Urban Dictionary defines this as: "the act of, upon reaching a stop light/sign, all the members of a vehicle bail out and dash laps around the car until the light changes or the other people around you get really pissed".
Wikipedia adds a definition for a second sense of this term:
also used as a figure of speech to mean any large, ineffective, and chaotic exercise. In this usage, it is often shortened to just "fire drill," omitting the offensive insinuation that Chinese people are more likely to engage in such disordered activity.
Wiki also offers some etymology. I'd recommend a grain of salt with this, given its wiki-nature. I can't resist adding it here, because of Colonel Biebel's cat.
The term is alleged to have originated in the early 1900s, during a naval incident wherein a ship manned by a British officer, Colonel Edward J. Biebel, and a Chinese crew set up a fire drill for fighting a fire in the engine room. In the event of a fire the crew was to form a bucket brigade, drawing water from the starboard side, taking it to the engine room and throwing it on the "fire." Because water would accumulate in the engine room, another crew was to take the excess thrown water and haul it back up to the main deck, and then heave it over the port side (in order to bail it out).
When the drill was called the first moments went according to plan, but then orders became confused when Colonal Biebel's pet cat "Zip" got in the way of the crew. The crew for the bucket brigade began drawing the water from the starboard side, running over to the port side, and then throwing the water over, and so by-passing the engine room completely. One of Colonel Biebel's junior officers, Ensign JP Paolin, became so disgusted with the mess, he coined the phrase. Thus the expression "Chinese fire drill" entered the English language as meaning a large confused action by individuals accomplishing nothing.