Thanks for all the help so far, everyone.
I guess I should give some background info on the project itself. I am trying to add steering wheel radio controls to the vehicle. It's a '95 Jeep Grand Cherokee. So far, I've pretty much figured out how to get the signals from the wheel to the dash (The '96 model uses resistive multiplexing to do this, which I am basically copying, thus the Arduino).
First, I have NO idea what a magnetic encoder is, so I will read about that. That sounded promising.
I thought about the motor, but didn't like the idea since the knob on the radio would be physically turning itself (right?), and that's besides the need to power the motor. The knob also makes audible clicks when turned.
About the digital stuff, I do think that's how it's controlled with the systems that came with steering wheel controls. I have a '95 model, which didn't have the option for the steering wheel controls. The '96 year models had very different electronics, and the steering wheel control info went through the data bus first. There is a two-pin plug on the back of the radio through which the bus communicated things such as the steering wheel commands among other info. I have no idea what kind of signals are sent through those two wires, or else I could probably just duplicate them. I was thinking it would be easier to just open up the radio, hard-wire the circuits to the individual buttons and add another plug behind the radio for all this. That way I could just use the Arduino and maybe some PCB relays to complete circuits as desired. Everything should be easy except for the volume knob.