All,
Although I see a post with a potential workaround with the GSM/CDMA versions I have different symptoms, and potentially an alternate workaround (but not ideal). I'll list it here in case Apple is listening or it helps anyone in the interim.
I bought four new GSM (UK) iPhone 7's for Christmas. Three work fine using either iOS 10.0.1, 10.2.0 in my 2011 Mercedes CLS. Clearly not an issue with the car then!
The other one skips, drops, cuts out etc etc. Basically unusable. Initially I found that disabling 'sync contacts' helped, but then the problem returned. Then I found if I disabled my Apple Watch Series 2 (airplane mode) the problem disappeared for a while, but returned again. After resets, upgrades, and faffing about in the car for hours it seemed to do no good overall. The problem would not completely go away. However after reading this post I tried it again this morning and it worked fine (sync off, watch on). Perhaps there was too much going on at the same time.
IMHO there is a causal link between the contact sync option (I have over 3000), Apple Watch, and car bluetooth. But it is not specific to the iPhone in my case as the other three identical models work fine. Note that the presence of the watch does not cause a problem for other phones so it's not interference. (ie if I use another phone for audio but the watch is still on and connected to my problematic phone).
The problematic phone works fine with other bluetooth devices such as speakers and headphones. But in those cases I get the little headphone symbol on the phone so it's using a different sw path.
I'm not normally compelled to write support posts, but after spending nearly £3000 on these things to keep my whole family on the same platform, I want a solution that doesn't involve a 30 minute reconfig exercise (that may or may not work) in order to hear music everytime I get in the car.