128w ago - Here is a guide I wrote on how to convert your Demo / Kiosk PS3 into a fully functional Retail PlayStation 3 console via JailBreak using PSGrade (or similar) so that so you no longer need to enter PS3 Demo Unlock Codes in.
First, we need to be able to use the jig and to do so, we need the kiosk to not auto start when switch is flipped. You can use the public PSGrade (the only version out there, there is no special kiosk version)
First do the following:
Have a disc in the drive
Turn off the power switch
Turn it back on until you see the Blu-Ray light flash one or two times
Turn it off at the power switch (in the back)
Turn it on again at the power switch (in the back)
Now, when you turn the power switch on, the PS3 will still be in standby mode, so we can act as if we are going to jailbreak the unit. Instead of a PSGroove hex, we're going to use our dongle with the PSGrade hex. Go about the normal procedure for jailbreaking, by pressing eject and power. The console will panic and shut down the first time. When you turn it back on your controller should desync and the resolution will be super low.
The vsh (XMB) for kiosk does not have the red box. However, if you see the console is in low res and controller is not syncing until plugged in, then the unit is in factory mode. Now unplug the JIG and power down the console normally.
Format a thumb drive to fat32 and make sure only lv2diag.self from the lv2diag 1 folder and ps3updat.pup are in the root of the thumb drive. Plug thumb drive into the usb port that is all the way to the right (if the console was laying down horizontally). Now, just push the power button to turn on your PS3.
You are going to see a black screen and your memory card light is gonna flicker for roughly 10 minutes until the process is done. The console will shut down on its own when it finishes, so don't mess with it until it's done.
When the console finishes doing its thing, turn it back on and it will be in red box (service) mode. Now, unplug the thumb drive and delete the 2 files you put in there. Then, put the lv2diag.self from lv2diag 2 folder and then plug it back into the same USB port, that it was in before. Once its plugged in, reboot the console. It will now finalize the install and turn it into a full blown retail. enjoy
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Ok. I believe I have recovered. I found the original demo/kiosk 3.41 firmware. I put it on my thumb drive and then held the power switch down until it powered off. Then I press the power switch again and held it until it beeped twice. This took me to some type of service mode. From there I chose to do a system upgrade. It went through its upgrade process and it looks like all is good for now.
What version of kiosk/demo firmware was on it before you started?
Sorry just went back and had a look and it was on 3.2 version firmware. Whenever I have tried to go to a higher firmware via the service mode method it has not worked, also read many times it is not a good idea. This may well be the cause of your problem.
I would download the official 3.15 pup and use that instead of the modified 3.41 pup. If that works ok you can then either jailbreak at 3.15 or download official 3.41 pup and upgrade via usb.
Manufacturing failure is from what I understand because you are attemting to downgrade to a firmware level older than what the console is.
For instance if the console came from factory with 3.20 firmware and you try to install 3.15 version of firmware it will give that error.
What pup are you downgrading with? Is it an early one? maybe try something newer?