Sync iTunes library to USB flash drive?

Mine is on MT-002.138.001 so it looks like a newer version.
I tried doing as you suggested by setting the iPod Classic to play before plugging it in and it sort of works.

However all I can do at that point is use the scroll control in the car to move between the album tracks and play them, it still won’t let me browse or search the iPod. So if I want to listen to another album I’d have to disconnect the iPod, find whatever I want to play and re-connect it. Hardly ideal.
Did you have to install anything on the iPhone to get it working in the car, and was that through USB or Bluetooth? Would you mind saying what car you have? That could be useful information to feed back to the dealer.