Your explanation as to how to fill this out is correct. The problem that I think you are missing is that the data validation within this cell is not de-activated by the check box as it should be. You have numerous people pointing out that if they put a space in the FMEA box, the error goes away. This is because a space is actually a character. I'm assuming that the data validation within the FMEA block only requires that something be entered, so the space is fulfilling this requirement. Please get your programmers to fix this issue as it's highly annoying.
