The other alternative is a totally non-form-factor unit like the satellite radio people have gone for. A velcro-on screen you stick somewhere in view and a box of gubbins elsewhere. ideally with direct audio out or at least CD bus connectivity.

I would choose this method because I think it would allow for more flexibility in the mp3 player design. You wouldn't be limited to what ever display and controls the car maker used. Look how the ipod bmw thing turned out as an example.