Android Auto is Google's solution for bringing the power of your smartphone to the relatively dumb nature of vehicle infotainment. Basically you're using your phone to broadcast a new user interface onto your car's touchscreen, thus bringing the full power of the latest phones to your car.
But first, the gist is this: Android Auto works by projecting Android apps onto onto the in-car display after the phone has been plugged in to the car via USB. The phone itself does all the heavy lifting. (Though Google and Qualcomm and sewing the seeds for Snapdragon-powered infotainment systems that have full builds of Android running the car.)
Phone calls are handled over Bluetooth. This opens up the possibility to use mobile apps such as Google Maps, Google Play Music, Google Now and a host of third-party offerings. Presently, that mainly means media apps — music and podcasts and the like — though messaging apps can also get piped through Android Auto. Hangouts, Skype, etc. They're headless, meaning there's not actually an app to interact with, but you get the important part: the message.
Android Auto apps have a consistent design, with large, round buttons for easy touch points, and similar menu structures. The idea is that apps won't be any more distracting than they need to be (which is why user interface elements look the same from one app to another), and generally don't need more than a quick glance to be put to work.
A big update to Auto in late 2016 added a phone version of the Android Auto interface to the app, which displays the complete Auto interface solely on the phone. Essentially, it's a new Car Mode, baked into Android itself. Android Auto also will support "OK Google" commands, meaning you can initiate searches and bark orders without having to hit a steering wheel button first, or touch the display.
Android Auto-compatible cars are available in 30 countries from a wealth of manufacturers, and more are being added all the time. Older vehicles can find aftermarket solutions from the likes of Kenwood and Pioneer.