cars were mixed. GM sold 70% more Chevy Volts from January to February and the same goes for Toyota and its Prius Hybrid. While Volt sales are still below the December 2011 all-time highs, forecasts do project GM will sell nearly 10,000 of the electric vehicles by year-end, or roughly 30% more than last year. Meanwhile, sales of the Nissan Leaf have ticked down for more than five months in a row. February was the worst monthly sales report for the Japanese company in almost a year.

While the sales of some electric cars are up month-over-month, the number of electric cars sold is tiny in comparison to the rest of the auto market. It will likely remain that way unless changes are made fast says Adner, who is also the author of the new book, The Wide Lens: A Strategy for Innovation.

"I'm rooting for the electric car.... I think it is a great idea and I think we need it," he says. "But the current approach to the electric car is doomed to fail in the mass market" and it is "not because these cars aren't great" but because two key factors which plague the electric car market.

#1: Fix the Resale Market

"For most Americans a car is an investment and when you think about what car you want to buy the resale value matters a lot," says Adner. "The resale value for an electric car is dramatically different than for a regular car and it all comes from the battery," which is half the cost of the car.

As is typical of batteries, they get used up after a certain amount of use. They have a finite lifespan, which leaves you with "depreciation on the most expensive part of your car," Adner says.

But battery technology is constantly improving. "That is great news for everyone who has not yet bought a car," he notes. But "[if] You buy a 2012 (Nissan) Leaf and you try to sell it back to the market in 2016 and [guess] what you find?"

You'll find that the technology is outdated and much better in newer vehicles. "Suddenly selling your car back to the market is like selling a used computer," which, like all technology, tends not to hold value upon resale.

Adner does have a solution. "You have to decouple the purchase of the car and the purchase of the battery…using a model that looks just like the cell phone providers who also give you a really expensive piece of hardware [but] take the depreciation out of your hands by putting you on a multi-year contract." In the accompanying interview, he tells Aaron that one company called Better Place is already doing this.

#2 Create a Smart Grid

"The electric car as a construct itself suffers from the problem that its own success brings about its failure," Adner says. "As long as only three of us are driving an electric car it is not a problem, but if half of New York City drove electric cars and plugged it in when they got to work in the morning the power grid would collapse."

This is very intuitive. As more electric cars come on line, the bigger the problem for energy suppliers. Adner says if the electric car is to have a chance, America needs a smart grid, a proposition the country has been mulling for the last 20 plus years.

If the resale and smart grid issues are addressed, "the electric car can be a success," he says. "But unless they are crossed the electric car cannot win."