The White Subaru Hell Loop

24:15A transportation arm to deliver cars to people's homes across America. Carvana builds the chain, but when they're done, they realize that what is missing is the customers. Carvana needed a way to get attention. We were not a hot Silicon Valley company with venture capital investors that had a lot of attention from the media. Here's Ernie Garcia III on the Cars and Culture podcast. We could not get anyone to cover us to save our lives. We were trying so hard to get any coverage because you know, first startup, you know, media coverage is one of the only ways to get your word out. In 2015, Carvana hit on a way to finally get the word out.

24:54They seized on a diabolical marketing gimmick. The used car business is going high tech with Carvana, the world's first fully automated, coin-operated car vending machine launched today right here in Nashville. These structures that Carvana would call car vending machines really meant this. The company would have some physical locations, and those locations would be 75-foot-high glass structures modeled to look a bit like the vending machines kids buy little toys from. It's the first complete online auto retailer in the world that allows you to pick up your car.

25:33from an auto vending machine. The whole thing's automated. If you bought a car from Carvana, you could get it delivered to your house the boring way, or you could come get it from one of these snazzy new machines. You come here to the Carvana Welcome Center, where you're given a coin. You put the coin in this machine, and that starts the vending process. And get this, you even get to keep the coin. It was completely silly. It had very little to do with Carvana's core business or even what was novel about the company, but it was a hit. And Carvana opened vending machines all across the country.

26:11The vending machines, when I mentioned Carvana to people, are still the thing that seems to have stuck in everyone's heads. But the thing that got Wall Street to pay attention to Carvana was actually something beyond the company's control, the pandemic. So the pandemic was, like, amazing for Carvana at first, right? Because people weren't going out shopping. The last thing you want to do is, like, I was at a car dealership on March 11th or something, like, 2020, just kind of being like, what are we going to do? Like, watching a car dealership kind of reckon with the coming sales apocalypse. Were people terrified?

26:52Yeah. The salespeople were scared because they work on commission. And so if nobody's coming, like people weren't sure if car dealers were essential businesses. Right. Nobody's going to like put you in the box to talk about your financing. Yeah. You know, like that's the last thing anybody wants. Or do a test drive with a stranger. And so there's that. New car assembly stopped for a while, which drove up used car prices like crazy. Right. It was kind of a perfect tailwind for Carvana. They were growing. They expanded super, super rapidly to keep up with their growth trajectory. In 2021, Carvana sold over 425 ,000 cars, the stock price more than quadrupled.

27:33And Ernie III was all over TV, celebrating his company's extremely good quarter. On CNBC, host Andrew Ross Sorkin asks, essentially, won't the Carvana stock price eventually have to settle down a little bit? It can't just go to the moon. I think the bigger question for the market and trying to understand where we are in our economy and what's going on in terms of supply with cars, new cars, used cars, is whether this is going to sustain itself. Ernie, like any good CEO, instead just answers the question he wished he'd been asked. If you don't mind, I want to take a moment to take a victory lap and say it's our first positive quarter and to thank all the people of Carvana that have worked so hard over the last eight years to make that possible.

28:16Eight years ago, we launched, we sold a couple hundred cars. And this quarter, we sold over 100 ,000 cars. And this year, we'll sell 1 ,000 times as many cars we sold that first year. And to do that, have our first profitable quarter is something that we're really, really proud of. And so thank you to everyone out there on the Carvana team. Great job.

28:34Ernie's face on CNBC next to a big green hockey stick of his company's stock value. It's hard not to think this is probably something he visualized in the eight hard years of trying to build this company. when nobody paid attention, when he had to go on local TV news in a giant vending machine to try to get Wall Street to take him seriously. He's finally in the place where he must have wanted to be. And he's about to get knocked out of it. Because the same pandemic that shut down the brick-and-mortar competition that made a lot of people desperate to find a car, that pandemic was also shutting down a kind of in-person office that Ernie's company actually depended on.

29:12One of the things that happens is also DMVs shut down and DMVs slow down. And so all of the normal kind of title processing and all the paperwork side gets really screwed up. Oh, so at the same moment they're having a ton of customers come in the door, at many state levels, the actual processing of the paperwork gets all messy. Interesting. That would not have occurred to me. Turns out, the hard thing about being Amazon, but for cars, isn't just that cars are heavy to ship or that used cars are unique and unwidgety. It's that buying a car is one of the more paperwork-intensive purchases in life.

29:57To be an Amazon means to take care of pesky logistics invisibly. But with all these state DMVs under stress, those pesky details became quite visible. Without a DMV, you can't transfer a title, which normally means you can't sell a car. But Carvana kept selling cars. And the first place Ben saw them get in trouble for this was in Raleigh. This was August 2021. The first thing that put them on my radar is they had a dealership get suspended in North Carolina. A Carvana dealership? Yeah. And what did the state say? Why were they doing it? Because of title? It was because of, like, paperwork issues.

30:31You've likely seen the big vending machine of cars from the Beltline in Raleigh. The machine is now out of order after the state accused them of improperly filing car titles, inspections, and temporary tags. Do you remember how our listener Jed would years later hear a news story that referenced Carvana's license being suspended in North Carolina? This is that story. The DMV claims Carvana violated licensing laws, failing to deliver titles to the DMV, selling cars without a state inspection, and issuing an out-of-state temporary tag on a vehicle sold to someone in North Carolina. not. And why don't the states, like at the risk of asking a very obvious question, why are the states bothered by having people driving around with either temporary tags or out-of-state temporary tags?

31:13Well, part of it is that licenses are revenue for that state, right? So like if you're the North Carolina DOT and Carvana is dealing with Georgia to get you to be able to drive, like you're not getting the revenue that you should be getting. Interesting. So that's part of it. Other car dealers who are doing all that paperwork and have to do things the way that things have always been done are grumbling. Car dealers are also a pretty powerful lobby in every state. I didn't know that. And they're no friends of Carvana. Some version of this situation in North Carolina was happening in lots of states.

31:51Carvana getting in trouble with local officials, in some instances facing class action lawsuits, 2021 to 2022 was a dark time for the company. Most crucially, Wall Street saw Carvana making what it believed was a bad acquisition, taking on a lot of debt. And Carvana's stock price plummeted from a high of$370 to$3.50 per share, a 99 % drop in value. Good afternoon, and welcome to the Carvana fourth quarter and full year 2022 earnings conference call. In an earnings call in 2023, Ernie had to stand in front of everybody and defend his leadership. Ernie? Thanks, Meg. And thanks everyone for joining the call.

32:37Ten years ago, in January 2013, we launched Carvana in Atlanta, Georgia. We were a passionate group of people who believed we could build something new in the world that we would be proud of. Ernie's voice sounds tight here, almost like an adult in detention. Unlike his previous Victory Tour, he does not sound like a man having fun. Who would be? 2022 had a lot of hard days. But we're a scrappy group, and hard days aren't always the worst thing in the world for scrappy people. Scrappy people find a way, and we're finding a way.

33:06By the time this earnings call happened in 2023, Carvana was saying publicly that it had worked out the kinks in its system. The DMVs the company relied on had long since reopened, that paperwork backlogs had been worked through, the source of Carvana's headaches, in theory, should have been resolved. That summer, a man named Jed, a man with excellent taste in podcasts, would be moving from Ohio to Missouri to be with his partner, Liz. And in a bind, he'd buy a car from Carvana. He'd buy a car, but for months, he would not have the title to that car. And he wouldn't understand why. Why didn't Carvana just take the title from wherever they were keeping it and send it to him.

33:49Only Carvana knew the answer to that question. After a short break, Carvana.

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37:21Welcome back to the show. I've spent a lot of time in Judd's paper trail, frankly, more than I wanted to. As somebody who tries to avoid almost all bureaucratic entanglement in my own life, at any cost, meaning I don't want to speak to the manager, I don't want to chase down the refund, if you bring me the wrong food, I will just eat it. It was strange for the search engine team to dive so deeply into someone else's hell loop. But we did. We got Jed's permission to go through his correspondence with Carvana. We talked to Carvana. We emailed with the Missouri DMV, well, the Missouri Department of Revenue, which oversees the DMV, a fact I never wanted to know.

37:59But I now understand what happened. I know who messed up. I know why Jed's title was so hard to get into his hands. And now that I do know it, I also know a little bit more about how the world works and how it sometimes doesn't. So let me take you along. To understand this whole problem, like what was happening behind the scenes of the process driving Jed nuts, I want to start by playing you this conversation I had with a man named Tony Hall, who works at Carvana in a very important role. Can you say your name, introduce yourself, and what you do? Yes, my name is Tony Hall. I'm the head of policy for title and registration modernization, and I'm part of Carvana's government affairs team.

38:40Tony works at Carvana now, but part of why I wanted to talk to him is because of where he used to work. At an institution Americans have hated, maybe since its invention, the DMV. Because the answer to our question really starts with the DMV. And before he worked at Carvana, Tony Hall spent a decade at the Texas DMV. Actually, a little more than a decade. I spent 10 and a half years working for the Texas Department of Motor Vehicles. Seven and a half of those were actually on the title policy and procedure side of the house. So you lived for like a decade just in paperwork? I spent a decade living in paperwork and trying to move to digital processes, yes.

39:23Tony was able to give me a picture not just of how inefficient a DMV actually is, which way more than I had imagined, but he was actually able to offer an explanation for why it might be that way. It's something he first began to understand in September 2011, when he was just a young DMV employee. I don't know very much about the Texas DMV. How paper was it when you started and how digital was it when you ended? When I started, essentially, everything was relatively paper-based. There were some very old-school, methods that dealers had where they could enter data into a laptop, put the data on a thumb drive.

39:59They would take the thumb drive with the physical paperwork and walk it into the county tax office. The county tax office would plug the thumb drive into the state computer terminal. And then, no joke, they would sometimes literally put a stapler on the enter button and have it run through all the screens on the transactions. And I think the thumb drive could hold 25 transactions. And then they would kind of post-audit the paperwork to make sure, do we have all the documents? Are things signed where they need to? Obviously, if there were paperwork issues, they were sending those back to the DMV.

40:30Tony said back then there was an entire job for someone called a title runner. Like a car dealer would pay a title runner to pick up the title from the dealership and run it over to the county tax office. I'm an impatient person, so the fact of all this just makes my jaw drop a little bit. There are government offices that aren't famous for functioning well, but DMV offices are famous for not functioning at all. What is it about motor vehicle paperwork that stymies local government? You got to keep in perspective, right? A motor vehicle for many people is the most valuable asset that they ever own.

41:06If you own a home, it's your second most valuable asset, generally speaking, right? So I feel like there's a lot of sense of we've got to make sure as a government agency, we are doing this right and we are protecting all the parties that are involved with it. It's people rely on a motor vehicle to get to and from work, take care of their kids, take care of family members, whatever the case may be. So what may seem like an innocuous error could be life-changing. And I think that innately drives this sense of anytime you're doing something new and innovative, even when there's a demand for it, inevitably you're going to be introducing new risk.

41:48So look, obviously, or at least in my opinion, obviously, DMVs are inefficient for many reasons. But according to Tony, there's at least one good one. That in some way, their slowness may have a logic. They'd rather be inefficient than make a mistake. Because for many people, their car is their most valuable possession. Car dealers, when they sell you a car, they handle the title and registration for you. and they get used to the quirks of the rules of their particular state DMV. Carvana, as a national company, has had to learn the rules and regulations of 50 DMVs and stay on the right side of all of them.

42:28Tony said that gets complicated. Every state does things different. In some states, you have safety inspections. In some states, you have VIN inspections. In some states, you have emissions inspections. Some states, you have multiple combinations of those. who can do those sorts of inspections varies. In some states, dealers can do those themselves. In some states, you have to take those vehicles and have somebody else perform those inspections. This is a podcast. We're not going to tell you about every one of these rules or every one of these rules exceptions, but things get gnarly. And you also have state and federal regulations that govern the transfer of ownership of a vehicle.

43:07And you're trying to layer all these things specific to a particular person's circumstances. So every car is a snowflake, every DMV is a snowflake, and every car owner is a snowflake, each more beautiful than the last. Jed is our snowflake, a nice man who was in a hurry to move across the country to be with his sweetheart who just happened to get caught between two complicated and interlocking systems, the Missouri Department of Motor Vehicles and Carvana. So I want to retell you Jed's story. I'm even going to replay some of his quotes. But I want you to hear the story from the behind-the-scenes perspective that Carvana had.

43:46Carvana owned a white Subaru Outback. The company wanted to sell it. The title to that car belonged to Carvana. Again, the title, literally a piece of paper, like a physical piece of paper, that says Carvana owns the car. That title, set in the headquarters of Carvana, was literally in a filing cabinet, among many filing cabinets, in a building in Arizona. That title was in the filing cabinet when Jed pressed the button to buy the car. I chose a car that night and financed it and was ready to go. We delivered the car to the customer in Ohio on June 2nd, 2023. That's Haley Pollack, a senior manager of communications at Carvana.

44:26She used to work in customer service. The customer provided us a Missouri address that was his home address and then indicated that Missouri was where he wanted to register the vehicle. So the car has been delivered. The title stayed in the filing cabinet at Carvana. In order to transfer that title to Jed, here's what was supposed to happen, according to the rules of the Missouri DMV. The Subaru needed to be registered. To register it, the state needed proof of several facts. That this Subaru had passed inspection in Missouri. The Jed, its driver, had insurance. and that Jed had paid taxes on the car because in Missouri, everyone in the state pays an annual tax on their cars.

45:09I'd never heard of that. If Jed could prove those facts to the state, his car would be registered and it could be driven. And if it's registered then, and only then, would the state of Missouri print up a new title and give it to Jed? All of this, a long way of saying that Jed needed three pieces of paper. I'm not that worried about it. Like, okay, we're missing a few documents, but how hard could this be? When I have a free afternoon, I'll go down to the DMV and I'll take care of it. Oh, Jed. He had no idea. The customer called us. He was actually sitting outside the Jackson County Assessor's Office because that's when he received information that he needed the title in his name, which starts a bit of a cycle.

45:54This bit of a cycle, this was the hell loop. This was where Jed got stuck. our advocate is explaining that we can't provide a title in his name. She explains that we do have a title. It's titled in Carvana's name, but we can't provide it to him until the registration is complete. And so he actually walks inside the courthouse on his phone with the advocate. Wait, I'm sorry, can I ask you a question? Is this like, you're describing this in like a very high amount of detail. Well, is this because like when it says like your call may be recorded for quality assurance, was this call recorded for quality assurance?

46:31Yes. I remember vividly standing in that courthouse just thinking, I don't know where to go from here. I took another number and I went back to the desk and I started explaining what was going on. And the woman interrupted me and said, Carvana, huh? Oh. And she said, this happens all the time. We're always having problems with Carvana. She said it's a problem on their end and they need to work it out. I can now, after months of reporting by search engine, although we were working on other stuff at the same time, confidently report this was actually a problem on the state's end. They needed to work it out.

47:08This one state employee, she made a human mistake. She misspoke. It happens. Carvana's customer advocate would wind up calling the state directly, figuring out that Jed did not, in fact, need a physical title with his name on it, that he just needed a photocopy of the title with Carvana's name on it, and Jed would end up showing that emailed photocopy to a state employee who finally gave him what he needed. It makes me understand that a large part of Carvana's job is just to intricately understand bureaucratic logic. Bureaucratic logic is different from human logic. It doesn't pretend to be internally consistent.

47:44So understanding why one rule exists won't necessarily help you predict another. But bureaucratic logic has to be followed by human beings who make human errors. The answer to Jed's question, why didn't Carvana just hand over the title to him? Carvana is a car dealer. States expect car dealers to handle title and registration paperwork for the cars they sell. And dealers can't just improvise on the fly. Their state licenses are at stake here. Dealers have to give their paperwork to the state. And the state then issues the new title to the new owner. I did run this bit by the Missouri Department of Revenue, who runs the Missouri DMV.

48:24They confirmed it. Of course, the promise of buying a car on your phone is that in theory, you're not supposed to have to know about any of this. Carvana is trying to offer a seamless experience. So, how often do they actually deliver that? What seems clear to me now is that the cases where Carvana customers do not get title and registration in a timely manner, those were happening much more frequently from mid-2020 through 2021. The company acknowledges this. They shared internal data showing frequency of registration delays. You see some before the pandemic, more during it. But then, after the pandemic, after the company takes a big public hit for this, you see things get smoothed out.

49:11the tricky cases become increasingly rare. Tony from Carvana said that if you believe the customer experience is really getting better, it might not just be Carvana doing a better job, it might also be the DMVs. He says that the pandemic, which shut so many DMVs down, was also finally the push they needed to plug their systems into the internet. at. COVID certainly changed the narrative around how antiquated the title and registration process is to the extent that DMVs themselves are having the most substantive conversations about this issue. And I would say they've had more conversations about this title and registration modernization just broadly in the last two, two and a half years than they probably have ever had before.

49:59It's funny to think of all the unintended consequences of a global pandemic, one of them would be more pressure on DMVs to have electronic record systems that work. I would not have guessed that in the beginning. It's funny, you know, like early in our story, one of the things we talk about is that like the big idea that Carvana's CEO had in the beginning is just like to create essentially like Amazon, but have used cars. Listening to you talk, I'm like, oh, someone who would have been imagining that dream in like 2015, I think it would have been perhaps impossible to totally understand the amount of tangle that they would ultimately have to untangle.

50:39It sounds like you guys are still untangling it. Yeah, I mean, it is a daily evolving process for us.

50:48So that's Carvana's story. The company seems to be in pretty good shape these days. Most news stories you see are about their comeback, not their problems. And the stock price is mostly recovered. We relate all this to our listeners, Jed and Liz, who were at first, I think, a little confused. I think it's possible all of us here were maybe judging Carvana by a reputation it may have outgrown. It's a little tough to let go of. Who doesn't love the story of a glitzy startup founded by a pickleball-playing CEO that grew too quick and stumbled? We know that story. It's easier to tell. And you spend much less time having to learn about the intricacies of how paperwork functions at the Missouri Department of Revenue.

51:31Anyway, Jed and Liz, to their horror, now understand all of these intricacies. They will return again to the Missouri courthouse this month, but for much happier reasons. This time, they're picking up a marriage license.

51:54Thank you.

52:24Search Engine is a presentation of Odyssey and Jigsaw Productions. It was created by me, PJ Vogt, and Truthy Pinnamineni, and is produced by Garrett Graham and Noah John. Fact-checking by Holly Patton. Theme, original composition, and mixing by Armin Bazarian. Additional production support by Sean Merchant. If you'd like to support the show, get ad-free episodes, and access to our upcoming board meeting in December, please consider signing up for Incognito Mode. You can learn more at searchengine.show. Our executive producers are Jenna Weiss-Berman and Leah Reese-Dennis. Thanks to the team at Jigsaw, Alex Gibney, Rich Pirello, and John Schmidt, and to the team at Odyssey, J.D.

53:04Crowley, Rob Mirandy, Craig Cox, Eric Donnelly, Colin Gaynor, Matt Casey, Maura Curran, Josephina Francis, Kirk Courtney, and Hilary Schott. Our agent is Oren Rosenbaum at UTA. Follow and listen to Search Engine with PJ Vote now for free on the Odyssey app or wherever you get your podcasts. Thanks for listening. We'll see you next week.