  We study Gauge-Higgs unification model on the orbifold $S^{1}/Z_{2}$ based on
the extended SM gauge group $G_{SM}^{ex}=SU(2)_{L} \times U(1)_{Y} \times
SO(3)_{F}$. The group $SO(3)_{F}$ is treated as a chiral gauged flavour
symmetry. Electroweak-, flavour- and Higgs interactions are unified in one
single gauge group SU(7) which is broken again down to $G_{SM}^{ex}$ by
orbifolding and imposing additional boundary conditions. The compactification
scale is O(1) TeV. The orbifold $S^{1}/Z_{2}$ is put on a lattice. This setting
gives a staring point for RG-transformations. As a result the bulk is
integrated out and the extra dimension consist of only two points: the orbifold
fixed points. Parallel transporters (PT) in the extra dimension become
nonunitary as a result of the blockspin transformations. In addition, a Higgs
potential emerges naturally. The PTs can be written as a product $e^{A_{y}}
e^{\eta} e^{A_{y}}$ of unitary factors $e^{A_{y}}$ and a selfadjoint factor
$e^{\eta}$. The reduction $48 \to 35 + 6 + \bar{6} + 1$ of the adjoint reps of
SU(7) with respect to $SU(6) \supset G_{SM}^{ex}$ leads to three $SU(2)_{L}$
Higgs doublets: one for each flavour. Their zero modes serve as a substitute
for the SM Higgs. When $G_{SM}^{ex}$ is spontaneously broken down to
$U(1)_{em}$, an exponential gauge boson mass splitting occurs naturally. This
breaking leads to $SO(3)_{F}$ flavour gauge boson masses much above the
compactification scale. Thus tree-level FCNC are naturally suppressed. Making
some simplifying assumptions we also calculate fermion masses and CKM mixing
angles. As for the gauge bosons an exponential fermion mass splitting occurs
naturally. The model predicts a large Higgs sector consisting of 30 Higgs
particles and in its simplest form the weak mixing angle $\theta=0.125$.
